Hey Ian,

I'm not much of an economist, but looking at the source data at the ECB (http://www.ecb.int/stats/euro/circulation/html/index.en.html) and plotting value shares between "transactional money" (below 100€) and "mattress money" (above 100€) shows a fairly boring picture - the share of mattress money has even been falling recently. Total cash supply numbers aren't expanding crazily either... What do you make of that?

http://www.themel.com/ecb-cash.png is a painful 30 minutes' worth of dealing with OpenOffice calc & GIMP - I thought it would go faster than using R, but I was seriously wrong, and the output sucks badly.

Thomas,

You're right, your graph doesn't look anything like the Economist's!! Maybe there are two ECBs?

We're using the same source data, just graphing different things. When I looked at that Economist graph (absolute value of 500€ bills in circulation), I wondered why, excluding the Lehman discontinuity, there was a steady 12.5 bn/year increase even pre-crisis. This has apparently been going on since inception, and I still have no explanation for why it's there exactly, just general inflation/slowly ballooning money suppy?

Then I thought that the mattress stuffing hypothesis should stand out through a relative popularity increase in large notes over small ones, which doesn't seem to be there, see my graph. But as I said, I'm not an economist, so I'd love to hear from people who know more about this. A story that might work is that many of the people who had gotten 500 bills immediately post-Lehmann figured out over the last years that it's better to stuff the mattress with gold or CHFs instead of a fiat currency of questionable stability...

the congressional testimony into the pivotal role that rating agencies played in the whole thing had lots of the no-documentation, no-down, 1% interest only payment mortgages going to speculators (2000% ROI in parts of country with 20-30% inflation during the bubble) ... but also a large number going for drug cartel money laundering.

On the real-estate side of the operation, the mostly unregulated loan originators being able to pay for triple-A ratings on the packaged mortgages (toxic CDOs), met they no longer had to care about the borrower's qualifications or mortgage quality ... contributing to no-documentation loans. On the wallstreet side of the operation they were taking enormous cut, fees & commissions on the estimated $27T in triple-A rated toxic CDOs done during the bubble.

Wallstreet used the off-book of the too-big-to-fail as dumping ground for huge amounts of the triple-A toxic CDOs as dumping ground (end of 2008, $5.2T in triple-A toxic CDOs being held off-balance by just the four too-bit-to-fail

Since the onset of the financial crisis in summer 2007 there has been stronger growth in demand for £50s, pointing to an increase in demand for banknotes as a store of value.
...

3.3.7 Economic conditions

The changed economic conditions since the start of the financial crisis in August 2007 have probably impacted the circulation of cash in a number of ways, most of which will have stimulated the use of cash:

* grey economy: possibly the largest but most difficult to quantify is the extent to which, faced with harder economic times, people or businesses prefer to receive cash for goods or services where the subsequent accounting for VAT or other tax can be less rigorous than previously. The velocity of circulation of £20s has dropped recently, indicating that they are spending more time outside the known channels of cash circulation, or being hoarded;

* store of state-backed value: there is evidence from the Bank of England’s data on notes in circulation that some increased demand for £50s has been from customers using the notes as a store of value;

* budgeting: many people do find that, faced with budgetary pressure, it is easier to budget with cash: a week’s cash can be withdrawn, and during the week can easily be counted and compared with the amount of the week remaining. This would impact most denominations of notes, and all coin. However, there are some who find it easier to budget with cards, as the precise amount for a transaction is paid: these cardholders find that cash change is too easily spent.