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On Banknotes
On Banknotes
Courtesy of Bruce Krasting
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There is a curious story in the Swiss press today. On the surface it appears innocuous.
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Paper money has been in transition for the last ten years. Most of the big issuers of paper have updated their bills to minimize forgery. The US has spent a bundle on this effort, and it too has had problems and delays with issuing the new, more complicated money. So my first thought about the Swiss delay was that this is more of the same. Technical printing problems are to blame.
My second thought is that this is not a benign delay; something more than meets the eye is happening. There have been press reports in Switzerland that commercial banks are no longer able to meet client demand for safe deposit boxes. All of the boxes are apparently taken. As a result, people are renting safe deposit boxes in hotels. (Link)
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From Le Temps 2/6/2012:
A distinguished lady had hidden 65,000 euros in the heels of her shoes and her bra.
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A Labrador is trained to sniff out banknotes in Chiasso.
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A motorist was caught in early February with more than 200,000 euros hidden at the bottom of his suitcase.
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In a survey of "the great capital flight", the daily La Repubblica suggests a rise of 50% of receivers of property along the border with Switzerland in late 2011 over the summer.
Interesting. What in hell is going on here? Why are safe boxes so much in demand? What is in these boxes? Is it gold? Probably. Cut and uncut diamonds? Probably. I don’t think that all these boxes are being filled with deeds, wills and other important papers. The vault boxes are being used as a store of wealth.
So I ask, “Is there paper money in these boxes?” The answer is,“Of course there is”. Bigger questions are, “How much paper money is going to boxes? And who’s putting it in there?”
Sadly, I don’t have an answer - only an opinion and some thoughts. I think that these boxes are filled with:
A) Hot money from Swiss banks with customers whose names and accounts that are in the process of being revealed to host country taxing authorities and,
B) New money from Italian, French and German citizens who fear that their Euros will lose value.
The Swiss National Bank would have to be fully aware of this. It would be seeing a huge demand for Swiss paper money. It is responsible for printing the bills, so it knows exactly what is happening. In fact, the SNB has been facilitating this for years. The following information on banknotes in circulation is from the SNB in 2010.
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I would love to know what these numbers are in February of 2012. I'm assuming the paper money outstanding today is much larger than what existed at the end of 2010.
Note that 59% of all bills outstanding are of the 1,000 CHF denomination. This is crazy. It's the same as having $1,000 bills in the USA. Can you imagine going into a Starbucks to buy a paper and a coffee and tendering a $1,000 bill? It wouldn’t work in the US. The SNB provides the obvious explanation for the huge float in large denominations.
The high proportion of large denominations indicates that banknotes are used not only as a means of payment but also – to a considerable degree – as a store of value.
Right, the big bills are for stashing wealth away.
Thomas Jordan, the new interim head of the SNB, spoke yesterday about the intervention policy of the SNB. He was as clear as you can get. The SNB isn’t going to let the EURCHF peg fall below 1.2. Period:
We remain firmly committed to defending the minimum exchange rate of CHF 1.20 per euro.
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This commitment applies at any time, from the moment the market opens in Sydney on Monday to when it closes in New York on Friday.
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We will not tolerate any trading below the minimum rate in the relevant interbank market.
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To enforce this policy, we are prepared to buy foreign currency in unlimited quantities if necessary.
Mr. Jordan is also responsible for issuing bank notes. Given that he is prepared to sell CHF to all comers in any market, at anytime of the day, he must also be willing to print more paper money to meet the demand.
I think this is exactly what is going on. When the 2011 information about Swiss banknotes in circulation is released, I anticipate a very big run up in bills outstanding, and most of those new bills will be of the CHF 1,000 variety. This is the same money that is now filling up those hotel vaults in Switzerland. The CHF banknotes are also leaving the country and ending up in mattresses all over the world.
What a ridiculous situation this is. Ten of billions of Francs are gathering dust. This money has no incentive to emerge, as interest rates in Switzerland are already negative. One is better off leaving the money in a box than in a bank.
The Swiss story is on the top of the list of arguments against currency intervention and monetary policies that drive interest rates to negative levels. The fact that Swiss hotel safe boxes are filling up with CHF 1,000 bills is proof of a failed policy.
I will report on the outstanding banknotes in Switzerland when the SNB makes the information available. A few closing thoughts:
1) The US Department of Justice (DOJ) must be tearing its hair out over this development. For years the DOJ has been trying to get the loot that Americans have hidden in Swiss banks. But now, thanks to the SNB, that hot money can find another “safe” home - a vault at a hotel.
