52 PA R T I Introduction Where Are All the Dollars? FYI The close to $1500 currency per person in Canada, and over US$2000 of U.S currency per person in the United States, are surprisingly large numbers Currency is bulky, can be easily stolen, and pays no interest, so it doesn t make sense for most of us to hold a lot of it Do you know anyone who carries $1500 in their pockets? We have a puzzle: where are all these dollars and who is holding them? One group that holds a lot of dollars are criminals If you were engaged in illegal activity, you would not conduct your transactions with cheques because they are traceable and therefore a potentially powerful piece of evidence against you This is why Tony Soprano had so much cash in his backyard Some businesses also like to hold a lot of cash because if they operate as a cash business, which makes their transactions less traceable, they can avoid declaring income on which they would have to pay taxes The other group that holds Canadian and (to a larger extent) U.S dollars are foreigners In many countries, people not trust their own currency because they often experience high inflation, which erodes the value of their currency; these people hold dollars as a hedge against this inflation risk Lack of trust in the ruble, for example, has led Russians to hold enormous amounts of U.S dollars In fact, over half the quantity of U.S dollars are held abroad institutions, and also include deposits held by one bank with another, known as interbank deposits The foreign currency deposits are mostly denominated in U.S dollars Notice that the M2 and M3 monetary aggregates not include deposits with near banks, such as trust and mortgage loan companies (TMLs) and credit unions and caisses populaires (CUCPs) The M2+ (gross) monetary aggregate includes M2 (gross) plus deposits at near banks, life insurance company annuities, and money market mutual funds Finally, M2++ (gross) adds to M2+ (gross) Canada Savings Bonds and non money market mutual funds (i.e., bond and equity mutual funds) This broader monetary aggregate is good at capturing information about the long-run spending plans and expectations of the household sector of the economy.3 With the financial innovation that has occurred, TMLs and CUCPs can also offer deposits that function as media of exchange The Bank of Canada has responded to this by introducing new measures of money The M1+ monetary aggregate includes currency outside banks and chequable deposits at chartered banks plus other assets that have cheque-writing features all chequable (personal or nonpersonal) notice deposits at TMLs and CUCPs These assets are also extremely liquid because they can be turned into cash quickly at very little cost The M1++ (gross) aggregate includes M1+ (gross) plus all nonchequable (personal or nonpersonal) deposits at chartered banks, TMLs, and CUCPs Both the M1+ (gross) and M1++ (gross) monetary aggregates internalize the substitution between demand and notice deposits and are good at capturing information about changes in savings behaviour, as well as transaction intentions Joseph Atta-Mensah and Loretta Nott, Recent Developments in the Monetary Aggregates and Their Implications, Bank of Canada Review (Spring 1999): 19, provide an excellent discussion of the recent behaviour of Canada s monetary aggregates