The blue touch paper has been lit on the Money Supply boom of 2020

Today as I shall explain later is a case of back to the future especially for me. It brings an opportunity to examine one of the economic features of the current Covid-19 pandemic. This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

The Euro Area

This morning has brought another signal of this so let us go straight to the ECB data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March.

Previously we had eight months of growth of ~8% so as you can see going to 10.4% and then 11.9% shows that the accelerator has been pressed hard and maybe the pedal has been pushed to the metal. If we switch to the cause of this which is mostly the rate of QE purchases by the ECB well you can see below. Apologies for the alphabeti spaghetti.

ECB PSPP (EUR): +9.545B To 2.216T (prev +10.936B To 2.207T) –

CSPP: +1.181B To 213.147B (prev +2.324B To 211.966B) – CBPP: +1.028B To 280.778B (prev +1.030B To 279.750B) – ABSPP: -377M To 30.738B (prev +161M To 31.115B) –

PEPP: +30.072B To 211.858B (prev +28.878B To 181.786B) ( @LiveSquawk) ( B= Billion and T=Trillion )

These are the weekly increases and if we stick to the money supply we see that in one week alone some 42 billion Euros of QE took place which means that on the other side of the ledger the narrow money supply has been increased by the same amount. Some of this was previously taking place and the more recent boost is called PEPP and is of the order of 30 billion Euros a week.

What this means is that the total amount of narrow money has gone from just under 9 trillion Euros in January to just over 9.5 trillion in April and will be going past 10 trillion fairly soon ( at the current pace in July).

Tucked away in the detail is that people have been wanting cash as well. The amount in circulation rose by 25.6 billion Euros in March and by 15.1 billion in April. Only a couple of months but that represents a clear shift of gear as we note April was the same as the whole of the third quarter last year and 2020 so far has already exceeded 2019.

Broad Money

This is a case of the same old song.

Annual growth rate of broad >monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March.

The pick-up in annual growth is of the order of 3% and this is the highest growth rate for nearly 12 years, well until next month anyway! Switching to totals it is now 13.6 trillion Euros.

The breakdown is rather revealing I think.

The annual growth rate of the broad monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March, averaging 7.1% in the three months up to April. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -0.3% in April from 0.0% in March, while the annual growth rate of marketable instruments (M3-M2) decreased to 6.7% in April from 10.1% in March.

This tells us a couple of things. The opener is that the expansion is a narrow money thing and in fact narrow money over explains it. That means that in terms of wider bank intermediation there was a credit contraction here as we shift from M1 to M3 via M2.

Also at first it looks like the rate of deposits from businesses has picked up but then we see it seems to be insurance companies and pension funds. Or if you prefer the ECB has just bought a load of bonds off them and they have deposited the cash for now.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 6.7% in April from 6.0% in March, while the annual growth rate of deposits placed by non-financial corporations increased to 13.7% in April from 9.7% in March. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 12.3% in April from 16.9% in March.

Although that might seem obvious we have seen stages where it has not appeared to be true.

Credit

The credit punch bowl has been out too.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 4.9% in April 2020 from 3.6% in the previous month. The annual growth rate of credit to general government increased to 6.2% in April from 1.6% in March, while the annual growth rate of credit to the private sector increased to 4.4% in April from 4.2% in March.

The main thing of note here is the surge in credit given to governments which links to the increases in public expenditure we have seen. There has been quite a swing here as it was negative ( -2%) as recently as February and had been negative for 9 months. So the Stability and Growth Pact was applied and then abandoned.

Looking at the breakdown the fall in loans to households is presumably a decline in mortgage lending and I think you can all figure out why companies were borrowing more.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) stood at 4.9% in April, compared with 5.0% in March. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.0% in April from 3.4% in March, while the annual growth rate of adjusted loans to non-financial corporations increased to 6.6% in April from 5.5% in March.

@fwred of Bank Pictet has got his microscope out.

Wow, another massive increase in bank loans / credit lines to euro area corporates, up €73bn in April following €121bn in March (both the largest on record by a huge margin)…….Finally, the surge in bank loans in March-April was broad-based across countries. No one left behind.

His Euro area glass is always full so let me point out that there are times when companies are borrowing to invest (good) and times they are borrowing because they are in trouble.

Also he has been kind enough to illustrate one of my main themes so thank you Fred and the emphasis is mine

Euro area corporates are drawing on their credit lines and taking new bank loans like there *is* tomorrow.

Side-effect: most banks will easily qualify for the lowest TLTRO-III rate from June (-1%).

What a coincidence!

Comment

This is an example in a way of the circle of life as back in the day I got a job because as a graduate monetary economist City firms wanted people to look at the money supply. Although there was a difference in that the central banks and governments were trying to bring it down as opposed to pumping it up. Rather ominously it did not work as planned and sometimes did not work at all.

How should it work? In essence the extra money balances (narrow money) should be spent relatively quickly and thereby give the economy a boost. That is why I look at narrow money and as an indicator it has worked pretty well. The catch or “rub” as Shakespeare would put it is velocity or how quickly the money circulates and there we have a problem as it is hard to measure especially right now. We know that for a while it will have been extremely low because in many areas you simply cannot spend money at the moment.

As we look internationally we see many examples of this. I have gone through the Euro area data today but if we switch to the US the numbers are even higher. The annual rate of M1 growth is 27.5% there so the pedal may even have been pushed through the metal. Care is needed as definitions vary but even using a more Euro area one it looks as though it would be over 20%.

As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent

I got the blues
Got those inflation blues

The future for cash is more hopeful than you might think

This is a hardy perennial pf a subject but it now comes with a new twist provided for us by Which Money.

According to the Bank of England: ‘Like any other surface that large numbers of people come into contact with, banknotes can carry bacteria or viruses.’ So whether handling cash, debit card or credit cards, wash your hands when you get home. If you can, pay using a bank card.

That seems rather unpleasant doesn’t it? Also I do hope that the new plastic bank notes are cleaner than the old ones or the Bank of England has scored something of an own goal here. Still at least you are no longer in danger of former Governor Mark Carney dipping into into your curry.

However Which point out that many still use cash.

Many are still reliant on cash. Two thirds of those who depend on cash have no digital skills and over a third are likely to be a vulnerable customer. It may be impractical for these people to apply & learn to use a debit card for online shopping in the midst of the pandemic.

There are also age issues here.

Nearly half of those who rely or depend on cash are aged over 65, while nearly a third are aged 55 to 64. Both groups are more likely to need to self-isolate and ask friends, family or volunteers to shop for them.

Actually that reminds me of one of my aunts who is suing cash to settle with her neighbours who are kindly doing some shopping for her. I have helped her fix her internet so she could pay them online if necessary but I have no great hopes although she does realise the hygiene danger in using an ATM.

In the week the UK went into lockdown, ATM use fell by 50%, according to ATM network Link.

