The amount of cash sitting on the sidelines in the U.S. economy fell to US$3.827-trillion as of the end of March 2010, according to data from the Federal Reserve. Defined as the sums in money market mutual funds plus small time deposits at U.S. commercial banks, the figure hasn’t been this low since September 2007.
It also represents a marked decline from a peak of US$5.015-trillion in 2009. But the real question is will investors continue to redeploy their excess cash?
National Bank Financial’s chief economist and strategist, Stéfane Marion, thinks they will. He says it is important to keep in mind that despite the significant decline of the past year, the level of sidelined cash remains above its historical average relative to the size of the economy.
The analyst also noted that history shows that cash as a share of GDP continues to decline in the months that follow the confirmation of job creation, as investors are heartened by the prospects of a sustainable recovery.
The last two recessions have shown that when interest rates are low, the cash-to-GDP ratio can fall by roughly six percentage points in the months that follow the confirmation of job creation.
“This is good news for the economy and financial markets,” Mr. Marion says.