In a world plagued by low productivity, inequality, negative interest rates and deflation, the idea that something as simple as a physical cash ban might magically turn things around is, understandably, a tempting proposition.
Furthermore, there are many convincing arguments for why this would be the case.
Most simply, cash is the means by which the criminal and tax-dodging grey economy get to have their cake and eat it: i.e. retain a right to claim the fruits of a collaborative and productive society supported by a social welfare system funded by taxes, without having to contribute their share of the bill (or in the case of the criminal element, despite actively disrupting the collaborative structure). Without cash, then, crime doesn’t pay, because there’s no way to protect the proceeds of a criminal lifestyle. As a consequence, the argument goes, criminals would simply pack it in. Read more
We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen.
More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless. Read more
How much would you pay for a bundle of 100 1-renminbi bills?
Is the answer Rmb109? Read more
An interesting data point in the wake of this week’s SMP sterlization fail.
The amount of cash on overnight deposit at the ECB has breached the ‘psychologically important’ €300bn for the first time since June 2010. Read more
Hat tip to International Financing Review’s Christopher Whittall for directing us to this rather interesting article by Gareth Gore at IFR about the rise of collateral-swap type deals between European institutions and US investment banks, seemingly to plug the financing gap created by the departure of the US money market funds from Europe.
The following paragraphs are especially poignant, we think (our emphasis): Read more
Cash may be king but it’s going to cost the subjects. Negative interest-rates are here and that’s rarely a good sign. Click through for the two-page explanatory note sent to clients by BNY Mellon. A 13 basis point fee will be charged on accounts with an average monthly balance of over $50m “per client relationship”. An additional fee will be levied if 1-month T-bill yields fall below zero; at pixel-time they were yielding a quarter of a basis point.
BNY Mellon to charge on $50m-plus deposits – FT
The search for a safe haven just got even trickier. BNY Mellon announced on Thursday that it is to charge a fee on all those cash deposits piling in as investors flee risk assets. Presenting, then, the latest cash killers — flashes courtesy of Reuters:
Thursday, August 04, 2011 10:54:35 AM RTRS – BNY MELLON SAYS TO CHARGE FEE ON “EXTRAORDINARY” DEPOSITS; TRADERS CITE THIS FOR US T-BILL DEMAND BK.N Read more
Use it as collateral of course.
We refer, of course, to the massive cash reserves built up by banks due to quantitative easing. Reserves which, as most deflationistas point out, have been stuck firmly on banks’ balance sheets rather than making their way through to the real economy — thus supposedly having little inflationary impact. Read more
It gets less attention than its credit-denominated relative, but the 2008 financial crisis actually sprung from a massive ‘collateral crunch’ within the shadow banking system.
Read Manmohan Singh on rehypothecation, or try to get your hands on Matt King’s seminal ‘Are the brokers broken?’ note. The Citigroup credit analyst warned just two weeks before Lehman’s collapse that “brokers’ and banks’ gross usage of repo, revealed in footnotes of 10-Qs, far exceeds that which shows up on balance sheet. Although in principle much of this is for clients (mostly hedge funds) it still makes their business as a whole much more dependent on the continued availability of repo funding than might otherwise be appreciated.” Read more
The FT reports that some of Wall Street’s biggest banks are preparing to cut their use of US Treasuries in August as a precaution against any turbulence that could follow if warring Republicans and Democrats fail to increase soon the US debt ceiling, a senior bank chief said. One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system’s reliance on Treasuries. Market Oracle has a guide to financial crisis and repo.
Here’s something you don’t hear very often in the City of London: cash doesn’t get the attention it deserves as an asset class.
But SocGen’s strategist Dylan Grice wants to change that. He reckons there are times when it’s simply the best thing to own. Read more
Talk of Japanese investors repatriating their foreign exchange holdings continues.
And with headlines like “Japan’s Mrs. Watanabe says: ‘hold off on carry trade,” how could it not? Hold the thought, though — because Nomura is back to quash it. Read more
Here’s Brian Lenihan interview with RTE in which he says Ireland needs a IMF/EU bailout loan — but not a three figure one.
More as we have it. Special cabinet meeting later on Sunday.
Short-selling info firm, DataExplorers, reports on Tuesday that the amount of commercial paper (CP) and certificates of deposit (CDs) — otherwise known as ‘near cash’ instruments — held by custodians has quadrupled over the past six months. The thing about commercial paper and CDs is that they’re relatively safe to own, says FT Alphaville, but typically pay no or very little interest — in other words, they’re not the highest-yielding of assets. Read more
According to an ECB document made public on Wednesday, the Greek finance ministry sought advice from the European Central bank on a draft law it hopes to introduce to restore fairness in taxation, and which would also address tax evasion.
(H/T @fiatcurrency) Read more
Just how much cash is sitting on the sidelines? That’s a question many people are asking right now, with seemingly everything (except the US dollar) rising.
Fortunately, Tim Bond, the head of asset allocation at Barclays Capital, is on hand to provide some answers. From the latest edition of his Global Speculations: Read more
The crisis in money markets has been a running theme here on FT Alphaville recently, particularly its potential impact on your average, run-of-the-mill corporate. Soon we may have more of a clue just what some of the effects might be.
Ford Motor has $1.5bn in debt coming due today; whether it uses cash to pay that down or part of its $11.5bn revolving credit line will be an interesting datapoint for money markets as well as a gauge of corporate confidence in the banks.
The credit line, part of a larger restructuring plan negotiated in 2006 (along with $23.4bn of borrowings), is complicated by the collapse of Lehman Brothers. Bloomberg reports: Read more
Just when you need it most, gold isn’t living up to its safe haven reputation. Reuters reports:
Tokyo (Reuters) – Gold dropped 1.5 percent on Tuesday as investors viewed bullion as a risky asset, preferring to lock in their positions to raise cash amid deepening financial turmoil after the implosion of Lehman Brothers…