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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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As long as the photos were in the public domain, it would be okay. So, as long as they didn't belong to a private institution, were not themselves copyrighted and were older than statute dictates (I think in the US, it is 19 years- please correct me if I am wrong...), then you were golden.
However, just because you have published them in your book doesn't give you any rights over the photos, either. Once deemed in the public domain, then they remain there.
:D
In my case : vatican private library photos were copyright covered. (((.
I don't know if 12th century photos covered by copyright are public or not. 19 year rule does it apply?
ANyways, I threw in the towel on that one!
Taking pictures of graffiti is bad ass man.
good post,
surely those hoarding swiss bills are doing as diversity to other hard assets. trusting in any currency as a store of value is presently beyond my comprehension. the uncertainty in just what to do was worrisome 3 years ago. now, i am wore down to accepting that whatever actions i have taken to preserve value of my savings is more than the majority of my friends and neighbors.
"It's all about the bucks, kid. The rest is conversation," said Gekko.
Things are getting crazy, and this doesn't tell of a thriving European economy or US eonomy.
Bruce
Only 1, as in ONE, reason I can think of. And I can think of all of them.
DEVALUATION of a currency of a Major Economy. Hint Hint, Wink Wink. The counterparty risk to the one currency I am alluding to is global.
Good luck. I have faith in you to figure this one out.
Kneecap
Au = clink-clink, Ag = rrrinngg!
So long, FRNs!
since I have a whole bunch of FRNs, maybe I should put off that toilet paper purchase for a while. Looks like the USD (paper version) will be the shittiest currency around.
I keep a little cash in Norwegian Kroner and Swedish Kroner. If you need to keep some paper, those would be a couple of the top two, also the Canadian dollar. The Swiss Franc is sooo 1970s... unless you're buying 20 Franc gold Helvetias. If the US currency goes to crap and you need paper, those should do in a pinch, and they'll hold their value better.
Excactly, I never understand the logic of taking out a ton of cash and securing it anywhere.
People doing that are fighting the last economic depression / banking crisis from the '30s. Back then non-gold backed paper currency was new enough that the central banks couldn't print forever without people quickly losing confidence. As a result, keeping your money out of the banks was a smart thing and saved you.
Times are different now, when there is the next bank crisis central banks are just going to print to save the banks. As a result, keeping your money in paper money in a suitcase will not save you, the wealth in that suitcase will be printed away.
To survive this time you just have to exit the whole system. That means buying "stuff", whatever you think that is.
I agree, it's like militaries always fighting the last war. It's stupid. The franc is totally fiat now (as of 2000?), so what's the difference?
I agree with your last sentence, however, read "When Money Dies" - Adam Ferguson, and you will see how long a country can print before the final death of its currency. While Germany and Austria printed, their currencies both started to devalue, however they could not fathom that it was the printing that was abetting the currency destruction. The magnitude and timeframe of the printing that occurred in Germany will astound you.
Taking cash out of the banks didn't save anyone in the 20's-30's. Liquidating everything one owned simply bought time. If you owned gold and held it until a new fiscal and monetary system of balance was put in place, then you were able to retain wealth. Holders of all stocks, debt instruments and cash were essentially wiped out.
i agree with the gold play as a way to prevent against a massive devaluation of the euro. IF YOU CAN GET THE GOLD of course. the next best thing is to convert to Swiss francs and stick it in the bank there. If the Swiss decide a dollar peg is more useful...goodbye euro. I happen to think Greece is going to be "dollarized" the old fashioned way: via a military intervetion as simply put that can't go back to ANY currency whatsoever. Moreover THESE ARE NOT BANK-RUNS...but COUNTRY RUNS. Unprecedented in financial history. I can easily forsee a problem with hunger in Europe next winter if the "euro thing" really does turn into the "zero" as i called it over two years ago.
You are correct, and real assets are the key out. I just keep a couple grand in paper, for walking around money in the event the banks sieze up. I fully anticipate that money to evaporate. If I can slow it down by going to different currencies, that works for me. Also, If we have an event when US paper gets trashed, devalued whatever, you don't want to be going to the store with gold or silver eagles, you might get shot. However, not every country would devalue at the same time, so if you keep some CAN, NOK and Swedish, you'll have more chance of keeping some value. Also, when these currency events happen, people are usually happy to get some foreign paper currency that holds some value.
I like Parssons book better (dying of money) than when money dies: http://dyingofmoney.com/ though both are good. They just did a reprint of it too, I have one of the first printings which is quite the collectors item now.
Just hope we don't get a full on collapse. That would really suck. A voluntary return to gold at 20,000/oz would be far better. We'll see.
Never trust safety deposit boxes. When the bank doors get closed you have no way into your stash. Plant it in the backyard where the Rotweiller lives....he's on duty 24/7.
59% of the VALUE of all bills in circulation NOT 59% of all bills in circulation. Big difference.
Yes. That was the point.....
I thought it was clear. Of the 47b worth of bills, 27b or 59% are denominated in 1000 notes.
You don't find that odd? 60% of all the money is not for transactions, but as a store of wealth.
