BY JOHN MAULDIN
One of Germany’s largest banks is seriously considering stockpiling cash. Sources within Commerzbank have told Reuters they are “examining the possibility” of hoarding billions of physical euros in secure vaults.
This is truly bizarre. Under normal conditions, holding cash is anathema to commercial bankers. They keep as little as possible on hand; they certainly don’t go out of their way to hold more.
Why would a financial institution hoard cash?
Given the lending rules in Europe, this tactic makes sense. Hoarding cash allows banks to avoid the -0.4% NIRP penalty for parking cash with the ECB.
Nonbank financial institutions are also storing cash. Munich Re, one of the world’s leading reinsurers, said back in March it would store both physical cash and gold to avoid paying negative interest rates.
Although management framed the move as a minor test at the time, you don’t conduct a test like that unless you see some chance that you’ll need to hold cash on a larger scale.
The real reason the ECB will no longer issue 500-euro notes
Perhaps not coincidentally, the ECB announced plans to remove 500-euro notes after 2018. The ostensible reason is that the large notes could “facilitate illicit activities.” However, few believe the deterrence of crime was the bank’s main objective.
The ECB knows that discontinuing larger bills makes cash storage more expensive and less feasible for banks. It also knows that the presence of large amounts of physical cash in an economy is inconvenient for any central bank that wants to push interest rates negative.
Now, the ECB’s move makes more sense. Draghi isn’t worried about German and French citizens stuffing their mattresses with euros. The real threat is banks doing this on a much larger scale.
The ECB’s promise to continue issuing 500-euro notes until 2018 is probably honest—but it made no promises about how many it will issue. I bet the number slows to a trickle very soon. The big bills will be hard to find, especially if your name is Commerzbank or Munich Re.
Deutsche Bank blasts Draghi’s stimulus plans
Deutsche Bank is also sparring with the ECB. Chief Economist David Folkerts-Landau recently issued a note blasting Draghi’s stimulus plans. He was unusually blunt… especially for someone whose bank is not exactly on the firmest footing right now.
The entire piece is worth reading to fully appreciate the intensity with which Folkerts-Landau addresses the ECB. But, here are some highlights (emphasis below is mine):
Already it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns. What is more, the ECB has lost credibility within markets and more worryingly among the public.
But the ECB’s response is to push policy to further extremes. This causes misallocations in the real economy that become increasingly hard to reverse without even greater pain. Savers lose, while stock and apartment owners rejoice.
Worse, by appointing itself the eurozone’s “whatever it takes” saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation.
Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.
Our models suggest that in its fight against the spectres of deflation and unanchored inflation expectations, the ECB’s monetary policy has already become too loose.
Hence, we believe the ECB should start to prepare a reversal of its policy stance. The expected increase in headline inflation to above one percent in the first quarter of 2017 should provide the opportunity for signaling a change.
Thinking the unthinkable
I agree with the gentleman from Deutsche Bank… but the chances of ECB’s reversing policy, as Herr Folkerts-Landau suggests, range between slim and none.
We have relied on monetary policy to such an extent that we no longer hold our elected leaders responsible for their inaction. Yet somehow we think that monetary policy is going to save our bacon once again if we slide into a recession. Let me tell you, this time it won’t.
We need to start “Thinking the Unthinkable,” which was the title of my speech at the Strategic Investment Conference. I said something along these lines:
If I had gone to people four years ago and said that 40 percent of the world's sovereign bonds would be at negative rates, that central banks would expand their balance sheets by $10 trillion, and that the world would still look somewhat normal, even with all of the geopolitical risks that we have with ISIS, etc.—people would have said, “John, what are you thinking?” And yet all of those unthinkable things have come about.
Even contemplating what should truly be unthinkable is enough to give everyone economic heartburn. Perhaps we’ve sailed past the era of conventional monetary policy, off the edge of the known world.
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