Saturday, March 5, 2016

What's Happening to Our Money?

Burn these bills?

I joked last week about a current trend of economists' recommending elimination of large-denomination currency like $100 bills and 500-Euro notes in order to protect ourselves from global terror and crime cartels.   My suggestion was to get rid of the U.S. penny instead.

In the last several days, serious people have attacked the no-high-currency agenda as part of a larger concern -- the increasing chance that negative interest rates will reduce the value of personal savings.

James Grant, editor of the always-interesting Grant's Interest Rate Observer noted this in an interview the other day.

        . . . you hear this persistent . . . drum beat in Bloomberg and the
        Financial Times and other organs of advanced monetary thinking,
        which is that we must retire, we must get rid of these large
        denominations because they compromise central bank control.
        They facilitate terrorism and terroristic financing because they are
         the very essence of money laundering; we must get rid of them.                              Well, these thoughts are widespread, and what
         precedes implementation of these ideas is a discussion of them.
         I think this is coming.

Negative Interest Rates
Meanwhile, central banks have been adopting negative interest rates for money they hold on deposit from commercial banks.  Currently, Credit Suisse loses 75 francs annually for each 1,000 francs it parks in the National Bank of Switzerland.  The European Central Bank rate is -0.30%; Sweden's is -0.50; Denmark's -0.65%; and Japan's -0.10%.

The goals of negative rates are to push money out of banks and into investments, and to increase currency inflation and decrease the value of a currency in the interest of promoting exports.

This doesn't always work, unfortunately; Japan's currency value has increased 10 percent against the dollar since it adopted its negative rate two months ago.

Fed Rates in the U.S.

Last year, the Federal Reserve appeared to buck the negative interest rate trend.   After holding its rate near zero since 2008, the Fed raised the rate to 0.25 percent in December.

Talk at the time suggested there would be four additional bumps in 2016.  Then economists said maybe only two bumps.  Then zero bumps.  By mid January, James Grant was saying the Fed should cancel the December increase and go back to the zero rate.

Then, last month, the Economist reported that the Fed had asked large American banks to estimate the effects (on the banks' balance sheets) if short-term treasury yields were to go negative -- say to -0.5% -- for a period of years.

We live in wild times now.

Interest Rates for Consumers

None of this means that your local bank will start charging you to have a savings account before the snow melts.  If negative rates are adopted, the largest depositors will be the first to feel the pain.

On the other hand, a simple savings account at Bank of America currently pays 0.1% interest.  If there is any inflation at all, the value of your savings already is declining.

Back to James Grant, who explains the obvious.

        Interest rates are positive, because, in general, people prefer things now rather than
        later.   There's a reward for waiting, a reward paid to the saver for waiting, and that's
        called interest.
                 Negative interest rates seem to turn that aspect of human psychology on its head
        and they reward you for wanting something now. It doesn't make sense. So negative
        interest rates are a conceit of the academic economists who run the monetary
        institutions of the world. I think the theory is dubious and the practice, as we have seen
        it so far, is equally doubtful.

Bill Gross

William H. Gross, a legendary investor, ran a huge bond fund that for many years outperformed its rivals by 50 to 100 percent every year.  There were some stutters starting around 2011, and he left his firm (along with many of his investors) in 2014 for the welcome embrace of the Janus group.

This week Gross released a widely circulated analysis of the current interest rate environment.

His theme was that credit -- the loans and bonds that funded businesses and grew the economic pie and the expansion of government programs -- has been changed utterly in recent years.

His targets were low-to-negative interest rates.

      Private sector savers are growing leery of debt piled upon debt and government regulators
      have begun to build fences against further rampant creation. In addition, the return offered
      on savings/investment whether it be on deposit at a bank, in Treasuries/ Bunds, or at
      extremely low equity risk premiums, is inadequate relative to historical as well as
      mathematically defined durational risk.

      The recent collapse in worldwide bank stock prices can be explained not so much by
      potential defaults in the energy/commodity complex, as by investor recognition that
      banks are now not only being more tightly regulated, but that future ROE’s will be much
      akin to (those of) a utility stock.

Gross also warned against the equity of insurance companies that forecast performance based on future annual investment returns of 7% to 8%.  He said that government pensions funds, many underwater already, also are assuming unachievable high returns to pay for promised retirement benefits.

He also warned us little people.

      And the damage extends to all savers; households worldwide that saved/invested money
      for college, retirement or for medical bills. They have been damaged, and only now are
      becoming aware of it. Negative interest rates do that.

Then Gross echoed James Grant's original point:

       There is a somewhat suspicious uniform attack on high denomination bills of global
       currencies. Noted . . . (leaders) all seem suddenly concerned that 500 Euro or 10,000
       Yen notes are facilitating drug dealers and terrorists (which they are). But what’s an
        economist/central banker doing opining on law enforcement?

       It appears that the one remaining escape hatch for ordinary citizens is being closed.
       Money in a mattress will (soon) be associated with drugs/terror. The cashless society
       which appears over the horizon may come sooner than the demise of the penny!

       Give a 500 Euro/take a 500 Euro is in our future I guess. Both that and the lowly penny
       will be equally scorned.

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