Kelly Evans: Cash Is Still King

Scott Mlyn | CNBC

Wouldn't it be ironic if at the end of the whole crypto craze and pandemic spending bubble, cash was more attractive than ever?  

I think even the early crypto bulls themselves are coming to realize this. There are all sorts of tracking and tracing problems that exist even with something like Bitcoin; it leaves a trail of breadcrumbs, so to speak, as to where it's been. Regulators are obviously going to start following this with more interest than ever. So other than something like Monero, which promises to be truly, completely anonymous, the best option for leaving no trace of spending behavior is the good, old-fashioned greenback. 

That's especially true now that the Fed is looking into creating digital dollars. What if we're all suddenly required to use them? What if these dollars track your spending, or even expire if you don't use them in time (hello, Stimulus 3.0)? Now that people are realizing this, they're thinking maybe having some actual cash isn't such a bad idea. Kind of like stockpiling plastic straws once you realize they're about to be outlawed. Thanks to crypto, cash is actually starting to regain its luster.  

And the banking system is currently flush with it. In fact, there's so much cash on bank balance sheets that they are sending near-record amounts of it back to the Fed for minimal interest in return. (This is the spike in "reverse repo" that's been garnering some recent headlines.) "The culprit is mainly risk-averse individuals who are flooding the banking system with deposits," wrote strategist Brian Reynolds this week, "causing the demand for super-safe instruments to outstrip their supply."  

In fact, yields on some very short-term Treasury bills have turned negative--and would be even more negative if banks couldn't park their extra cash at the Fed, said Reynolds. The Fed's actual target interest rate itself has been sliding towards negative territory; it was at 0.05% earlier this month even though it's supposed to be around the midpoint of the Fed's 0% to 0.25% range. 

 "This is the first time I've seen Wall Street banks clamor for the Fed to back off" of quantitative easing, one observer wrote--because in essence the system is saying you're giving us too much cash--take it back! "With one hand, as part of QE, the Fed is buying $120 billion a month...With the other hand, the Fed took back $351 billion via overnight reverse repos, undoing nearly three months of QE," he added.  

It seems illogical if everyone is starting to worry about inflation. But in fact, that concern could help trigger people to let go of their cash. (Remember record low velocity?)"We remind people that...negative yielding T-bill episodes have been generally bullish for stock prices," wrote Reynolds. "If just some of these flows into bank deposits were to reverse and go into equities, the result would likely be a turbo-charged bull market." (Emphasis mine.) And hey, that sounds better than it all going straight into the economy and turbo-charging prices.  

See you at 1 p.m! 


Twitter: @KellyCNBC

Instagram: @realkellyevans

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