2) I think there is a connection between the delay of the new Swiss banknotes and the current demand for large denomination bills. The SNB does not want any interruptions as the new notes are issued. It needs all the big bills it can get from the printers.
3) Forthcoming restrictions on the availability of CHF 1,000 notes wouldn't surprise me. Any Swiss citizen will be able to get as much as they want, but people coming over the border from Italy will be faced with restrictions. This, of course, would just add to the demand (fear factor). The most likely outcome would be a black market on the big bills.
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This is the weirdest “bubble” I have seen. A mad dash for paper money. Like most bubbles, it is a result of manipulative monetary policy and an exchange rate regime that does not reflect supply and demand. Like all bubbles, it will eventually pop. And like all popped bubbles, that will cause a great deal of pain for all involved.
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Bruce- just caught your piece... this is really some heads-up stuff.
Bruce,
Top post seems to have fallen out of the rotation so hopefully you will pick this up and, if useful...
In today's Ft. Lauderdale (FL) Sun Sentinel: http://www.sun-sentinel.com/business/fl-trade-topper-20120210,0,2292588....
I thought the last line was kind of interesting/odd?!
"...Trade growth came partly from importing gold from Colombia and Mexico for shipments to Switzerland, WorldCity said."
Pete
Good catch Bruce. Really appreciate your posts, thanks!
Bruce
Could the Norwegian Kroner also become subject to such cash-hoarding?
If the new currency is an excuse for devaluing the new currency, that could be disastrous for people with currency in bank accounts. There has to be a reason that people want their holdings to be more mobile than that. Are they afraid that they might not have access to their funds, until after an exchange rate for the new currency is announced? Are they keeping their assets ready to move, perhaps to exchange outside the Eurozone? That would certainly be in keeping with preparing for the worst. Planning ahead is just self preservation. It comes down to what I wrote about things that work.
Friday, Feb. 10th, 2012 – I wonder if people see the progression of events to their logical conclusion. The analogy in the financial world would be solving the Titanic’s problem by hitting the iceberg, harder. The central banks have only one chance to try it, and they are taking it. We’ll see how that comes out. For me, there are no options in that scenario. There is only one way it can come out. I know that people disagree with that statement and adhere to their optimism. That’s nice. I’ll save a place for them in line, at the soup kitchen. Starvation shouldn’t be a penalty for misjudging decisions. That’s the general public view. Perhaps public opinion errs on that point. Famine is a common condition in the world. Life doesn’t work, the way people expect it to. It’s a simple choice. Some things work. Some things don’t. The choices produce the circumstances. I can agree with the position, to each their own. It’s not my job to run the rest of the world. The other side of that coin is that everyone is without excuse.
http://thedailyclimb.wordpress.com/
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Bruce, this is blatant speculation and illogical. Get out of the ghetto of Westchester and see what goes on in Switzerland.
Swiss do not use checks and not often credit cards. Most monetary exghanges are digital bank to bank, instantly and at no fee. However, cash is readily accepted and one can easily profer a 1000 franc note for a cup of coffee or even bus fare.
Euro currency over 100 euros is not accepted in EU countries because everyone thinks all bills 100 euros ad over are counterfeit. In the USA if you have as little as 10,000USD in your possession, you are assumed to be criminal... not so in Switzerland, where the average individual net worth is ten times the USA average, the taxes are lower and the wages higher, as§are the prices.
If I go into any local post office, put my postal card in the reader, enter my PIN code and ask for 200,000chf euros or dollars, the clerk will instantly hand over large bills, with no fuss, no need for a supervisor and no suspicious activity report.
If I attempted a similar transaction in France, the gendarmes would be called. If one attempted such a transaction in a US bank, one would be told there is not that much money available at the bank.
People are moving their liguid assets out of the USA and Euroland. Perhaps they consider their assets to be personal property and not subject to governmental control or confiscation.
To quote Bruce,"You don't find that odd? 60% of all the money is not for transactions, but as a store of wealth." No I do not find it odd. What is money, if not a medium of exhange and a store of wealth. When I give my granndchildren a birthday gift, I give them a 1000 chf bill. Being Swiss children they are more likely to save it than spend it, which is exactly why they get a large bill.
You give a child 1000 franc note. Nice of you. You say the child will save it. How? Under a mattress? In a vault?
No, If the child was really going to save the money, then it would be put in a bank. No?
You are right about the freedom of money transactions in Switzerland. Anyone can move any amounts from bank accounts and cash and carry has no limits. BUT, here we are talking about cross border transactions of illegal nature, the size of it and the rigidity of current CHF pegging to EUR. BK is right to point out that this sudden rush to safety will create extreme tensions on CHF.