They make all those 1000s as a different form of intervention. If you want to stash money, you look for big bills. No one cares about 20 Franc notes.
If you looked at other countries, you would not find this. That is a big difference.
Another relatively appealing high denomination banknote is the Singapore $1000 bill, not as valuable as chf but nicely
portable too.
Agreed, your point is well made.
Most countries are more concerned with hindering illegal activity so reduce the value of their top bill to $100 or less.
The key concept is portability.
So for me the important question is.....who does Switzerland serve? Are they powerful enough to keep the status quo?
btw, the real heavy-weight fiat currency note used worldwide for cash transactions of greater amounts is the EUR 500
Gromit, your question is simple, the answer is complicated.
Switzerland is neutral. Switzerland has also a varied banking landscape that is important for the nation.
The two big megabanks have a different agenda from the rest, you can count them as countries-within-the-country.
Nevertheless, the hard-core industry part is heavily integrated in the eurozone industry - they calculate and price in EUR, for example.
Switzerland is also very conservative, so yes, they will try to keep the status quo. But this depends from what kind of capital controls are going to be put in place in the next years. A repeat of the 70s?
For centuries Switzerland has enjoyed privileged neutral status, respected by all including Nazi Germany.
Why should it continue? What powerful interests does it still serve?
well, theirs and everybody's too. UR above point to the fact that they act as diplomatic-in-between for the US and Iran, for example.
how this got started is fascinating and goes back to the Congress of Vienna (after Napoleon) where TPTB forbade Switzerland to go on in the business of providing mercenary regiments (only the Pope retained the privilege). In exchange they got neutrality.
Thanks yes it's fascinating history and essentially clever market positioning by Switzerland which has worked for hundreds of years.
Which makes the recent US government actions against UBS and now Wegelin so interesting. What is the endgame here? Does Switzerland have enough juice to keep their criminal activities protected?
please keep in mind that Switzerland was one of the poorest countries in Europe if not in the world until the 20th. there was no clever positioning, they are just the-next-best-thing-to-a-libertarian-country on this planet.
criminal? well, this depends where what crime was committed by whom and who prosecutes it. I don't see Corzine in jail, for example.
meanwhile my niece is chiding me for oversimplyfying the history and tells me that I omitted the 1848 revolution... oh, bother...
Swissyland is a strange place.... a libertarian nanny state, where you are quite free to do what ever you want consistent with the the idea that everyone else has the right to be completely free of you....
It continues to serve all the powerful's long-term interests. Most recently the US's- when their foolish backpackers and off-duty PMC contractors get picked by the Iranian security services. There's a reason the backup/alternate UN facilities are here. But it's not cheap and the Swiss pay for it, the median income household's bill just for upgrading air force fighters this year is looking to be $2500.
hello BK...please answer
I'll try to answer anything, but I'm not sure what question you ask.
Send a note to me at Bkrasting@gmail.com and I'll try my best.
bk
At least they can burn the paper notes to keep warm as Europe gets more cold and violent weather.
Great post Bruce! The worldwide bank run has taken flight...buh-bye fiat...nice knowin ya.
The irony here is that the demand is for the fiat. If I'm right, there will soon be a black market in the fiat. And the fiat will trade at a premium.
What a crazy world we live in. Go figure.
But demand for fiat is the NORM for Switzerland- it is a CASH economy, and a very expensive one at that. It's where the shit poor poverty line costs you 4,000/MONTH, and the median household income is 8,0000/MONTH. I keep several months cash at home to pay rent and bills. In my wallet there is 1xCHF1000, 3xCHF200, 1xCHF100, and 140CHF in small paper- so it’s 54% in CHF1000 notes. The safe is almost 100% big bills.
In practical terms, if I take my wife to dinner and drinks at the Schweizerhof tonight I will break the CHF1000 in my wallet on the tab, and if we decide to go St. Mortiz for the weekend (because I've lost my mind after not being able to see the asphalt in of front my house for over a week now) it will probably cost me a little under CHF5000. So what might be nominally a large amount of "cash" doesn't actually go very far in an expensive cash based economy, and the next month’s rent is due a few days to boot.
On a more empirical level - in the past six years the CHF 1000 notes have only increased from 56.2% to 59.7% of the outstanding fiat money supply. Looking back six months to the imposition of the peg after the CHF/EUR explosion- the change has been less than 1%. More concerning is the 75% increase in the fiat money supply over the last six years (and the noticeable inflation underlying that increase) as well as the HUGE increase in the digital money supply over the last six months. The SVP wants a bifurcated domestic currency where gold trades alongside fiat at different rates, but in a sense there is already a bifurcated currency with digital francs increasing at a much faster rate than paper francs even though they trade at parity. However, when the SNB loses control of the beast and the growth of the digital money supply leads to more significant domestic inflation- if the SNB responds with currency controls or possibly something more creative and drastic, then there probably would be an explosion in demand for non-digital currency, but I don’t think we’re there yet, and there will be an actual spike in the historical data set before we do get there.
http://www.snb.ch/en/iabout/stat/statpub/statmon/stats/statmon/statmon_A...
