Cash remains the king!
According to FDIC data, a record $2 trillion in cash was added in the deposit accounts of US banks since the coronavirus first struck in the country in January.
In April alone, the money flowing into banks grew by $865 billion, more than the record for an entire year.
“Any way you look at it, this growth has been absolutely extraordinary,” said Brian Foran, an analyst at Autonomous Research. “Banks are flooded with cash; they’re like Scrooge McDuck swimming in money.”
More than two-thirds of these cash deposits were made to the 25 biggest institutions — JPMorgan Chase, Bank of America and Citigroup, whose assets grew much faster than the rest of the industry in the first quarter of 2020.
Fed Money Printing Behind the Deposit Boom
The main driver of this was the response to the pandemic. In March, when shutdowns started, corporations like Ford and Boeing withdrew tens of billions of dollars from lines of credit to park them at the banks.
During this time, the Federal Reserve also began printing money to support financial markets. Also, these big banks serviced a large chunk of the government's $660 billion Paycheck Protection Program to bolster small businesses. Institutions like Fidelity and BlackRock gained deposits after the Fed began its bond-buying program.
In April, the personal savings rate hit a record 33%, and personal income climbed 10.5% the same month. So, megabanks that have the most US retail customers also serviced the stimulus checks and unemployment benefits for individuals.
Brian Moynihan, Bank of America CEO said last month that checking accounts below $5,000 balances had up to 40% more money in them before the pandemic.
Inflation & Stock Market Bubble
These deposits may have helped the industry mint record profits in the post-financial crisis era even with low-interest rates, but now they are running out of uses for this growing pile of cash.
With more deposits than they know what to do with, banks could end up lowering their interest rates further since they don’t need more money.
Besides the deposit boom, the government’s money printing is expected, by some, to lead to a collapse in the dollar along with inflation.
“The dollar is going to fall very, very sharply,” said Stephen Roach, one of the world’s leading authorities on Asia, predicting a 35% drop against other major currencies.
Others see a stock market bubble in the making. According to investor Jeremy Grantham, after Japan in 1989, the tech bubble in 2000, and the housing crisis in 2008, this could be the fourth bubble of his career.
Such an environment of low-interest rate would be bullish for bitcoin, a cryptocurrency that has been the best performing asset of the decade and is still away from wide mainstream adoption.
This money printing might not have left people with many choices but to hoard the cash in banks and piling into the stock market. But the fact that people are increasingly trusting bitcoin over big banks and institutional investors are frequently getting into bitcoin as a hedge against inflation and a store of value; we could see some part of this money flowing into BTC as well.