What is very troublesome is that this is now concomitant with Draghi's decision to open the ECB spigot for the Euro banks, with upcoming LTRO and 7T ceiling announced. We will have an unfurling of "fiat" Euros all ending up in CHF accross the border.
Impossible situation by end 2012!
Logical conclusion of this Euro bank protection by Euro printing and Oligarchy stampede converting these Euros into CHF will be to limit access of individuals to Euro money; exit Greece from Euro club and maybe Portugal.
Crazy play, as now the fiat systems saturate beyond control and whatever you do as CB you shoot yourself in the foot!
The middle column says 'amount in CHF', not number of bills. That amount represents the total value of that denomination.
Approximately 27 million notes denominated in 1000CHF; over 33 million in 200CHF; 84 million in 100CHF; over 40 million in 50CHF; over 72 million in 20CHF; over 66 million in 10CHF; and 'only' 254,000 denominated in 500CHF.
So a little over 10% of the bills are 1000CHF denomination, not 59%.
But its 59% of the VALUE, not the number of notes.
Exactly. That is what I said. Krasting conflated 'amount in CHF' with number of notes in the red notes under the accounting table. You agree with me, you didn't need the 'but'.
How surprising is it that the highest-denominated note is a large percentage of the value of the notes? Take one each of CHF 10, 20, 50, 100, 200, 500 and 1000. The 1000CHF is 53% of the value. Given that there is a context, i.e., they are stashing the bills in safe deposit boxes, it is not unusual that the distribution favors larger bills. So 1000CHF notes being 59% of any distribution is not remarkable.
Thanks Bruce, Starting tomorrow I'm gonna go all in - Linen.
Paper is so hot right now.
How long until we get Zimbabwe notes?
Got mine; you?
I just don't get the logic of putting paper money in a safe deposit box. In the case of hiding Francs from US authorities I guess it can make sense, but people have been doing this more and more with Dollars in the US also. If you're that worried it's time to stuff it under the mattress, or better yet, buy some gold. I find it hard to believe banks won't resort to looting safe deposit boxes when they get desperate.
They are converting it to cash to hide it from the new reporting laws in several broke countries. They don't want it on the books with their name on it because it could be a target for tax, confiscation, and or get them thrown in jail if they have not complied with the new laws. Having cash in a safe deposite box pays no interest and is not as liquid but it is private. Swiss bank accounts are no longer considered private in many countries. This article just means money is going into hiding.
Now would be a good time to sell your EURUSD calls and buy mui mui puts in that direction.
Also, look for the resurgence of the USD v. JPY over the next several months.
Just my humble opinion, of course. I'm most likely very, very wrong. But I could be quite incorrect about that.
Thanks again for the valuable insights into the way money really works. It is fascinating.
:D
I'm with you on the call.
EUR/USD to $1.265 by early March.
JPY was looking weak today.
So you are saying to dump PMs? (not physical, but paper replicas)
I have never understood the fascination and obsession with gold, silver, platimum, palladium, etc. They're all pretty. I have some. But 4X traders don't care about all that.
All we care about is the relative value of one form of fiat scum to another, that's all. When the useless linen of one country goes up or down against the fiat ponzi of another nation, we can make (or more often, lose...) money.
No one said a word about precious metals. Frankly couldn't care less about precious metals as a trading or investment device. So, in answer to your query, no. No one said anything about it. What makes you think we did?
:D
You would never have interested DR Mengele for your gold lining, but you do interest normal people who like truffles in their omelet. As for linen I prefer it undone.
http://www.google.fr/search?q=truffes+au+chocolat+blanc&hl=fr&client=saf...
Now that's a truffle I could sink my teeth into!
My latest attempt to find some relative sanity is doing bonsai (avec une chose de quatre-vignt...mais...). Do you know that the proper way to plant maple seeds is to put them in pretty warm water overnight to soak, then put them in some dirt in a baggie in the fridge for one hundred days before planting?
All of you out there who have had some difficulty raising your rare Japanese red maples from seed should try this horticultural trick. I find out if it works in April.
:D
Hi there Bruce. I would just like to note for your readers (you may already know this), but the 1000 CHF note pictured is not from the current series of banknotes and is obsolete - you can buy them on Ebay in the $750 range because they are no longer legal tender.
To see a current 1000-franc banknote, look here (SNB website): http://www.snb.ch/en/iabout/cash/current/design/id/cash_current_design_1000
As for 1000 CHF, in 20 Franc gold coin it comes to fifty pieces that fit nicely into a standard coin tube. The gold value is USD16,168 whereas the valueof the 1000 CHF in usd is about 1,095.00
I think that Swiss have hired a central bank that has destroyed their currency.--nothing new under the sun.