On the other side of the coin the banks do occassionally get something right.

The good news is that many banks and building societies have introduced the ability for you to pay a cheque in by taking a photo of it and uploading it to your mobile bank app.

Sweden

Now let us have a ying to the yang above as Sweden is the country which has moved the furthest in terms of using electronic money.

Cash is used to a lesser extent. The figure shows that the proportion of those who paid for their most recent purchase in cash has decreased from 39 per cent in 2010 to 13 per cent in 2018. (As from the beginning of 2018, the question refers only to purchases in physical shops). Source: The Riksbank.

If we switch to a more modern payment method which is using your smartphone then according to the Riksbank it is now as popular as using cash.

Number of payments by Swish increasing sharply. The figure shows that the number of Swish payments (millions of payments per year) made by mobile phone (in real time) has increased from 0 in 2012 to 400 million in 2018. Source: Bankgirot.

On a personal level I remember being impressed when the patient ahead of me paid for their physio with their phone which let me putting some notes in my bag feel a little antediluvian. But on the other hand I have seen people getting into a mess trying to pay that way at the supermarket. The trend are clear though.

 In ten years, the average Swede has doubled their card use.

Cash in circulation has been dropping for some time but there has been something of a reversal in recent times. For example it was over 100 billion Kroner in 2010 and fell to 57 billion in 2017 but has since picked up to 63 billion so we will have to see. The rally is of course minor compared to the previous drop but is intriguing when for example the use of smartphones for payment might make you think it would drop further. Maybe negative interest-rates have had an inverse effect in the same way they have boosted saving.

Speaking of negative interest-rates there have been some ch-ch-changes in approach and the emphasis is mine.

At today’s monetary policy meeting, the Executive Board has decided to continue the purchases of covered bonds and government bonds until the end of September, and to hold the repo rate unchanged at zero per cent. The Riksbank is prepared to continue to use the tools at its disposal to  support the economy and inflation.

This is very significant because it previously was one of the standard-bearers for negative interest-rates. Having plunged into their icy-cold grip early in 2015 they only ended the experiment at the end of last year and went as low as -0.5%. Yet in spite of the economic situation described by them below they have not returned.

The great uncertainty over the course of the pandemic
means that the Riksbank, in this report, has chosen to discuss developments on the basis of two different scenarios, rather than a single specific forecast. In these scenarios, GDP in Sweden this  year will be 7 or 10 per cent lower than in 2019, respectively, at  the same time as unemployment will rise to close to 10 or 11 per
cent, respectively.

Staying with the cash issue we now see that unless there is yet another U-Turn from the Riksbank it will not be put under pressure by the establishment lust for negative interest-rates for some time if at all. Of course for the Riksbank this means it has run negative interest-rates in a boom and raised them in a collapse which gives them something of a dunce’s cap or as Madness would put it.

You’re an embarrassment

Comment

There are many different perspectives here. I have looked at Sweden moving away from negative interest-rates and in a minor way ( banks only) Japan nudged away a little yesterday. On the other hand the Euro area seems firmly in their grasp. There have been rumours about New Zealand today which look just that for now but also ones about the US Federal Reserve. However I think they are not the central banking go to they once were not because of any concern for us but because of The Precious.

The reach of negative rates is limited, however, because commercial banks find it hard to charge negative rates to their retail depositors, who might choose to hold their wealth in cash. ( St. Louis Fed)

Of course ambitious young central bankers will be trying to think up ways of subverting this.

Also whilst Sweden has seen less cash in circulation others have seen it rise.

There are over 70 billion pounds worth of notes in circulation…….That is roughly twice as much as a decade ago… ( Bank of England)

The US has seen a not dissimilar pattern with the amount of cash in circulation being US $942 billion back in 2010 but US $1745 billion in March this year.

So the in spite of moves like the phasing out of the 500 Euro note by the ECB there is in fact more cash around in many places. So it is not dead yet. As ever the official campaign to discredit it goes on.

Large sums are also likely to be held overseas or for illegal uses: the so-called ‘shadow’ economy. ( Bank of England)

Meanwhile the large amounts of banking fraud going on is something they hope you will not spot although to be fair the Riksbank of Sweden gives it a mention.

The number of frauds with stolen card details or identities has increased, for example.

What next for the War on Cash?

Yesterday we took a look at a country which seems to be happy heading for a post cash era. Sweden has seen nearly a halving of cash use in the past decade and the size of the change would be even larger if we factored in inflation and did the calculation in real terms. This is particularly significant as we remind ourselves that Sweden already has negative interest-rates, and as I pointed out yesterday there are roads ahead where it would cut them further from the current -0.5%. The reason why cash is an issue for negative interest-rates is that it offers 0%, and so there must be a “tipping point” where interest-rates go so negative that bank deposits switch to cash in enough size to create a bank run. Such a prospect has created terror in central banking halls and boardrooms and has been the main barrier to interest-rates being cut even lower than they have. In my own country the Bank of England was so terrified of the impact of lower interest-rates on the “precious” that it claimed 0.5% was a “lower bound”, even when other countries were below it. That had a different reason ( their creaking antiquated IT systems could not cope with 0%) but told us of their primary response function.

Cash in the USA

The Financial Times has taken a look at this and seems upset at the result.

Americans can’t quit cash

If we switch to the actual research which was undertaken by  the Federal Reserve Banks of Atlanta, Boston, Richmond, and San Francisco we see the following.

In October 2017, U.S. consumers each made on average 41.0 payments for the month . Thus, on average, an adult consumer made 1.3 payments per day. Notably, an average
of 40.2 percent of consumers per day reported making zero payments. Also in October 2017, U.S. consumers each made on average $3,418 worth of payments for
the month.

So after finding out how much as well as how often? We get to see via what method.

In October 2017, consumers paid mostly with cash (30.3 percent of payments), debit cards (26.2 percent), and credit cards (21.0 percent). These instruments accounted for three-quarters of the number of payments, but only about 40 percent of the total value of payments, because they tend to be used more for smaller-value payments. In contrast,
electronic payments accounted for 30.3 percent of the value of total payments but only 8.9 percent of the number
of payments. Checks, at 17.7 percent, continued to account for a relatively high percentage of the value of
payments.

As you can see cash remains king (queen) in volume terms but has faded in value terms. The bit that sticks out to me is the amount still accounted for by Checks ( cheques) as I am struggling to think of the last time that I used one. Also the comments section provides a reason as to why cash remains in use for small payments on such a large-scale in the US.

Americans carry cash for smaller transactions partly because their unstinting devotion to the $1 bill means it is much lighter.  I can carry round a bunch of 1s and 5s for coffee in the day at a fraction of the weight of the euros or pounds that would do the similar job in Europe. ( Saughton)

For those unaware UK coins are fairly heavy and the £1 and £2 coins get more use than you might expect as the Bank of England has had its struggles with getting £5 notes into general circulation. So suit and trouser pockets can take a bit of a pasting. If we continue in the same vein even the convenience of digital payments faces an apparent challenge.