I repeat the words of the SNB on what the 1000 are used for:
The irony is amusing - "on a short enough timeline" paper CHF may be a store of value. But bankers are liars and central bankers are two-faced liars (to the respective domestic and external audiences), and in the SNB's case perhaps ambidexterous, double jointed, forked tongued, multilingual, poly-faceted liars. CHF has always been a pathetically weak currency in terms of purchasing power, and since Swiss banks basically pay no interest to depositors now, keep inconveniently short hours for anyone except the 3.4% unemployed who probably can't afford their services anyway, and tend to offer expensive and inconvenient charge cards often fully secured (ironically) by cash deposits, and since there is no substantially increased crime risk for the average person to keeping and using cash- everyone has, does, and will use fiat, especially since it’s none of Jordan’s or Jeethner’s business (or even my banker’s - who is a typically nosy Swiss even though the Swiss themselves desire and value privacy) where I decided to have dinner tonight or how much I spent on it (unless I wind up claiming it as some sort deduction against taxes owed them at a later date).
I think the "delays" in the ninth banknote series must continue until the SNB balance sheet is fixed and the fiat-digital supply balance is restored. Otherwise, the quick introduction of a tenth series would make the SNB look like clueless and unprepared hacks who didn't know what they doing when they installed the CTRL+P dipping birds at the SNB money supply terminal. Given the relatively constant makeup of the Swiss fiat supply, if the wealthy PIIGS are filling hotel boxes with CHF instead of X-series EUR or gold, then the wealthy PIIGS are undesirable paupers by Swiss standards, because the growth in the Swiss fiat money supply is only “marginally” more than the observable Swiss inflation over the same time period, and they certainly aren't spiking denomination-specific demand for the CHF1000 note beyond its historical average money supply composition - unfortunately I haven't found John Williams' Swiss doppelganger yet, but at least the SNB dutifully documents the growth in the respective money supplies each month.
excellent remark - you might want to visit St.Gallen and witness how cattle is transacted there when it's market time, it's not uncommon to see bundles of hundreds of CHF 1'000 notes on the tables of the restaurants nearby. I have seen tourists nearly fainting at the sight.
Bruce, are you sure you really remember Switzerland well? ;-)
"The irony here is that the demand is for the fiat. If I'm right, there will soon be a black market in the fiat. And the fiat will trade at a premium."
This is because only about 1-5% (depending on the country/currency) of the money supply is actually in the form of physical cash (coins & banknotes). So if a bunch of banks collapse and a bunch of digits disappear, the money supply could in theory be radically smaller. Of course the central banks could just make new digits, but on the street level people would be panicking and demanding cash.
Or maybe people are just stupid.
Because people realizing more and more that currency covers only a small fraction of MZM and we don't talk about all the other paper assets out there. When the music stops it's too late to panic.
And I don't see that the central banks can print a panic into inflation, it's like trying to fight the fire of a skyscraper with a hand pump. Even if the central banks had infinite printing capacities, it would take years to deliver all that money physically.
How long would it take to make credit cards for every man woman and child? (hint: less than a month)
Fiat: not all that interesting to people who aren't trying to work under the table or buy things the authorities would rather they not.
A credit card payment is nothing else than a promise, which the merchant has to redeem through the system. It requires that the merchant trusts the system.
But in a panic nobody trusts the system, otherwise there would be no panic.
So forget credit cards, they could even drop $100,000 bills from helicopters, if nobody accepts them, they are worthless.
Of course, banks would accept $100,000 bills anytime, but in a panic nobody trusts the system. Nobody would bring money to a bank in exchange for a balance sheet, otherwise there would be no panic.
Only small bills like $20 and below will be accepted on a broad bases (like for gas, food and love:)) and to print and ship all outstanding obligations in small notes would take a while.
The precious metals manipulators have done their jobs well. All that money could be in gold but the downside to gold has been greater than from currency manipulations. You can also fit more 1000 franc notes in a box than the equivalent value in gold.
So buy Iridium then.
They should "convert" their paper wealth into physical gold silver bullion and hide-bury it in a hole in the ground!
"The vault boxes are being used as a store of wealth." Really? I can think of a hell of a lot less expensive, and safer, solutions than putting hard assets into the vault of a system that has already shown itself willing to take "segregated" private property.
Though I'm no fan of the man, Biggs relays a good story in Hedgehogging about protecting wealth when the rules change; interview with old Chinese general.
Paper is still paper.
Until it is just paper. The Romans cut down the forests to build boats. The Maya cut down their trees to make farmland. The easter islanders cut down their forest to move statues.
We cut down our forest to make fiat. Castles of fiat that rise to the moon. Soon electrons will save the forest from death by printing press, but who will save us?
Mass hallucinations are a bugger. Keep dreaming for we perish when we awaken.
Is this a prank or a wank?
But seriously, we are cutting down rain forests in Amazon and Africa, to make bio fuel land and feed lumber scams.
I thought the U.S. and most physical currencies were actually processed cotton and not wood pulp?