Christmas is upon us, and so is the seasonal spike in the demand for cash. This Christmas bump relates to the previous post on liquidity and uncertainty. Christmas isn't just about buying presents – it's also about traveling to distant places to meet up with family and friends. We realize that we can't anticipate all eventualities along the way. To insure ourselves against these uncertainties we carry a bigger wad of cash. This liquid wad provides a very real service by comforting us, even if we never end up having to use it.
It's illuminating to plot the Christmas spike in cash in order to compare it over decades. See below. The data I'm using is the weekly currency component of M1 from the Federal Reserve.
We can eyeball a few trends from the chart. First, we see a consistent seasonal spike in currency in circulation in December and climaxing around New Year's Day. Cash falls heavily in January as people and businesses redeposit it at the bank.
While the Christmas bump was very pronounced in the 1970s and 80s, it appears to have grown more muted over time. In recent Christmases, say 2011, it is difficult to pick out the spike at all, although if you look carefully you'll spot it. It's not just the Christmas bump that has declined, the general rate of increase in cash outstanding over each period has slowed. This is evident in the gradually flattening slope of each line. People don't need cash as much as they used to. Credit cards and direct payments provide good alternative forms of liquidity.
It's also interesting to see a monthly saw-toothed pattern in the data, particularly in the older periods. Around the middle of each month cash outstanding peaks, falling until the beginning of the next month. My guess is that this is some sort of paycheck effect. People deposit paychecks at the beginning of the month, then build up a buffer of cash to pay for that month's necessities and incidentals, this buffer steadily being drawn down over the latter half of the month. This saw-toothed pattern has all but disappeared in the data. Cash just isn't as important as it once was for payments.
It's worthwhile noting that come Christmas the Fed doesn't "blow" this cash out into the economy. Rather, people "suck" it out of the Fed. In anticipation of a spike in the demand for cash by consumers and businesses, private banks decide to hold more cash in their vaults. Banks build this buffer by converting reserves in their bank account held at the Fed into cash, with Brinks trucks moving this paper from Fed to bank. Before the credit crisis of 2008, a general withdrawal of cash would have required the banking system to rebuild their reserves in order to meet statutory minimum reserve requirements. The Fed would have offered to buy treasury bills from the banking system in order to provide those reserves. Nowadays banks hold so many excess reserves that if they convert some of these into cash, they don't need to buy more reserves in order to meet statutory requirements.
It's illuminating to plot the Christmas spike in cash in order to compare it over decades. See below. The data I'm using is the weekly currency component of M1 from the Federal Reserve.
We can eyeball a few trends from the chart. First, we see a consistent seasonal spike in currency in circulation in December and climaxing around New Year's Day. Cash falls heavily in January as people and businesses redeposit it at the bank.
While the Christmas bump was very pronounced in the 1970s and 80s, it appears to have grown more muted over time. In recent Christmases, say 2011, it is difficult to pick out the spike at all, although if you look carefully you'll spot it. It's not just the Christmas bump that has declined, the general rate of increase in cash outstanding over each period has slowed. This is evident in the gradually flattening slope of each line. People don't need cash as much as they used to. Credit cards and direct payments provide good alternative forms of liquidity.
It's also interesting to see a monthly saw-toothed pattern in the data, particularly in the older periods. Around the middle of each month cash outstanding peaks, falling until the beginning of the next month. My guess is that this is some sort of paycheck effect. People deposit paychecks at the beginning of the month, then build up a buffer of cash to pay for that month's necessities and incidentals, this buffer steadily being drawn down over the latter half of the month. This saw-toothed pattern has all but disappeared in the data. Cash just isn't as important as it once was for payments.
It's worthwhile noting that come Christmas the Fed doesn't "blow" this cash out into the economy. Rather, people "suck" it out of the Fed. In anticipation of a spike in the demand for cash by consumers and businesses, private banks decide to hold more cash in their vaults. Banks build this buffer by converting reserves in their bank account held at the Fed into cash, with Brinks trucks moving this paper from Fed to bank. Before the credit crisis of 2008, a general withdrawal of cash would have required the banking system to rebuild their reserves in order to meet statutory minimum reserve requirements. The Fed would have offered to buy treasury bills from the banking system in order to provide those reserves. Nowadays banks hold so many excess reserves that if they convert some of these into cash, they don't need to buy more reserves in order to meet statutory requirements.
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