Those of us still paying cash are standing in lines behind phonsters fumbling with their payment app. When it looks faster and easier I’ll switch. ( Proclone )

That may be because it does not work well.

The other main reason the US lags on electronic purchases is because the cashless infrastructure is atrocious. ( Saughton)

Also that it may be businesses rather than consumers which prefer cash.

Mom and pop stores and restaurants may require cash for any transaction, and almost all do for purchases under $10. Cheques for larger payments are also due to vendor requirement. That dynamic would be worth comparing to other markets instead of implying consumer preference. ( Pharmacy )

What about the Euro area?

I noted that the replies pointed out the way that cash remains prevalent in Germany (historical), Belgium ( tax-avoidance) and Austria ( see Germany) so let us take a look. From the European Central Bank or ECB.

The survey results show that in 2016 cash was the dominant payment instrument at POS. In terms of number, 79% of all transactions were carried out using cash,
amounting to 54% of the total value of all payments. Cards were the second most frequently used payment instrument at POS; 19% of all transactions were settled using a payment card. In terms of value, this amounts to 39% of the total value paid at POS. ( POS = Point Of Sale )

I doubt using geography as a method of analysis will surprise you much.

In terms of number of transactions, cash was most used in the southern euro area countries, as well as in Germany, Austria and Slovenia, where 80% or more of POS transactions were conducted with cash……… In
terms of value, the share of cash was highest in Greece, Cyprus and Malta (above 70%), while it was lowest in the Benelux countries, Estonia, France and Finland (at,
or below, 33%).

The ECB thinks it tells us this.

This seems to challenge the perception that
cash is rapidly being replaced by cashless means of payment.

It then goes further.

The study confirms that cash is not only used as a means of payment, but also as a store of value, with almost a quarter of consumers keeping some cash at home as a
precautionary reserve. It also shows that more people than often thought use high denomination banknotes; almost 20% of respondents reported having a €200 or
€500 banknote in their possession in the year before the survey was carried out.

This means that the ECB will find itself in opposition to more than a few of its population soon.

 It has decided to permanently stop producing the €500 banknote and to exclude it from the Europa series, taking into account concerns that this banknote could facilitate illicit activities. The issuance of the €500 will be stopped around the end of 2018, when the €100 and €200 banknotes of the Europa series are planned to be introduced,

 

Comment

Let us consider the relationship between the use of cash and financial crime. You may note that the ECB statement uses the word “could”. That as I pointed out back on the 5th of May 2016 is because the German Bundesbank thinks this.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity……… the volume of notes devoted to such transactions is unknown and would be extremely difficult, if not impossible, to estimate.

So the ECB seems to be basing its policy on the rhetoric of Kenneth Rogoff who in a not entirely unrelated coincidence thinks that central banks will have to go even further into negative interest-rates next time around. Our Ken has been rather quite recently on the subject of cash equals crime. This may be because if we look above we see that Estonia has moved away from cash both relatively and absolutely and yet you will have had to have spent 2018 under a stone to have missed this.

Danske Bank Estonia has been revealed as the hub of a $234bn money laundering scheme involving Russian and Eastern European customers. ( Frances Coppola)

Perhaps the authorities were too busy checking on the 500 Euro notes and missed a crime that would have taken four of out five of the total Euro area circulation. Priorities eh?

There are levels I think where this will be come more urgent. I have suggested before that I think that around -2% would be the level where people might move away from banks on a larger scale. So far in terms of headline official rates the lowest is the -0.75% of Switzerland. Of course another problem area would be created if we saw bank bailins on any scale which may be a reason why so many bank share prices have struggled.

Me on Core Finance TV

 

 

 

How easily could the promises of an interest-rate rise from the Riksbank turn into another cut?

Today brings us to the country which on one measure has dipped into the world of negative interest-rates more than anyone else. This is the world of the Riksbank of Sweden which has this interest-rate on deposits with it.

The standing deposit facility means that the counterparty may have a positive balance on its account in RIX at the end of the day. The counterparty then receives interest calculated as the repo rate minus 0.75 percentage points. If this entails a negative interest rate, the counterparty pays interest to the Riksbank.

This is because the headline Repo rate is -0.5% meaning that the standing deposit facility is currently -1.25%.

For some time now, partly because as we will come to in a minute negative interest-rates have proved to be much longer lasting than promised or in official language been temporary, we have looked at the impact of this in cash and its availability. That has been in the news this week.

As cash use is declining rapidly, it is important that the Riksdag adopt a position on the issue of what constitutes legal tender in Sweden and its connection to the Swedish krona as a currency. Any legislation should be as technology-neutral as possible in order to also be applicable to any future means of payment issued by the Riksbank. ( Riksbank)

Sweden is a country which is in the van of those using electronic means of payment and if we look at the official figures the amount of money ( notes & coins) in circulation has been falling, at times sharply. The amount was 88 billion Kronor in 2013 and in subsequent years then has gone 80 billion, 77 billion, 65 billion and then 57 billion. The trend gets even clearer if we look back to 2008 the table suggests that the amount was around 107 billion. So we are left wondering if this year the amount will be half what it was in 2008.

However you spin it the situation is such that cash needs protection according to the Riksbank.

The Committee proposes a requirement that companies shall be able to deposit their daily cash takings in their bank accounts. The Riksbank wishes to go a step further even in this regard. Banks should also be obliged to ensure that private individuals can make deposits.

Of course some will think to quote Hamlet “”The lady doth protest too much, methinks”

The State of Play

According to the Riksbank things are going really rather well.

Economic activity in Sweden is strong and inflation is at the target of 2 per cent. Since the monetary policy decision in September, developments have for the most
part been as expected and the forecasts remain largely unchanged.

It hammers home the point even more later.

In Sweden, too, economic developments have been largely as expected and economic activity has been good for a long period of time……….. Inflation increased to
2.5 per cent in September, partly as a result of rapidly rising energy prices. Different measures of underlying inflation are lower and inflationary pressures are still assessed to be moderate. However, there are signs that inflationary pressures are rising and the conditions are good for inflation to remain close to the target of 2 per cent in the coming years.

I have given the full detail on the inflation situation because it highlights the mess that the Riksbank has put itself in. Inflation has gone above target and like so many central banks it is then keen to find any measure which gives a different but then trips over its own feet by telling us “inflationary pressures are rising”. So we have a tick in the box for an interest-rate rise.

Let us now look at the economic performance.

The labour market situation is expected to remain strong, even if GDP growth slows down going forward.

This is based on this from Sweden Statistics.

Sweden’s GDP increased by 0.8 percent in the second quarter of 2018, seasonally adjusted and compared with the first quarter of 2018. GDP increased by 2.5 percent, working-day adjusted and compared to the second quarter of 2017.

