The amount of currency people hold in their pockets and under their mattresses is the single best indicator of the level of fear on main street. Since last summer, when people first got the wind in their nostrils that banks might fail in big numbers, individual depositors have withdrawn roughly $90 billion from their bank accounts “just in case.”
To put that number in perspective, the total reserves of the U.S. banking system last summer before people got spooked was $85 billion.
In recent weeks, however, people have stopped taking $100 bills out of their bank accounts. Total currency held by the public was $849.4 billion on May 18, less that it was a month earlier ($850.1 billion on April 20.) I think it is a sign people are beginning to unclench their buttocks and become a little less afraid. That’s a great sign for spending. When people became frightened last August/September they slammed their wallets shut and stopped buying everything. That’s when the economy fell off the table, inventories spiked up and employers began laying off workers in a hurry.
When the public exhales and put their money back in the bank there will be a rebound in spending. There will also be a further $90 billion spike in bank reserves, which will eventually show up as lending. I don’t know about you, but I can’t wait to see this happen.