After May’s dismal jobs report, the odds of the Federal Reserve raising the target federal funds rate anytime soon are just about nil. Remember that the Fed has declared itself for the past several years to be “data dependent”, meaning that they are looking for good economic news and data that indicates that the economy has gotten back to normal. And what do they mean by “good news” or “back to normal”? Why, the overheated boom-period growth rates we last saw at the height of the last housing bubble. That is why the Fed will not be raising rates for a long time.
The ECB officially decided to end production of the €500 note yesterday, with production winding down at the end of 2018. Ostensibly this was done to prohibit the use of the €500 note by criminals and terrorists. While this is just one step in the long-term War on Cash, what might some of the more immediate effects be?
1. Increased Demand – Knowing that the €500 note is going to be phased out, expect those holding cash and those wanting to hold cash in the future to increase their demand for €500 notes. Whether the ECB will cater to this demand by allowing higher amounts of €500 notes to be printed before the ultimate phaseout date remains to be seen.
2. Premia on Notes in Good Condition – Given a finite number of notes in existence post-2018, it is not unreasonable to expect that €500 notes may trade at a premium to their face value in the future. Since they will remain legal tender and will be able to be redeemed at face value at banks for an unlimited period of time, they will be worth at least €500. But because they allow a much more compact transportation of money than €100 and €200 notes and because supply will now be fixed, they may begin trading at a premium to their face value. €500 notes in mint condition might eventually trade on black markets at €550, €600, or more. Bills in worse condition would trade at lower premia, until bills that were completely worn out would be traded in at banks for brand new lower-denomination notes.
3. More Counterfeit €500 Notes – Because the €500 note is being phased out, it will not receive any anti-counterfeiting updates that other notes will inevitably receive in the future. As counterfeiters become more adept at creating fake euro notes, they will target the €500 note since it will remain redeemable at banks and will undoubtedly be demanded even more on the black market. If counterfeiting of the €500 note occurs on a large enough scale, the ECB may eventually rescind the bill’s legal tender status and set an end date by which time all €500 notes must be redeemed.
A new ECB white paper has found evidence that many major market-moving data releases in the US are leaked in advance of their official publication, allowing some investors to profit from trading stocks and Treasury securities when those data are released. Included among the data releases studied are two from the Federal Reserve Board, on industrial production and consumer credit. The researchers analyzed price movements in the S&P 500 futures market and the 10-year Treasury Note futures market in the thirty minutes prior to these data releases, assuming that strong price movements in the direction of the eventual post-release price were indicative of some sort of leak. The industrial production release was one of seven releases that was strongly suspected of being leaked. This isn’t good news for the Fed.
The Fed is already grappling with an ongoing probe into a 2012 leak of confidential interest rate information to a financial newsletter. The Fed also provides news organizations with sensitive data which is embargoed until the Fed publishes it, however those embargoes are occasionally breached. Then there are the accidental leaks from the Fed on FOMC matters and the case of the former New York Fed official who obtained confidential information from his former colleagues after he went to work at Goldman Sachs. There have been enough mistakes and leaks that the idea of sensitive information being systematically leaked to certain market participants isn’t far-fetched. Especially because such leaks rarely come to light and almost never result in anyone’s termination, the risks of being caught don’t outweigh the potential benefits of making friends on Wall Street or making a little extra money. At the very least, this study should result in hard questioning surrounding these data releases and the importance placed on them. In particular, the Federal Reserve’s role as a market mover should face scrutiny. Leaking information to profit special interests is all the more reason to end the existence of government agencies that have so much power to move markets.
In the aftermath of the bank heist targeting Bangladesh’s central bank, international financial network operator SWIFT has warned that its networks were compromised. Hackers have apparently accessed the network and used it to send a number of fraudulent payment orders. Why do hackers do this? In the apocryphal words of Willie Sutton: “Because that’s where the money is.” Why bother hacking individual bank accounts when you can instead hack an entire bank or even the backbone of the financial system?
Let’s take a look at a selection from a prominent official’s recent speech and tear it apart piece by piece.
Deflation refers to a situation where prices decline persistently. If prices of individual goods and services fall thanks to innovation and improved productivity, this is of course a good thing. A good example is the gradual price decline in PCs and smartphones. However, the deflation I am talking about refers to a situation in which the prices of a broad range of goods and services decline, and consequently, prices as a whole drop. In most countries, including the United States, general prices are measured in terms of consumer price indices, which are the weighted averages of baskets of goods and services purchased by consumers. Put very simply, deflation can be understood as a continuous decline in consumer prices.
What happens to the economy if prices as a whole decline continuously? Looking at the overall economy, suppliers of goods and services will see a decrease in sales and profits, and firms with declining profits typically start to lay off employees or restrain their wages. Employees that have been laid off or whose wages have declined experience a fall in their income and restrain their spending due to uncertainty about their future. Such restraint in spending leads to a further decline in the sale of goods and services, resulting in harsher competition among firms. Firms therefore lower prices in order to compete, leading to a further decline in their sales and profits. This simple outline shows that once deflation starts, it perpetuates itself, so that the economy falls into a bad “equilibrium, in which economic activity is shrinking.”
Who was this prominent official?
There have been many monetary cranks over the course of the centuries who have thought that creating more money would benefit society, and have sought to do so by creating money backed by assets. John Law’s Mississippi Bubble and its creation of money backed by land is one prominent example, and despite his failures such movements towards asset-backed money backed by real estate, copyrights, and other tangible or intangible assets still exist today. While the faults with such schemes are readily apparent to Austrians, they stem from a well-meaning desire that money should be backed by something of value.
Gold and silver coins used to be used as the currency of everyday transactions but they were replaced by banknotes, those being easier to handle and exchange. Banknotes were promised to be exchangeable for gold and silver, but banks and later central banks started to create more notes than they had gold or silver backing. Eventually the promise of exchange for gold and silver went by the boards and we were left with what we have today, a system of unbacked paper fiat money that can be printed ad infinitum. The only reason this fiat paper money has any value is because enough people trust that the government will not erode its value too much and because they believe that enough other people will accept it in exchange for goods that they will be able to use it to make purchases with it. If that trust ever erodes, however, all bets are off.
From last night’s propaganda event featuring Janet Yellen and her predecessors Ben Bernanke, Alan Greenspan, and Paul Volcker.
The negative interest rates imposed by the Bank of Japan have begun to make their way into the Japanese banking system. Japanese trust banks have begun to impose negative interest rates on accounts held by institutional investors. It shouldn’t be surprising that Japanese banks are trying to pass on the costs imposed by the central bank’s policy of negative interest rates. It happened in Switzerland, it is happening in Japan, and it will happen in Europe. And as it becomes more widespread, investors will begun to withdraw their funds from the banking system.