If we look back we see that GDP growth was 2.6% in 2014 then 4.5% in 2015 and then 2.7% in 2016. So the position has been strong for a while although the per capita (person) situation is not as strong as the population has risen by 2.3% over the same period.

Monetary Policy

If we note that the economy has been doing well and inflation is above target you would not expect this.

 the Executive Board has decided to hold the repo rate unchanged at -0.50 per cent.

There are two issues here the first is how it has arrived at a strong economy and inflation above target with interest-rates negative and the next is how doing something about this remains just around the corner.

the Executive Board assesses that it will soon be appropriate to start raising the repo rate at a slow pace. The forecast for the repo rate is unchanged since the monetary policy meeting in September and indicates that the repo rate will be raised by 0.25 percentage points either in December or February.

As an aside it used to be the case that central banks used to think that what is now called Forward Guidance was a bad idea. The Bundesbank of Germany was particularly enthusiastic about trying to act in an unexpected fashion. There is however a catch.

As you can see it has a 0% success rate with its interest-rate forecasts so whilst in theory it has a policy opposite to that of the Bundesbank in practice it has turned out to have even more surprises. Well unless you possess enough brains to figure out the game. Even more than the Bank of England it has attempted to get the changes provided by an interest-rate rise from promising it rather than delivering it. If there is a clearer case of the central banking boy (girl) who cried wold I do not know it.

Money Supply

You may not be surprised to read that money supply growth soared in response to  the negative interest-rates and QE of the Riksbank. In fact narrow money growth rate 15% at the opening of 2016 and broad money just failed to make double digit growth as it peaked at 9.9%. You might think if you look at the GDP growth data for the year that it was time to raise interest-rates but like the Bank of England when it had the chance the Riksbank apparently knew better.

Now we find something awkward for the recycled promise of an interest-rate rise. This is that in 2018 narrow money growth has fallen from 8.4% to 6.8% and broad money growth has fallen from 5.4% to 4.5% and as the 5.4% was a freak number if you look at the series as we had 6.4% through the spring. So looking at them in isolation you might be thinking of an easing. Oh hang on…..

Comment

The Riksbank changed course around 5 years ago and since then has mostly run a pro-cyclical monetary policy and reversed the conventional view on how to operate it. Regular readers will recall that was partly driven by Paul Krugman calling them “sado-monetarists” and they may also note that mentions of Mr. Krugman have noticeably faded. But they will also be aware that I have argued that negative interest-rates were described pretty accurately by Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

But as even supporters of the guidance are suggesting that there may only be one interest-rate rise I see trouble ahead. Monetary growth is plainly slowing and this week has brought news that such slowing in the Euro area is having an effect. The Bundesbank is worried about economic growth in Germany and this morning’s Markit business survey told us this.

The pace of Eurozone economic growth slipped
markedly lower in October, with the PMI setting the
scene for a disappointing end to the year.

So whilst two members of the Riksbank did vote for an interest-rate increase today I can see two scenarios increasing in probability. One is that they eventually do raise but then reverse quite quickly. Or more darkly that the next move is either another cut or easing in another form such as QE which would be the final confession that they are in as Coldplay put it.

And I lost my head
And thought of all the stupid things I said
Oh no what’s this
A spider web and I’m caught in the middle

 

 

What next from the war on cash?

This morning the BBC has posted an article on a subject I was mulling last Wednesday.  As I walked into an appointment for some treatment for my knee the person before me was paying for his appointment by using his phone and transferring the money directly. I by contrast had put some cash in my pocket so I could pay in that fashion. If we move on from me suddenly feeling rather stone age and he being much more cutting edge there was one work related issue on my mind. What does paying by phone do to the money supply? It reminds us that the money supply also includes the ability to borrow and whilst everyone obsesses about banks also reminds us that it can now come from other sources. Or perhaps I should correct that to their being more potential routes these days.

Paying by phone

Here is an example quoted by the BBC.

Nikki Hesford, 32, is a convert to person-to-person payment (P2P) apps, using PayPal to pay for services and Venmo to pay back friends.

“The only time in the last year I’ve drawn out cash is for the school fete cake stall and to pay my manicurist,” says Ms Hesford, who runs her own marketing support company for small businesses.

“If I go for a meal with friends I can’t be bothered messing about with two, three or four cards,” she says.

“One person will pay on a card and the others will transfer through an app. It takes seconds rather than minutes fussing around with who owes what.”

PayPal has been around for some time but the likes of Venmo seems a real change and I can see the attraction. Who has not been out to eat with a group and been in a situation where the money collected in is short but everyone claims to have paid? For all our thoughts that millennials and Generation Z have it tough they may have stolen a bit of a march on the rest of us here. Venmo will by its very nature record each transfer and provide a type of audit trail.

In terms of scale then the position is building.

Zelle, one of the most popular payment apps in the US backed by 150 banks, launched in June 2017, but has already processed more than 320 million transactions valued at $94bn (£72bn).

A recent report by Zion market research suggested that the global mobile-wallet market in general is expected to top $3bn by 2022, up from nearly $600m in 2016.

The argument in favour is that it is quick and convenient,

Rachna Ahlawat, co-founder of Ondot Systems, a payment services platform, perceives a marked change in consumer behaviour.

“We want transactions to happen in an instant and at the click of a button,” she says. “Consumers not only want to operate in real-time, but they are looking for technology that allows them to play a more active role in how they control their payments, and are finding new ways of managing their financial lives.”

Financial Crime

The official and establishment view is that cash is a curse and the high priest of such thoughts Kenneth Rogoff wants this.

Why not just get rid of paper currency?

His opening argument is that cash is a source of crime.

First, making it more difficult to engage in recurrent, large, and anonymous payments would likely have a significant
impact on discouraging tax evasion and crime; even a relatively modest impact could potentially justify getting rid of most paper currency.

Yet we discover that even the new white heat world of person to person payments has you guessed it found that the criminal fraternity are very inventive.

“Malware injections and reverse engineering attacks can be used by hackers to understand the app’s code and silently trick you, going undetected by the typical security measures.”  ( Pedro Fortuna from JScrambler )

The truth is that whatever financial area we move into we take the criminals with us and sometimes there are already there waiting for us to make a mistake.

“With the increasing number of apps all requiring some form of authentication, it’s all too tempting to reuse passwords across multiple services. This increases the risk of your data being hacked.”  ( Sam Devaney from CGI UK ).

The banks

There is a very inconvenient reality for the likes of Kenneth Rogoff which is that so much financial crime is to be found at the heart of the system “the precious”.

Banks in Denmark, the Netherlands, Latvia and Malta have all been linked to criminal inflows from countries including Russia and North Korea. The EU has moved to centralize banking supervision, but money laundering has remained a national responsibility.