Slightly off-topic but I interviewed a Swiss bullion dealer in 2008 who wrote a book about the history of Swiss coins and banknotes:
http://www.thesilversquirrel.blogspot.com/2011/12/my-interview-with-johannes-mueller.html
Very interesting discovery about those big bills Bruce. But I think you are making a big assumption that these bills are sitting in vaults and not circulating. How do you know that they are not being used for VERY LARGE transactions which a certain class of people wish to keep outside of the watchful eye of Uncle Sam. The US monetary hegemony is being resisted all over the place. If I was a plutocrat, I would buy cool stuff with swiss franks and avoid scrutiny, taxation, and digital visibility.
Aside from saving space, why would anyone want the big bills?
Because they don't understand inflation, and they don't know what the definition of monie is.
Cuz me and Cleveland (and Burkhardt) so pretty?
So do you haul your $10million to the safebox in 100 $100,000 trips and tip a robber off, or go in with the full $10million all at once?
Hey, Ben
I'll give you $20 million tomorrow for $10 million today
om
The US had $756 billion in $100 bills in circulation (out of a total of $996 billion) in Sept. 2011. I've always wondered where all of those $100 bills are sitting. You almost never see anyone spending a $100 bill.
Could it be that a lot of this currency is being held at the Federal Reserve banks?
You're not in Las Vegas, are you?
Thanks, Bruce
This is the best thing I have seen from you in more than six months
Welcome back!!!!!!!
om
So, in a world run by money-lenders and where the governments have all agreed that unlimited digital credit issued by central banks = economic stimulus....um, like, what is one to do???? The central banks can presumably issue unlimited currency to monetize the debt....so where does that leave the currency?
If you think that current policy will carry on to the inevitable end, then the currency becomes worthless (buy gold). If however, you think the money lenders want to keep their fiat system in tact, then AT SOME POINT they will move to protect the currency (and call the loans)....then that paper in your safety deposit box becomes very valuable. Who knows....
This is the debate I have with myself daily. Which side will these lunatics end up on? The side where the most people get burned. Given the "cash is trash" mentality that has taken hold for the past few years, a contrarian bet may be that paper notes end up being the best thing a person could have. As you said, however, who knows? It's a crap shoot on all sides.
Reverse inflation?
In a hyperinflationary scenario the central bank is forced cut bigger & bigger cheques since there is no bid for the credit of the central bank. Here Bruce seems to be saying that the SNB is cutting bigger cheques due to overwhelming demand.
Ha. And people laugh and ridicule gold bugs. The 1% have gold too but apparently they also have millions in 1k Swiss notes stuffed in foreign safe deposit boxes. Why not cover all your bases in a total Ponzi world? Makes perfect sense because those greedy bastards don't trust anyone either and they don't want to report their money and they don't want to pay taxes on it just like us poor masses. Gold bugs are tame compared to these greedy hoarders.
Greedy Hoarders?
who the fuck are you to tell them how/where to keep their money?
Dont assume every rich person is a crook to be fleeced by the IRS and common parasites
It's still legal to buy gold in the U.S. pal. Unfortunately their are now tax and reporting laws here and abroad that the rich are supposed to follow whether you like it or not. It's called the collapse of the irredeemable dollar and a lot of the people hiding their $ are connected and have gained their massive wealth exploiting the very situation that's now falling apart. (not all but some) Call me crazy but I find it a bit unfair that the 1% have the ability to physically stuff boxes full of thousand dollar bills in a foreign depository to avoid to the certain destruction that awaits the 99%. It's a giant shit sandwich and no one wants to take a bite. I was also pointing out the irony and hypocracy of ridiculing gold bugs for trying to protect their savings from destruction when the 1% are obviously doing the exact same thing but on a much bigger scale and with more sophistication yet they are portrayed as being prudent. So chill out.
Fiat is not money, it is currency.
Bruce,
been meaning to ask you for a while... Where do you find all of your graffiti shots? You always seem to have a new one that seems tailor made....
Keep up the good work...
I travel the globe with an old Nikon.
Actually EVERYTHING is on the net. You just have to find it.
Everything is on the NET...is there no copyright issue when you publish it? Or do you get prior accord from original source?
Just asking, 'cos I put a novel on the Internet with some old pictures belonging to the Vatican gallery and my online editor said : "take out those photos, if your book sells you could have copyright problems!"
I did, not that my book sold big time!