A fault line in the banana

FRED Blog asks: Are we moving toward a cashless economy? They ask an interesting question. And they answer it, it seems to me, with a rather definite "No".

However, their conclusion is "the question remains open."

I'm confused by their post, so I'll leave it alone. But the graph they show is for currency in circulation. I've got monetarist blood, so I looked at it. Then I looked at currency in circulation relative to GDP, because, you know, context.

It's a banana, currency relative to GDP, low in the middle and high on the ends. The graph reminds me of a Scott Sumner post from two or three years back. Sumner said Currency-to-GDP is the inverse of velocity. He said interest rates move with velocity. And yeah, I'm leaving that alone too.

Here is the banana:

Graph #1: Currency in Circulation relative to GDP

I'm lookin at currency in circulation relative to GDP, and I see something no one else seems to notice. Or maybe it's that no one else thinks it is worth bothering with. But it sure looks important to me: Between the years 2000 and 2010, there is an interruption in the banana.

I brought the data into Excel and put a trend line on it. Two trend lines, actually: second order polynomials, both of them.

Graph #2

The blue line shows currency in circulation relative to GDP, just like on the first graph. The red is identical, and hides most of the blue. But there are two red segments here, each indicating the data used to generate one of the trend lines.

The long red (1951Q1-2003Q2) creates the basic banana shape that is so obvious on the graph. Then, after the interruption (2003Q2-2008Q2), the banana-path resumes, as shown by the short red (2008Q2-2018Q3).

But there is a problem with this simplification. Short red is low: lower than the trend of the long red banana. It also appears that short red is curving the wrong way; but I will say no to this, because short red is going the right way to become a flatline. I like flatline ratios: they suggest the approach of economic stability. Just one problem, then: Short red is low.

One could argue that the short red, running low, is a cause or a consequence, or both, of the economic sluggishness of the past decade. I would make that argument: Slow economic growth and slow growth of the quantity of money go hand in hand. Definitely.


Here is a detail of the "fault line" in the banana:

Graph #3: Currency Trends Detail

The fault line is blue. Notice that it starts in 2003 and ends in 2008. This fault line is not the result of the Global Financial Crisis or the Great Recession. The fault line came before those events and, if anything, was the cause of them.