Wednesday, July 11, 2012
Today something happened that TMM have only heard of happening in historical epoch pub stories of money market dealers of old. Negative cash rates in a major currency. Of course this has been the case with the Swiss Franc for some time, but TMM have coped with the logic of Swiss negative rates by confining all things Swiss to a little box that works in a parallel universe of finance on different laws of financial physics, where cuckoo clocks, expensive watches, hard cheese and mountain shaped chocolate bars operate in their own airport duty-free shop of unreality.
Yet this unreality has now permeated our own real universe with (and here cast your minds back to those post Maastricht glory speeches) the mighty Euro being so unwanted that you have to pay other people to take it off your hands. So in the case of this deposit, a fund manager has consciously placed your money at a known negative rate and he will charge you say a 0.50% management fee for this skill. Which does beg some pretty serious questions of fund management charges. As we are told that the fund mangager's fees are of course geared to performance so we expect negative management fees to be charged, with the manager receiving negative pay (paying to go to work).
At the moment negative yields sit firmly in electronic-money land with paper money immune from holding fees other than "wallatage", the cost of storage and security. In the case of Switzerland we have seen demand for highest denomination notes go up through the roof (we have posted the figures here in the past). We now expect the same to happen to Euro notes with "Wallatage" being replaced by "Mattressage" whereby wholesale cash moves out of banks, which is a shame as the last thing the European banks need is a run on deposits.
Mattressage in bond land has already resulted in negative yields in the front end of Germany and Denmark and today's moves in the Bund are pushing it further up the curve, but a negative yield is not enough to spur core domestics from taking cross border asset risk, with the related volatility risk, so it stays parked in euro stuff. However for the speculator the Euro is now firmly a funding currency and so on an fx basis the Euro is going very yennish, which means eur/yen goes downish.
But back to our thought experiment playing with the alternatives to paying to have someone look after your electrons (for this is all most money is, where the storage cost for a few bytes of data is remarkably low). We most simply end up with Europe storing its wealth in cash. How could the powers that be detract from this? Other than introducing unenforceable laws about maximum cash holdings, an alternative is to reduce the supply of bank notes in issue. This could lead, through arbitrage of holding costs, to bank notes trading at a premium to face. 505 Euros for a 500 euro note sir? Other fanciful ideas could include biodegradable notes that decay under your pillow or perhaps a reverse bank note auction on Saturday evenings on prime time TV where random bank note numbers are drawn and those notes cancelled.
But what do we call this new scenario? It's related to the cost of money itself in money terms rather than other asset terms. It isn't inflation and it isn't deflation. It's off on an axis all of its own creating all sorts of confusion as so far the only kind of 'flation' it has produced is imaginary and theoretical rather than observed. Just like the Imaginary Numbers we learned about at school, perhaps we should call it i-flation.
The whole idea of making money a costly and toxic asset does lead us into a parallel universe of negativity with negative money spawning from negative rates, where money avoidance is the game. Negative pay, you are paid to take food from shops, paid to fill up with fuel, muggers would hold you up at gun point and stuff your pockets full of money and most ironically Bankers are made to take the biggest bonuses possible (Bob Diamond being given £2 bio as a farewell gift). Basically the name of the game is to keep your bank balance as negative as possible. Which socially would be quite acceptable as the 1% and the 99% immediately find their positions in life reversed. Cheaper than revolution.