Apparently, in suburban Sydney, ancient paper notes are turning up.
It’s an intriguing anecdote, but it is just an anecdote. So, I went to check the stats.
The government publishes data on the size of deposits at banks, so if Aussies really are digging down the back of the couch to find money to spend, you’d expect bank accounts to be emptying out too.
Nope. As the red line in the next chart shows, Aussies are continuing to pile money into their bank accounts. Household deposits are zooming upward. However, interestingly, businesses are different – their accounts have stalled and are going backwards.
It looks like a mystery, right? Aren’t we supposed to be struggling financially? How come all this money is landing in people’s deposit accounts?
There’s an answer. And it explains why people would be spending old cash, as well as why bank accounts are rising: inflation is eating away at the buying power of your money.
When inflation is 8 per cent, as it has been in the past year, the buying power of your cash falls by around 8 per cent. If you had $100 in February 2022, it bought you $100 worth of stuff. Now you can buy only 92 per cent of that stuff, so we could say the buying power of that $100 is down to $92, compared to last year.
The person spending an ancient banknote at the café in Sydney is just responding rationally to incentives: it’s time to get the heck out of cash. If the stash is small, spend it. If the stash is big, deposit it.
If you leave money in cold hard cash, that’s the worst thing to do. It’s losing value fast. If you put money in the bank, at least it earns interest, and that loss of buying power is reduced. How much buying power it loses depends on the interest rate. The next chart shows a hypothetical bank account paying 2 per cent interest.
This phenomenon also helps explain why our bank account balances are going up. When inflation was low and interest rates on deposits were basically zero, it made no major difference whether you kept your cash in a box under your bed instead of in an ING savings maximiser.
In this period, the RBA was printing lots of $100 bills and they were just disappearing from circulation. People were saving cash. But I bet the banks are finding a lot of those $100 bills coming back to them now. People want the higher deposit rates that are suddenly on offer. As the next chart shows, deposit rates are now the best they’ve been in quite some time.
The long run
Inflation has been eating away at the buying power of money for my entire life. If I put a $1 coin in a piggy bank when I was a little kid, that coin would have bought a meat pie with sauce. If I get it out of the piggy bank today, it buys maybe a quarter of a meat pie, and no sauce. You could say the buying power of that dollar is down to 25 cents in 1989 dollars.
Leaving money in cold hard cash is a really bad idea in times of high inflation. It costs you. But there was a time when bank interest rates were higher than inflation. You used to actually make money by putting money in the bank.
As the next chart shows, just sticking your money in the bank used to add buying power every year. That slowed down over the past two decades and stopped around 2017.
The reason is a global glut of savings. The world is better at saving money than it is at coming up with good ways to invest it. We put money into banks but there isn’t a long line of good companies lining up to borrow it. Most money just gets funnelled into real estate, inflating real estate prices. But that has its limits. So, banks aren’t paying big deposit interest rates any more.
These days, if you want to make a return above inflation, you have to take risks. Anyone who has ever flipped through the Barefoot Investor book knows what he recommends – shares. The long-run returns on share investing have been higher than inflation. You get dividends and, in the long run, you get capital appreciation too, so you can sell those shares for more than you bought them.
Of course this doesn’t always work out in the short run! If you’d bought $100 worth of shares in April last year, it’d be worth $98 now, because the stock market has fallen around 2 per cent. And the buying power of that $98 is more like $90 because of inflation. You’d have to have got good dividends to make up for that.
Spending old Mawsons and Flynns
Of course, before you spend any old paper notes, or deposit them at the bank, just check online and make sure they aren’t worth a fortune. Every note has the signature of the treasury secretary and RBA governor of the time printed on it. Certain combinations of serial numbers and signatures are rare and worth a lot to the numismatists out there. (Numismatics is the term for currency collecting, so the people buying these rare old notes are called numismatists).
If you own a café and someone hands over one of these, don’t bank it.