At the moment the European Union seems to be the weakest link in this area although of course it is far from unique. As an example the situation at Danske bank was so bad it even found itself being trolled by Deutsche Bank which claimed it was only accepting one in ten of past Danske bank clients. According to the Wall Street Journal around US $150 billion of transactions are being investigated according to Reuters the bank itself is discovering large problems.

the Financial Times cited the bank’s own investigation as saying the Danish bank handled up to $30 billion of Russian and ex-Soviet money through non-resident accounts via its Estonian branch in 2013 alone.

The European Union seems to be particularly in the firing zone in this area right now and much of it seems centred in the Baltic nations. That reminds me that back on the 19th of February I looked at the issues facing ABLV in Latvia which developed into a situation where the central bank Governor Ilmārs Rimšēvičs has been charged with taking a bribe.

Whilst the European Union is presently in the firing line we know that banking scandals of this sort occur regularly in most places. Yet the establishment ignore the way that the banks are the major source of financial crime in their rush to implicate cash.

Some new notes

A sign that there is indeed counterfeiting happen was provided yesterday by the European Central Bank or ECB although it chose to present it another way.

New €100 and €200 banknotes unveiled!

Sadly the excitement captured only a couple of journalists attention but the press release did hint at “trouble,trouble,trouble.”

The new €100 and €200 banknotes make use of new and innovative security features.

I think we know why! But there was another sign.

In addition to the security features that can be seen with the naked eye, euro banknotes also contain machine-readable security features. On the new €100 and €200 banknotes these features have been enhanced, and new ones have been added to enable the notes to be processed and authenticated swiftly.

It makes me wonder how many counterfeit ones are in existence. This seems likely to get Kenneth Rogoff to add those note to the 500 Euro ones he wants banned.

Comment

This is a situation which has a paradox within it. We see that technology is providing plenty of ways which provide alternatives to cash and in spite of presenting myself as something of a cash luddite earlier I find them convenient too. Yet we want more cash in the UK the £40 billion mark was passed in 2008 and now we have according to the Bank of England.

There are over 3.6 billion Bank of England notes in circulation worth about 70 billion pounds.

We are far from alone as for example in 2017 the growth rate was 7% for the US and Canada and 4% for the Euro area and Japan. Yet the Bank of England confirms that the medium of exchange case has indeed weakened over time.

Cash accounted for 40% of all payments in 2016, compared to 62% in 2006

The Bank will have something of an itchy collar as it notes that the increased demand for cash will be as a store of value and the rise accompanies its era of QE and low interest-rates. Kenneth Rogoff is much more transparent though.

Although in principle, phasing out cash and invoking negative interest rates are topics that can be studied separately, in reality the two issues are deeply linked. To be precise, it is virtually impossible to think about drastically phasing out currency without recognizing that it opens a door to unrestricted negative rates that central
banks may someday be tempted to walk through.

As Turkish points out in the film Snatch “Who da thunk it?”

 

 

Number Crunching and Seigniorage at the ECB

This week has seen a flurry of activity at the ECB or European Central Bank and I do not mean the usual “sauces” which have been raising some doubt about a further reduction in the monthly flow ( currently 30 billion Euros) of QE bond purchases. Let us open with some Brexit bingo from the Financial Times.

Brussels is considering a €56bn raid on European Central Bank profits to plug a hole in the EU’s long-term budget after Brexit.  The European Commission will discuss the plan at its weekly meeting on Wednesday, where it is due to consider a range of new revenue sources as it tries to maintain its financial firepower once the EU’s second-biggest net budget contributor leaves the bloc in 2019.

There is some debate over whether the UK will be the second or third largest net contributor but you get the message. We also get a clear sign of the bureaucratic mind which of course wants more revenue rather than cutting spending in true Sir Humphrey Appleby style. But why not simply get the money from the usual sources ( minus one)?

The commission is considering an ECB cash raid as a quick way to generate money for the common EU pot as several wealthier members, including the Netherlands and Austria, refuse to raise their contributions to the €1tn EU budget after the UK’s departure.

Okay so as they do not want to pay how would it raid the ECB?

The ECB proposal would divert profits made by the eurozone’s 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56bn during the seven-year span of the next EU budget.

No doubt more than a few of you have spotted what Shakespeare would call the rub here but let me explain.

Seigniorage

This is the profit from issuing money which comes from the fact that if we take the example of the picture of the 50 Euro note it costs a lot less than that to make one. So as it comes off the printing presses hey presto there is a large profit, or rather when someone wants it there is. From the ECB.

They make their way to you via your bank, which pays the face value of the notes to the central bank. To do this your bank usually needs to borrow money from the central bank or it pays by handing over some of its assets. The central bank earns interest on the money it lends, or receives a return on the assets it acquires – and this is called seigniorage income.

To give you an idea the US Federal Reserve calculates it costs some 12.9 cents to make each US $50 note so the note is almost “all gravy” to coin a phrase. A little care is needed as smaller denomination coins actually make a loss – hence the campaigns from time to time to get rid of them – but overall the operation is extremely profitable. However you may note that it is not the capital profits under discussion here ( that presumable can wait for a more desperate time) it is the income from them.

Is anybody else thinking that the campaign to get rid of the 500 Euro note might now have a rethink? Kenneth Rogoff might go from hero ( of the establishment) to zero overnight.

But then we hit a rather large stumbling block.

Although the ECB does not physically issue banknotes, it has been agreed that of all the banknotes in circulation in the euro area, 8% – in terms of value – are considered to be issued by the European Central Bank. The national central banks put the notes into circulation on the ECB’s behalf, and the ECB earns seigniorage income on the 8% through the claim it holds on the national central banks.

Okay before we break that down let us have a break for some humour. From kim in a comment to the FT article.

The ECB takes a cut of the transferred seignorage, to pay for its Christmas Party.

But the 8% is a gift as you see the income goes to the central bank which is each national one.  Oops!

Danger! Will Robinson Danger!

There are consequences here and let me take you back in time to explain them. Let me illustrate from the Maverecon Blog of my tutor from back in the day Willem Buiter from 2009.

The NCBs that own the ECB themselves have a range of formal ownership arrangements, but
are ultimately under the financial control of their national fiscal authorities, because the
national fiscal authority can always tax the NCB.

So we are back in a way to how this story started because the money belongs to the national governments via their treasuries or if you consider belongs to be over playing it they can at least take it via taxation. It is not usually expressed as taxation but we regularly discuss payments from central banks to national treasuries as part of QE declared profits. Most of us would love to be able to declare something “independent” then sing along with the Steve Miller Band.

Go on take the money and run
Go on take the money and run
Go on take the money and run
Go on take the money and run

We of course would sooner or later end up in jail unless we had the wisdom to set up a bank ourselves. But then looking back to 2009 there is this that strikes to the core of the ECB itself.

What makes the ECB more independent than any other central bank is the fact that it has 16 national Treasuries as its counterparties rather than a single national Treasury. Should a European fiscal federal authority ever emerge, the anomaly of the ECB as a de facto as well as a de jure financially independent central bank would probably come to an end.

