Moneyisation #9
by Ned W. Schmidt
March 30/05
Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money which has a higher store of faith.
Or, More Going With The Flow.
In Moneyization #8 we talked about the difference between thinking of
money as a stock, or balance, and a flow. That article is good background
material for gaining an understanding of money. In particular, the reader
will gain a fuller understanding of two important money concepts. The
first relates to the need to think of money as a flow rather than a balance.
In short, where money is going is more important than where it resides
at any one single nanosecond.
Second, investors need to understand the concept of moneyization.
In previous eras the Westphalian view of nations and money dominated.
Sovereign governments determined what would be money and which money the
citizen would carry around in their purse. Enforcement was simple. Tax
collectors arrived at your door accompanies by sword wielding assistants
and demanded "sovereigns" from you in payment of your taxes. Over time
and especially since the abandonment of the Gold standard, individuals
have been increasingly making their own choices regarding which national
money they will hold.
Individuals learned that holding their wealth in a money in which they
had a higher degree of faith made more sense than depreciating paper money.
As long as they produced the required legal tender in payment of taxes,
freedom to choose money was available to them. Technology has enhanced
the ability of individuals to choose their money. Wealth now flows around
the world to those national monies with a higher store of faith, and that
process is moneyization.
Around the world, bad money is driving good money out of circulation,
a kind of Gresham's Law II. This action is making good money rarer and
pushing the price, or value, of that good money higher. Such
is the reason that the dollar price of Gold has risen along with the dollar
value of the Euro. Gold is "good" money and the
dollar is "bad" money. Those monies with a higher store of faith will
rise in value!
Attention is now being given to the many government reports on the denominations
of the holdings of individuals and government. The Bank for International
Settlements(BIS) also produces a quarterly data dump. That report has
received some attention as analysts try to come to grips with the status
of holdings in dollar denominated assets. For those with a need to fully
test their printer, the statistical section of the BIS report runs 111
pages. Once in hand, you will probably start coming to understand it about
the time this time next year. While extensive, the data being considered
below does only cover those countries that report data, about 38.
Our focus here is on the banking system, rather than central banks. Assets
of banks are interesting, but they are a "residual." The assets of a bank
are determined by the liabilities of the bank. Periodically some financial
institutions will attempt to ignore their liability structure. That effort
generally is what provides employment security for those responsible for
closing failing financial institutions.
Who determines the liability structure of a bank? You and all the other
individuals around the world determine the liability structure of a bank.
Individuals and consumers make the decision on how much money will reside
in their demand accounts. They determine the size of their time deposits,
and the maturity of those deposits. Banks make an attempt to influence
those decisions with a myriad of confusing offers. (Oh for the days of
simplicity again, 3% interest and a free toaster.)
Governments can not determine the way the citizens hold their bank deposits.
Any control they had has been diluted or destroyed by technology and the
era of capital mobility. People in every country have learned how to move
their wealth to "good" monies. Ultimately the consumer is able to get
close to what they deem is appropriate for their bank deposits.
This development is now worldwide. Despite the U.S. banking industry remaining
bogged down somewhere early in the last century, many countries have more
modern deposit offerings. In many countries, depositors may choose which
national money will be the denomination of their deposit account. For
example, the IMF estimates that at the end of 2001 on average 34% of bank
deposits in 85 countries were denominated in national monies not of the
location of the bank(De Nicolo' et al,2003). Banks around the world exist
that permit consumers to denominate their accounts in almost any of the
major currencies. Perhaps someday the U.S. banking industry will move
into the 20th century. U.S. consumers would certainly have benefitted
from their bank deposits being denominated in Euros rather than depreciating
dollars.(Ask your banker why they do not offer Euro deposits?)
Perhaps getting back to the subject would be wise. The BIS data lets us
take a look at how people around the world are denominating their money.
This data tells us how much of deposit accounts are in the major national
monies. With that, we can then look at what shifts consumers around the
world are making. Which national monies depositors prefer can be identified.
The First Chart is a stock or balance concept.
In it are portrayed the percentage of bank deposits in each of the major
national monies. Clearly the U.S. dollar still dominates. When saying
that, we need to note three conditions. First, the U.S. is included in
the data. The citizens of that country have little choice but to denominate
their bank accounts in U.S. dollars. Essentially that is the only choice
offered by the unimaginative U.S. bankers, causing totally dollar deposits
to be higher than they might be if U.S. consumers had more financial freedom.
Second, remember how many U.S. dollars are being put in the hands of people
around the world each and every day. The statistic, common now, is that
foreign investors need to recycle to the U.S. almost $3 billion dollars
every business day. Why is that? The answer to that question is important
here. The answer is that because U.S. consumers are sending foreign producers
almost $3 billion dollars a day for goods. About $700 billion a year in
dollars is being paid to individuals and businesses outside the U.S.
If foreign investors take time for a long lunch, the dollars will start
piling up in their bank accounts. Quite frankly, that they manage to recycle
that many dollars is amazing. The sheer size of the dollar flow from the
U.S. importing goods inflates the size of the dollar holdings of the world.
One can almost picture those little Bobcat loaders moving piles of dollars
around in the vaults of the world's banks. Finally, with oil prices being
higher and denominated in dollars, the world simply needs a lot of dollars
to pay for oil. Higher oil prices artificially inflate dollar deposits.
