What more can the ECB do for the Euro?

Yesterday in something of a set piece event the new ECB President Christine Lagarde got out her pen to sign some banknotes and in the midst of her soaring rhetoric there were some interesting numbers.

In the euro area, banknotes are used for retail transactions more than any other means of payment. Some 79% of all transactions are carried out using cash, amounting to more than half of the total value of all payments.

So cash may no longer be king but it is still an important part of the Euro area economy. Indeed the numbers below suggest it may be an increasingly important part, perhaps driven by the fact that 0% is indeed better than the -0.5% deposit rate of the ECB.

And since their introduction, the number of euro banknotes in circulation has risen steadily, reflecting both the importance of cash in our economy and the euro’s international appeal. There are now 23 billion euro banknotes in circulation with a value of €1.26 trillion – a third of which are being used outside the euro area.

The latter reflection on use outside the Euro area is a rise because if we look elsewhere on the ECB website we are told this.

It is estimated that, in terms of value, between 20% and 25% of the euro banknotes in circulation are held outside the euro area, mainly in the neighbouring countries. The demand for euro banknotes rose steeply particularly in non-EU countries in eastern Europe when the financial crisis erupted in 2008 and national currencies depreciated against the euro.

We can figure out what was going on there as we recall the carry trade leading to mortgages and business borrowing being undertaken in Euros ( and Swiss Francs) in Eastern Europe. I guess that left some with a taste for the adventures of Stevie V.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

I am not sure as to why the foreign holdings have risen so much. Some will no doubt cheer lead saying it is a sign of Euro acceptance and strength but there is the issue of notes being potentially used by money launderers and drug smugglers. The ECB is supposed to be against such criminal activity and has used that reason in its ending of production of 500 Euro notes.The circulation of them is in a gentle decline and there are now 458 million of them. The numbers of 200 Euro notes has shot higher as there were 253 million a year ago as opposed to 366 million ( and rising) now.

I did ask the ECB and they pointed me towards this.

Euro cash holdings are widespread in Albania, Croatia, the Czech Republic, the Republic of North Macedonia and Serbia. In those five countries, an average of 36% of respondents reported holding euro cash……..

That still leaves a fair bit unanswered.

Money Supply

There was some good news for the Euro area economic outlook earlier from this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 8.4% in October from 7.9% in September.

Here we are adding some electronic money to the cash above and we can see that the upwards trend seen in 2019 has been reinstated after last month’s dip. Or if you prefer we have returned to August!

This gives an explanation of how the services sector has held up as the trade war has hit manufacturing. According to the Markit PMI surveys this is especially true in France.

Service sector growth continued to run at one of the highest
recorded over the past year.

The Euro area and the ECB should be grateful for this as according to Matkit even with the monetary growth things in this quarter are weak.

“The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter.”

If we switch to the longer-term outlook we see this.

The annual growth rate of the broad monetary aggregate M3 stood at 5.6% in October 2019, unchanged from the previous month, averaging 5.6% in the three months up to October.

I think we get the idea that it is 5.6%! Anyway as we know M1 rose the wider sectors must have fallen.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 0.6% in October from 1.2% in September. The annual growth rate of marketable instruments (M3-M2) was -2.4% in October, compared with -1.1% in September.

The growth rate of 5.6% suggests a better economic outlook for 2021 and head but there is a catch which is this.

 net external assets contributed 3.0 percentage points (up from 2.8 percentage points)

The external influence has been growing over the past year or so and if we subtract it then broad money growth is a mere 2.6% and flashing a warning.

Official Surveys

Today’s releases were upbeat.

In November 2019, the Economic Sentiment Indicator (ESI) increased slightly in both the euro area (by 0.5 points to
101.3) and the EU (by 0.9 points to 100.0)……Amongst the largest euro-area economies, the ESI increased in Spain (+0.7), France and Germany (both by +0.4), while it remained virtually unchanged in Italy (-0.1) and worsened in the Netherlands (−1.0).

However there was another sign of trouble,trouble,trouble for manufacturing.

According to the bi-annual investment survey carried out in October/November this year, real investment in the
manufacturing industry in 2019 is expected to decrease by 2% in both the euro area and the EU. Compared to the
previous survey conducted in March/April this year, this represents a downward revision by 6 and 5 percentage
points for the euro area and the EU, respectively. For 2020, managers expect an increase in real investment by 1%
in both regions.

Care is needed with this series though because if you believed it wholesale Germany would be having a good year economically.

Comment

The ECB finds itself at something of a crossroads.Some elements here are simple as with a weak economy and blow target inflation then its policy easing looks justified.It does not seem to have many monetarists on board but it could easily argue that monetary growth is supporting the economy.

The more difficult elements come from how quickly it had to ease policy again as the ceasefire only lasted around ten months. This then brings into focus the question of why economic growth has been so weak? One way it is trying to answer this is provided by the way it has replaced someone who sometimes behaved like a politician with an actual one which suggests a bigger effort in this area.