There are of course some extra treasuries now so it should be even more independent and yet seems set to lose it. My argument with my old tutor would be that politicians are pretty much the same the world over so the situation has always been more like the episode of Star Trek where the USS Enterprise is swallowed by a giant amoeba in my opinion. Of which this is simply the latest step. It should not be true under the rules of mathematics but we know that in human behaviour more can sometimes be less.

The Income

Actually there is a problem here too as the ECB notes.

Seigniorage income has been falling since 2008, in line with a decline in euro area interest rates.

Let me make that clearer because you see at the moment their isn’t any because the current account rate is a grand 0%. Actually contrary to the forecasts above the ECB under Mario Draghi seems in no hurry to raise interest-rates so they could be there for a while and may well survive his term as ECB President. If a recession hits they could cut interest-rates again in which case the European Commission will have shot itself in the foot.

Comment

There are several issues here which go to the heart of an “independent” central bank. Up until now it has operated in concert with the establishment where lower interest-rates and QE have generated gains for the establishment. But the irony of the European Commission proposal would be that it would lose if the ECB cut interest-rates again as seigniorage income would be negative. So suddenly we might find that they are keen on higher interest-rates which is quite a tangled web! It might have been far better if the subject had remained in the text books.

Also there are national issues as some national central banks issue more cash that others under the ECB system. We find ourselves quickly returning to yesterday.

The value of accumulated net issuance of euro banknotes by the Bundesbank rose between the end of 2009 and the end of 2017 from € 348 billion to € 635 billion. Since 2010
On average, the Bundesbank gave an average of € 35.8 billion in euro banknotes a year.
This corresponds to an average annual growth rate of 7.8%.

Or we can put that another way as Lorcan R Kelly does here.

The Bundesbank has, since the introduction of the euro in 2002, put a net 327 billion euros into circulation above its on-paper allocation………In total, 592 billion of the 1.1 trillion euros worth of banknotes in circulation at the end of 2016 started life at the Bundesbank.

The ECB explains this by giving an example of German tourists spending money abroad whereas I am sure I am not the only person who remembers the phase where people were worried about the Euro and therefore keen on “German” Euros as opposed to in the worst case “Greek” ones. Also should interest-rates rise there is a cost as you have to pay if over your allocation.

Should the ECB, over time, raise benchmark interest rates to 2 percent, for example, that would impose an annual cost of 6.5 billion euros on the Bundesbank.

So a transfer to the European Commission what could go wrong. Also if we note that this seems to be something under the aegis of Mr.Juncker he might be able to help out with this.

One more thing worth noting from the data is the position of Luxembourg’s central bank. It has an allocation of less than 3 billion euros and yet has put over 96 billion euros into circulation, and in this case it doesn’t seem like holiday makers are to blame.

So as a final thought is the US Federal Reserve planning a Seigniorage party with its interest-rate rises?

 

The Swedish monetary experiment faces the decline of both cash and house prices

It is time to take a look again at the policies of the world’s oldest central bank as we remain in the Baltic region. From the Riksbank of Sweden.

In 1668, the Riksdag, Sweden’s parliament, decided to found Riksens Ständers Bank (the Estates of the Realm Bank), which in 1867 received the name Sveriges Riksbank. The Riksbank is thus the world’s oldest central bank. In 2018, the Riksbank will celebrate its 350th anniversary.

Yesterday brought news which will cheer the Swedish government as it received something of a windfall from this creation mostly due to a revaluation of its gold reserves. It has some 125.7 tonnes much of which is in London ( or not if you believe the conspiracy theories).

The General Council proposes that SEK 2.3 billion be transferred to the Treasury.

However the last bit of the 350 years has seen the Riksbank break new ground proving that you can teach an old dog new tricks.

In light of this, the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent.

This was announced last week and technically applies from tomorrow although of course it is a case of what might be called masterly inaction. We see that the world of negative interest-rates not only arrived in Sweden but continues and in fact if we look deeper we see that it has an interest-rate of -1.25% on bank reserves which is the lowest to be found anywhere.

Also we see that the Riksbank surged into the world of Quantitative Easing bond buying.

The Riksbank’s net purchases of government bonds amount to just over SEK 310 billion, expressed as a nominal amount. Until further notice, redemptions and coupon
payments will be reinvested in the bond portfolio.

As you can see policy is now set to maintain the stock of QE with any maturing bonds reinvested. So our old dog learnt two new tricks which does provide food for thought when we note a 350 year history after all why was it not necessary before. Also as we look ahead we see signs of a third new trick.

Economic outlook

This seems set fair.

Indicators for the fourth quarter suggest that GDP growth
picked up at the end of last year………Monthly indicators for demand and output also indicate that GDP growth at the end of last year was stronger 
than normal. Both industrial and services production have increased………. 
The model forecasts indicate GDP growth of 3.9 per cent during the fourth quarter, compared with the previous quarter and
calculated at an annual rate.

So economic growth has been good as this would be added to this.

 GDP increased 2.9 percent, working-day adjusted and compared to the third quarter of 2016.

If we look back we see that GDP is around 16% larger than at the pre credit crunch peak of the last quarter of 2007. Looking ahead the Riksbank expects economic growth of the order of 3% annualised at the opening of 2018 with growth slowing a little in subsequent years.

Employment

As you might expect with strong economic growth seen the situation here has been positive too.

Last year, the number of redundancy notices reported to
Arbetsförmedlingen (the Swedish public employment agency) was at the lowest level since 2007 and the level of 
newly reported vacant positions was very high . The strong demand meant that both the employment 
rate and the labour force participation rate reached historically high levels.

Yet in spite of other signs of what has been in the past come under the category of overheating ( resource allocation is at its highest ever) we seem something very familiar.

 Estimates indicate that the definitive outcome for short‐term wages in the economy as a whole for the full year 2017 will, on average, increase by 2.5 per cent, 
which entails a downward revision compared with the forecast in December.

These days wage growth nearly everywhere we look in what we consider to be the first world is around 2% and seems to have completely disconnected itself from many factors which used to drive it. Is this another side effect of the QE era? In Sweden we see that businesses seem reluctant to pay more.

the preliminary rate of wage increase is significantly higher in the public sector than in the business sector. 
recent outcomes indicate that wage increases at the start of 2018 will also be lower than in the Riksbank’s 
assessment from December.

Unemployment

The overall rate of unemployment has fallen less than you might think due to this.

The large increase in the labour force led to
unemployment.

Which is further explained here as we wonder what “weaker connection to the labour market” means.

 Unemployment has not fallen further among those born abroad 
partly because the inflow of labour in this group has been large, 
but also primarily because people born outside Europe, on average,
 have a lower education and a weaker connection to the labour market.

So in reality there are two labour markets here where the Swedish born one is at what was considered to be full employment. Bringing them both together gives us this for January.

