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The Funny Side of Misleading Statistics
December 3, 2014
Is Google the New General Motors?
December 5, 2014
Talking about the cost of pennies, the creator of XKCD tells us that you will have to drive 140,000 miles for the weight of a penny in your ashtray to cost you an extra penny of gas. Or, assume your time is worth $10 an hour. If it takes you any more than 3.6 seconds to look down, decide, and pick up a penny, then it is not worth it.
From: XKCD “What if?”
Add to that the calories you burn when you bend over, because they have to be replenished, the penny becomes even more “expensive.”
From: XKCD “What if?”
Where are we going? To our continuing use of coin and currency.
Cash Facts
Although cash can be costly when we think of transporting it, protecting it, making deposits and the time we devote to counting change, we continue using it. According to a recent Federal Reserve study based on 2012 data, cash remains the most popular form of payment. If we assume that the typical consumer averages 59 transactions in one month, then she will use cash to pay for 23 of them. But, as you might expect, because it was for the low value transactions, cash represented only 14 percent of the value of all purchases.
As you can see below, cash is ubiquitous but primarily for low value transactions.
From: FRBSF
Confirming our low value transaction use of cash, for financial and housing purposes, the use of cash decreases.
From: FRBSF
Perhaps predictably, higher net worth households prefer using their credit cards.
Correspondingly, older households prefer credit. In the FRBSF paper, they hypothesized that older households might prefer credit because of habits that predated current financial innovations.
From: FRBSF
Our Bottom Line: The Money Supply
Sort of like Goldilocks and her porridge, the money supply has to be just right. Too much and you have inflation, too little and you constrain production. Composed primarily of coin and currency, demand deposits, savings accounts and short term time deposits, M2 is targeted when the Fed formulates monetary policy. So, thinking like Goldilocks,the Federal Reserve needs to know how consumers and businesses spend cash to determine how much to provide.