“Countries with fiscal space should use it quickly, even more so when they suffer an asymmetric shock like Germany,” Villeroy told the Europlace international forum in Tokyo. “Those with high public debt should make their public finances more growth-friendly. ( Reuters)

Some of this is more French trolling of Germany but France has been more in favour of fiscal policy all along. As a side-effect by providing more bunds for the ECB to buy more fiscal policy from Germany would allow another expansion of monetary policy.

That leaves us with a curiosity that may become the equivalent of a singularity. Central banks have failed in the credit crunch era yet their importance rises and especially in the Euro area they seem to feel it is their role to dictate to politicians,

 

 

 

The war on cash continues

A feature of recent times has been the way that those in authority are becoming more authoritarian. This has come as a by-product of the fact that there has been more central planning often by central banks. The catch has come that in spite of an enormous amount of what was called extraordinary monetary action which now feels normal we are still struggling with the consequences of the credit crunch and seem unable to reach the “escape velocity” promised by the Governor of the Bank of England Mark Carney. Economic growth does not seem to be what it used to be does it?

On that road the central bankers promised success first from interest-rate cuts and then from bond buying or QE (Quantitative Easing) and more recently for even lower and negative interest-rates. That posed its own problems as of course the “innovation” of Forward Guidance had left them promising interest-rate rises but in the case of Governor Carney then delivering a Bank Rate cut whilst promising later cuts. This moved ever more central banks on the edge of or actually in the world of negative interest-rates or what has become known as NIRP (P=Policy). This then led to fear from the central planners as bank notes or cash offer 0% ( if you ignore storage costs and the like) and as official interest-rates go ever lower central banks are afraid that they will lose what power they have if people switch to cash on a large-scale. It would also be quite an own goal by the central planners as the use of electronic methods of payment has made like simpler and more efficient. In other words another possible side-effect for them to look at “another time” when they write self-congratulatory working papers.

More interest-rate cuts remain the recipe

You might think that after so many interest-rate cuts there would be the realisation that the medicine is not working yet instead we see this. From the IMF about Switzerland.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

Translating that into English means that the next time the Swiss Franc comes under upwards pressure interest-rates should be cut below the present -0.75%. Also the Riksbank in Sweden seems to have come to that conclusion itself as we note this from it.

The Executive Board were unanimous that the repo rate should be held unchanged at –0.50 per cent and assessed that it needed to remain at this level for six months longer than was forecast in September. The probability of the repo rate being cut further has also increased.

That would be intriguing as you see Sweden is perhaps the country which has advanced the most in terms of electronic payments and so a “dash for cash” would be especially destabilising.

Back on the 5th of May I pointed out that the ECB was planning to scrap the 500 Euro note and that the Financial Times was rushing to support the establishment line.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

It then went on about “gangsters” and “Greek savers” but seemed unaware that the German Bundesbank was not a fan.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity

Back in February Larry Summers was on the case in the Washington Post.

It’s time to kill the $100 bill

As a side-effect Larry seems to be keen on some weight-training.

a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.

US $20 bill as the highest denomination Larry? I have also just been contacted on Twitter by @PeterWarne29 who apparently was watching a chess show yesterday and saw the high priest of this movement Kenneth Rogoff come on and say that high-value notes were used by criminals and tax-evaders. How very Orwellian or perhaps just a bad dream or of course both!

The disappearing 500 and 1000 Rupee Note

From the Reserve Bank of India on Tuesday.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

So in terms of South Park “It’s Gone”  and this does matter because most Indian cash money was in these two notes. It came with something also a bit chilling.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

Although it was a public holiday even so it makes you think. Even now there are limits.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

Today’s press release tells us everything is fine.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

Although we may need a financial lexicon for these times version of the concept of fine.

As mentioned in RBI communications, it may take a while for the banks to recalibrate their ATMs; once the ATMs are functional, members of public will be able to withdraw from ATMs upto a maximum of ₹ 2,000 per card per day up to November 18, 2016;

How is it going?

Just for clarity those are not pictures of the queue to get into the England versus India Test Match to watch Virat Kohli bat. The banks have been told to open over the weekend.

Also there is this from the same source.

Maharashtra: Temples sealing donation boxes in Marathwada region so that people don’t try to donate their black money after

Comment

There is much to consider in India’s move and let me open with a difference from elsewhere. It has just offered a fixed-rate repo at an interest-rate of 6.25% so we are a long way from NIRP or even ZIRP. With the problems of corruption and tax-evasion in India I am sure there is a fair bit of truth in this from the RBI.

This is necessitated to tackle counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true. There is an immediate catch in that if the black economy is the size we are told it is then the gain is minor but perhaps I should not be too churlish. However there are clear side-effects as the picture above shows and the Financial Times has pointed out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Not much sign of a boost to GDP there! Also are some of those who should be caught able to slip and slide away?

The poor are hit far harder than the rich, who have credit cards and live in places where shops accept them.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin. Meanwhile here is a light-hearted suggestion for UK bank notes in the future, it is a joke right?