Smoothed and seasonally adjusted data shows an increase in the employment rate and a decrease in the unemployment rate, which was 6.5 percent.

Inflation

This morning’s update from Sweden Statistics told us this.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.6 percent in January 2018, down from 1.7 percent in December 2017. The HICP decreased by 0.9 percent from December to January.

The inflation number above is using the same methodology as in Europe and the UK and as you can see there is not a lot of inflation for an “overheating” economy. The Swedish measure called CPIF fell from 1.9% to 1.7% leading some to seemingly lose contact with reality.

Is Sweden’s inflation shortfall – short-term core trend below 1% versus 2% target – a serious concern? ( SRSV )

Not for Swedish consumers nor for workers as we note that in the past at least Sweden can have inflation.

The CPI for January 2018 was 322.51 (1980=100).

Those who follow my specialist interest in inflation measurement may have a wry smile at the cause of the fall.

 In January 2018, the basket effect contributed -0.2 percentage point to the monthly change in the CPI, which is close to the historical average.

Comment

There is a lot to consider here and the first is a familiar one of how will the Riksbank exit from its negative interest-rates and QE? It was promising interest-rate rises later this year but we have seen those before and the dip in the inflation rate puts it between a rock and a hard place which is before we get to this. From Bloomberg last month

Data released on Monday showed that home prices continued to slide in December, dropping 2 percent in the month, according to the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. The three-month drop was 7.8 percent, the steepest decline since late 2008. Prices were down 2.5 percent from a year earlier, the biggest drop since March 2012.

This may be a response to new rules that have been imposed in recent times on interest-only mortgages in response to this reported by Reuters.

Currently, around 70 percent of Swedish home owners have interest-only mortgages, meaning they do not pay off any of the principal of the loan they have borrowed.

Care is needed with the house price data as the official numbers show rises continuing but as 2018 progresses it too should be picking up ch-ch-changes. This leaves the Riksbank in something of a pickle of its own making as many of its members from the last 350 years would recognise but not apparently those in charge now. Especially as the economic growth in the credit crunch era does not look quite so good when we note the population has increased by around 9%.

Meanwhile we have yet another fail for economics 101 as I note this from Bloomberg earlier.

Last year, the amount of cash in circulation in Sweden dropped to the lowest level since 1990 and is more than 40 percent below its 2007 peak. The declines in 2016 and 2017 were the biggest on record.

With negative interest-rates one might have expected cash demand to rise but it has not returning me to me theme as yet untested that around 1.5% will be the crucial level. Still if nothing else Kenneth Rogoff will be delighted at the sight of Swedes waging their own war on cash. What could go wrong?

What is happening in the war on cash?

One of the features of the credit crunch era is the way that the establishment so regularly pushes the idea that cash money is bad for us. If we stop for a moment there is quite an irony and contradiction here as of course the various establishments have created so much more money via the use of Quantitative Easing. The leader in this regard has been the Bank of Japan which announced this back in April 2013.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen………In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base….

Actually it decided in August 2014 that even such an extraordinary number was not enough as like Agent Smith in the Matrix series of films the cry went up for “More! More!”.

The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).

Of course plenty of other central banks have been playing the same game as we see the Bank of England with its £435 billion of conventional QE and the ECB with around 1.8 trillion Euros of it and the US Federal Reserve with a balance sheet of US $4.47 trillion. The other side of this has been the money created which has sloshed around the financial world ever since exacerbating the problems that we are now told are the fault of cash!

The fanatic pursuing this argument Kenneth Rogoff will be familiar to regular readers and here from NPR is his argument.

Well, I think that a lot of the money – these big bills – is used to facilitate tax evasion and crime. We all use cash in our everyday life, but we don’t use hundred-dollar bills. We’re not using 500-euro notes. And yet these account for mountains of cash out there. I think they’re being used in tax evasion and by criminals of all types.

This is very awkward for our Ken and sadly he is rarely challenged on the two main problems. Firstly as I have described above the world has been flooded with base money with policies he supported which has facilitated all sorts of problems some of which he is now blaming on cash. Next if we apply the principle of banning things which are used by criminals and terrorists then we need immediately to get rid of mobile phones and as they seem to be increasingly using cars,vans and lorries they need to go as well. They also use houses and so on……

The UK seems to be demanding ever more cash

I referred to this a few days ago but here is some more detail from the Bank of England on the subject.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

The speculation referred to links to an article in the Guardian discussing the cashless society. Then the Bank of England points out that we are far from alone with this trend.

Banknote growth has been continuous, despite cash’s popularity as a payment method declining. In 2015, cash accounted for less than half of consumer payments (volume) for the first time. This paradox of falling transactional use of, but rising demand for, notes is faced by many other countries.

So it would appear that our road to a cashless society is er paved with cash, how contradictory! As to the cause well the author choses her words neutrally because it is rather close to home.

One factor driving this is low-interest rates incentivising increased hoarding, so notes remain in wallets and the retail sector for longer.

Let me spell this out the low interest-rates applied by the Bank of England have slashed the cost of holding cash. Also some will be afraid that the ideas of Kenneth Rogoff will be acted on so that further interest-rate cuts can be made and negative interest-rates can be enforced.

We are referred to some Bank of England research which is rather damning for Kenneth Rogoff.

However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.

Ken can apparently…..

The housing market

One feature of the modern era is high and indeed unaffordable house prices which of course have been driven by policies which Kenneth Rogoff has been a cheerleader for. Well there is a massive irony in this being reported by the Financial Times today.

Cash is pouring into UK residential property as never before, with buyers less reliant on mortgage finance in 2016 than at any time since comparable records began.

The scale of this issue is described below.

Using official figures on the number of property transactions and average prices, plus Bank of England data on mortgage financing for house purchases, the IMLA ( Intermediary Mortgage Lenders Association) estimated that £418 of every £1,000 used to buy property in 2016 was in cash. In 2013, when the BoE first collected comprehensive mortgage data, the cash contribution was £377, although the proportion of cash used for house purchases has been growing for a much longer period, the IMLA said.

I have to confess that this is a larger proportion than I was expecting. Also the FT’s economics editor has a really odd view on the creation of money.

Much of the cash is created by rising property values.

If true no wonder central bankers are so keen on ever higher house prices. Also as I have pointed out so many times, what could go wrong here?

Mr Williams said the Bank of England should relax the rules to make it easier for people without access to a large cash deposit to get a mortgage.

The issue here is that property prices have been driven higher by all the monetary easing and the ordinary person has been priced out more and more often. That is the fault of the central banks and has also been associated with more money laundering where the money is called cash but is more often the electronic money the central banks are so keen on. Giving people ever more debt is part of the problem not the solution here and of course debt has led to rather a lot of financial crime.

