Tuesday, January 27, 2015

Will Negative Yields in the Euro Zone Cause a Flight to Cold Cash?

Joe Salerno, academic vice president of the Mises Institute and professor of economics at Pace University, discusses:
Bloomberg reports that the yield on more than $4 trilllion of sovereign debt has turned negative.  Investors are now paying the Swiss government to borrow from them for longer than a decade and paying the German government to borrow for a lustrum.  For all Euro-area nations, according to Bloomberg calculations, average yields on sovereign debt are now at 0.68%.  With the quantitative easing program of the ECB set to begin in earnest in March and to likely drive bond yields even lower, what's an investor to do?  Dr. Brendan Brown, Head of Economic Research for  Mitsubishi UFJ Securities International suggests one intriguing possibility in his Daily Economic Report:
The 500 euro-note might become the new asset class in strong demand. We can do the arithmetic – 20 million euro- citizens put one hundred 500 euro notes under their mattress (or in the vault). That would absorb 20% of Sig. Draghi’s QE bazooka. And it could be much more than that. The authorities can hardly frown at ordinary citizens salvaging their funds from negative interest rates and/or increasingly burdensome charges.
Such old-fashioned currency hoarding would re-establish the primacy of cash vis-a-vis bank deposits in the monetary system and would deliver a crippling blow against the fractional-reserve banking system, which is the main transmission belt for the inflationary effects of the quantitative easing program.  

1 comment:

  1. It doesn't matter how much QE they do if banks don't lend and debt-laden consumers don't borrow.