Where Did All the Money Go?

This was the question that bugged me from the first day of the year until today.

They say, 2010 is a year of change, not that having resolutions was something new during the start of the year, but 2010 is just different. I was counting the money I got from my titos and titas last Christmas on January first to know how much I'd keep for my own and how much would go to my savings account and earn interest. Five thousand, six thousand, nine thousand... And I thought, man, how I wish I am this rich everyday. That day, I felt like a queen, for I was holding currency in my piggy bank bigger than usual. That's when this money-concerning puzzle hit me.

As of October 2005, the Philippine money supply or the total amount of money in circulation in the economy (M1) totaled P569.2 billion. It's specified as M1 because there are a lot of kinds of money supply, and M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency or money. To put this into perspective, we divide it by 37 million (ages 16 to 65), the number of adults in the Philippines then shown in the National Statistics Office site. This calculation implies that the average adult holds about P15,284 of currency. I was greatly surprised to learn that our economy has so much currency because average Filipinos for sure carry less than this in their wallets (Remember, I already felt rich of being able to hold P9,000 worth of money), except of course Henry Sy or Lucio Tan since P15,000 may just be worth their daily expense.

So, where does the money go? Who holds all this currency? No one knows for sure, but there are two possible explanations for this.

For one, much of the currency is held abroad. In foreign countries without a stable monetary system, sometimes people prefer foreign assets as store of value, such as the Philippines', compared to domestic assets. Also, much of it is used in the import and export trade. For example, when the Philippines buys goods and services to foreigners, it is financed by the domestic currency, so our money goes abroad.

Another explanation is that much of the money is held by drug dealers, tax evaders and other criminals. In the Philippines, currency is not the wisest way to hold wealth. Not only can currency be lost or stolen, but it also does not earn interest, whereas a bank deposit does (that's why that's what I'm going to do). Thus, most people only hold small amounts of currency and the rest is put safely in banks, invested in the stock market - that way their money wouldn't be idle. By contrast, criminals may avoid putting their wealth in banks because a bank deposit provides a paper trail so that the police can trace their illegal activities. For criminals, currency may be the best store of value available.

If only I knew this then when I was counting my money, I'd smile. Pity criminals, unlike me, their money would just be plain money; as for me, my money would make more money.