Now though, let us turn to the Second Chart. This chart shifts our thinking
from a balance concept to a more appropriate flow concept. Money, remember,
needs to be thought about as a flow. This chart shows the change in both
dollar and Euro denominated bank deposits in the first half of 2004 and
in the third quarter of 2004. The time lag for data is long, but not when
one thinks about the complexity of the problem. Individual banks have
to forward data to the national level. That data has to be checked and
then forwarded to the BIS. Then, the BIS has to put it all together. These
numbers are annualized.
During the first half of 2004 depositors, around
the world, increased their U.S. dollar denominated bank accounts at about
a $250 billion annual rate. Euro denominated deposits grew at about a
paltry $50 billion annual rate. The ratio, shown by the triangles and
using the right axis, of dollar accumulation to Euro accumulation was
well over five times.
A shift occurred in the third quarter. By this time the much larger working
balances of dollars needed to pay for higher priced oil had been accumulated.
The annualized rate of increase of Euro deposits moved up dramatically.
During this period the ratio of the shift to dollar denominated deposits
to Euro denominated deposits fell to slightly over one. This much lower
rate indicates a significant change in the desire to hold more Euros relative
to dollars.
Clearly, the world has changed its preference for national monies. A year
ago the world was willing to add five times more dollars to their deposits
than Euros. Apparently the world sobered up or quit watching tout TV.
The rate of dollar acquisition relative to Euros, despite the vast quantity
of dollars being shipped outside the country, fell to a little over one.
Depositors around the world are definitely shifting to a money in which
they have a higher faith, and that is not the U.S. dollar.
As dollars appear to still being accumulated by many sources around the
world, heavy selling of the dollar does not seem to be the source of the
dollar's weakness. Rather, the shift in preference to buying other national
monies seems to have made them stronger. Given two conditions, the U.S.
dollar's value can only continue to lose value relative to national monies
such as the Euro and Gold. First, the preferences of individuals around
the world have shifted away from the U.S. dollar to other national monies.
The current state of bureaucratic tyranny now rampant in the U.S. financial
services industries is exacerbating the situation. Any individual of another
nation would have to be an ultra masochist to attempt open a bank account
in the U.S. or move money to a U.S. account. Second, the structural nature
of the U.S. trade deficit of the U.S. means that a reversal of the situation
is not likely.
The argument that a goodly part of the U.S.
trade deficit is structural continues to be ignored. Thinking remains
focused on the notion that a depreciating dollar will turn the U.S. trade
deficit lower. That might happen if the U.S. produced the goods in demand.
That however is not the
case. In the Third Chart is plotted
the ratio of U.S. importation of goods divided by U.S. retail sails. All
of the value of imported petroleum products was not included as some clearly
does not go through the retail trade system. As is apparent in the chart,
the ratio rose dramatically.
Recognizing that some data discrepancies do exist with this approach,
imported goods rose from a low of 30% of retail sails to about 36%. A
shift of that magnitude is definitely significant. The goods U.S. consumers
are buying are increasingly coming from foreign production. U.S. manufacturing,
what little remains after the Federal Reserve's decimation of it, simply
does not produce the goods consumers want. This structural problem with
the source of production means that the dollar's depreciation to date
is not having material impact on the importation of foreign goods. However,
the U.S. has created an incredibly fast system for processing mortgage
applications on the internet, an accomplishment right up their with landing
on the moon.
In that chart is also plotted the monthly average dollar price of Gold.
The other side of importing goods is the exporting of green dollar
bills. As that ratio has risen in the chart, the amount of green dollar
bills exported has risen. With the global money preferences shifting to
the Euro and others, the only direction for the value of the dollar is
down. The ability of
the world to simply absorb the current massive exportation of U.S. dollars
has been overpowered. Selling of
dollar positions has not yet started, but the willingness to accept dollars
is falling.
The U.S. dollar will be ONLY the FIRST casualty of the reordering of money
preferences around the world. Other national moneys will also fade over
time. Gold, and Silver, will gain in popularity as monies. Destroying
the credibility of the world's largest national money will not enhance
over time the credibility of other fiat monies. As the last chart show,
opportunities are created on a regular basis for individuals to increase
their holdings of the preferred money.
The most recent rate increase by the Federal
Reserve is creating another buying opportunity for Gold investors. Foreign
exchange markets often over react to interest rate changes, called "over
shooting" in the literature. Recently the U.S. dollar has been stronger
because of the U.S. interest rate increase. As a consequence, the U.S.
dollar has become over bought. Gold has reacted as it should to this
rising value of the dollar, and retreated in price. Such events have
repeatedly been excellent buying opportunities.Both Gold and Silver investors
should
be adding to their positions on this price weakness. Indicators are moving
to buy signals on both metals,
like those shown in the last chart. While the U.S. dollars is trading
at
an extended price, Gold and Silver should be bought. The Gold Super Cycle
will not be thwarted by the "measured and meandering" policies
of the
Federal Reserve. Will you be profiting or watching?
References:
Gianni De Nicolo Ize (2003). Dollarization of the banking system: Good
or bad? (IMF Working Paper 146). Washington, D.C.: International Monetary
Fund.
Ned W. Schmidt, CFA, CEBS
The Value View Gold Report
Ned W. Schmidt, CFA, CEBS is publisher of The Value View Gold Report. His monumental report, "$1,265 GOLD", with 255 pages and 98 graphs, has now been released. Previous editions of this work have been read by hundreds, probably saving their portfolios countless millions of losses. Ned welcomes your comments and questions. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse of the U.S. dollar. He can be contacted at nwschmidt@earthlink.net. To get a copy of "1,265 GOLD" and to receive The Value View Gold report by e-mail each month click here.
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