Bitcoin

The war on cash makes alternative currencies look more attractive because they are outside the grasp of both governments and central banks. So it is hard to avoid such thoughts as we note that the price of Bitcoin has now passed US $1700. There are of course other factors such as money flowing out of India and China but it particularly intriguing to see Japan make it a legal means of payment. It is so often Japan isn’t it? Perhaps they increasingly fear even that interest-rates could go even more negative.

Comment

There is much to consider here but there is a huge irony and indeed hypocrisy in those who have flooded the world with electronic money blaming cash money for ills it contributed too. Many scandals such as “liar loans”, PPI miss selling, Li(e)bor and foreign exchange rigging had nothing to do with cash. Indeed in the news today is another example of a whole wave of financial crime that was nothing to do with cash.

Noel Edmonds, the television celebrity, has written to the boss of Lloyds Banking Group to demand compensation that his lawyers claim could run to more than £50m in connection with the fraud scandal at HBOS. In correspondence seen by the Financial Times, Mr Edmonds says HBOS and its disgraced former employee, Mark Dobson, destroyed Unique Group, his former business, a decade ago.  ( Financial Times).

I do not know the individual circumstances and there will no doubt be plenty of ” Mr Blobby” and “Deal or No Deal” jokes but I do know that there have been many problems in this area that seem to take forever to come to justice. They are nothing to do with cash.

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?

First they came for the 500 Euro note

Back on the 2nd of February I discussed a disturbing development in the world of monetary policy and central bank action.

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.”

Well maybe not only criminals as this next bit from the Financial Times shows.

The €500 note, beloved by gangsters and Greek savers, is now being investigated for ties to terrorism.

So the official story is to tell us that it is being done to reduce crime and terrorism and if you want a job at the ECB all you need to do is to think up another excuse along those lines!

The ECB announcement

Yesterday there was a further announcement from the ECB.

It has decided to permanently stop producing the €500 banknote and to exclude it from the Europa series, taking into account concerns that this banknote could facilitate illicit activities. The issuance of the €500 will be stopped around the end of 2018, when the €100 and €200 banknotes of the Europa series are planned to be introduced.

What is an “illicit” activity?

There is an issue here and it comes from the FT quote above which mentions Greek savers. What was illicit about them wanting 500 Euro notes? Well they took the money out of the banking system and higher denomination notes are the easiest way of doing that. Indeed those the bankers who run the central bank will no doubt have noted that the money in fact has not gone back. The ECB still has to deploy some 69.1 billion Euros of ELA (Emergency Liquidity Assistance) in Greece and yesterday we got an update on the position of some deposits. From Kathimerini.

In March there was an 182.3-million-euro drop to 41.2 billion euros, while since July 2015, just after the government introduced capital controls, the decline has come to 6.6 billion euros.

The annual decline from a year earlier (March 2015) is 25.9 billion euros.

Is that the illicit activity the ECB wants to stop? After all in Greece a bank run caused trouble for it which is significant when you consider its small proportion of the Euro area monetary system. What about Italy for example where the new Atlas bank recovery fund is being used up at a rather expresso rate? There is also Portugal where even the Novo Banco turned out to be old school and caused trouble for the Bank of Portugal. If we see the problems raised by little Greece ( which are ongoing…) then adding even Portugal would give the ECB quite a headache.

Is the 500 Euro note used for crime?

The largest of the ECB national banks does not seem to think so. From the German Bundesbank annual report.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity……… the volume of notes devoted to such transactions is unknown and would be extremely difficult, if not impossible, to estimate.

As you can see the evidence simply does not exist which is awkward to say the least for those who parrot the establishment line. From Jon Henley in The Guardian.

€500 ‘Bin Laden’ banknotes to be axed

Indeed there is more.

The €500 note, reportedly so prized by criminals that it trades above its face value

You might have though that the Bundesbank might have spotted this or indeed the other national central banks as it says they have no evidence either. Still I suppose “reportedly” offers a get-out cause. Oh and I thought that Bin Laden was supposed to be no longer with us.

Evidence for my case

By contrast there actually is evidence for my argument that this is being done to protect the banks. From the Bundesbank again.

for instance in the wake of the Lehman crisis that broke out in September 2008……….between October 2007 and October 2008, the value of €500 notes in circulation went up by around €40 billion.

So the main driver of any extra demand for 500 Euro notes was fears over the banking system. Is that a new version of an illicit activity?

Why the 500 Euro note?

Back on the 2nd of February I explained why it was in the firing line.

It was only on Friday that I pointed out that according to Gabriel Sterne that via the 500 Euro note then you could hold the equivalent of one billion US Dollars in the smallest possible space. In case you are wondering it is 3 metres cubed as opposed to 12 in US Dollars, 16 in Japanese Yen and a bloated 21 in UK Pounds.

Negative Interest-Rates

Many of you will be thinking that any war on cash will start this way as access is withdrawn. It is also clear that this is being implemented by a central bank which has negative interest rates ( deposit rate of -0.4%) and via QE has driven many bond yields negative as well.

As you can see the world of negative yielding bonds has found something of a home in the Euro area and I hope Italain readers will forgive my wry smile at the reality of negative yields there. But wait it is not just government bonds anymore as Mario Draghi sends out his buyers to chomp like Pac-Men on corporate bonds as well.

Those who find themselves increasingly facing a world of negative interest-rates and yields are likely to find even a 0% return attractive. For central bankers as the Bundesbank points out this present a problem.

As long as cash exists, shortterm interest rates can never be pushed far into negative territory…….. Hence the existence of cash constitutes an effective lower bound for short-term interest rates.

Somewhere approaching -2% I think.

Comment

There is much to consider in this as of course most of us have chosen to use cash less and electronic money more. This has been illustrated by this from the boss of Mastercard in Business Insider.

“By the time we get to another generation, 30 years down the track, will there be any cash? I very much doubt it. The idea of carrying coins — 2p, 1p, 50p all cluttering up your pocket — it will be an anachronism. It will seem as antediluvian as carrying a pouch full of gold.”

I am not sure about a 500 Euro note cluttering up your pocket and he is obviously pushing his company’s line but the later example of contactless paying on London Transport is valid. But there is a world of difference between choosing to do something and being made to as all observers of human nature and behaviour will be aware of.

Also as the group pushing for negative interest-rates are usually those who advocate helicopter money there is a conceptual issue. More helicopters will be required for the drop! That I supposed will be badged as a boost for GDP. Also as the main store of large helicopters is the UK RAF that alternative route may be blocked next month.

Oh and in time there may well be another issue as Blake Lavak pointed out to me on Twitter.

to be replaced by the Euro 1000 banknote as soon as Draghi gets his beloved inflation, surely. Remember the lira.

Who would have thought that Pink Floyd would have written the central bankers theme song?

Money so they say is the root of all evil today.

Also how would they deal with Wu Tang Clan?

Cash Rules Everything Around Me
C.R.E.A.M.
Get the money
Dollar, dollar bill y’all

That is before we get to the US $2 million album which is probably idealised and considered illegal by central bankers at the same time.