by Ben Traynor
Posted 26th September 2016
When I last wrote to you just over a fortnight ago stocks were taking a bit of a beating.
Some central bank non-eventery later, and they’ve regained the ground they lost.
So it’s as you were, until the next round of hyped up nonsense.
Or until the whole façade crumbles…
I’m writing this on Sunday night on the last train from London to Newcastle.
Homeward bound after two weeks away, and an itinerary that’s taken in Baltimore, Washington, New York and north, south, east and west London.
I’ve been meeting with colleagues and contacts to discuss subjects as varied as artificial intelligence, Vladimir Putin, Whitehall’s preparations (or lack thereof) for Brexit, a new way to trade gold, and much else besides.
All grist for future DRs as summer slides into autumn…
While in the States I also grabbed an advance copy of Jim Rickards’s next book (many thanks to my colleague Pete Coyne for sorting me out with that).
It’s a fascinating (and scary) look at how the authorities will respond to the next financial crisis. And it goes way beyond what they did in 2008 and its aftermath…
I’m hoping we can do another special edition version for our readers with extra bonus material. Watch this space for more details.
More chipping away at the edifice of cash
Sat in the lobby of my hotel one evening while in the US, I got this text message from a friend:
“Article by Rogoff in Prospect magazine about abolishing cash. Scary. Very scary.”
I made a point of buying a copy on my return to Britain. The article by Ken Rogoff, a Harvard economics professor and former chief economist at the IMF, doesn’t pull its punches.
“I have two main arguments for abolishing cash,” the esteemed man writes.
“First it would make it more difficult to engage in recurrent, large and anonymous payments and thus it would discourage tax evasion and other crime. Second, it is arguably the easiest way to help central banks invoke negative interest rate policies – a tool that would have been of great use during the 2008 financial crisis.”
So Rogoff makes no bones about this being a step towards imposing negative rates.
Indeed, there’s a growing confidence among top economists when it comes to discussing this idea. A constant repetition of the idea until it comes to seem normal.
Earlier this month Jim wrote to you about a paper delivered by academic economist Marvin Goodfriend at last month’s Jackson Hole symposium of central bankers.
Here’s an extract from Jim’s piece as a reminder:
So Goodfriend comes up with a new concept called the “flexible market-determined deposit price of paper currency.” (Seriously, I’m not making this up; you can find it in Section 5B of his paper.)
In plain English, this means the “money” in your bank account and the “money” in your purse or wallet would be like two different kinds of currency. There would be an exchange rate between the two, just as there is an exchange rate between dollars and euros. The Fed could set this exchange rate at whatever level it wanted and would not be obligated to “defend” that rate at any particular level.
What this means is if you go to the bank and withdraw $1,000, the bank might only give you $980 in cash because of the “exchange rate” between your bank account and cash. Or if you deposit $1,000 in cash, the bank might only credit your bank account $980 because of the same “exchange rate” between your cash and the bank account balance. In short, it’s a way to impose negative interest rates on physical cash.
Over the last twelve months I’ve seen virtually identical ideas put forward by two members of the Bank of England’s monetary policy committee, Martin Weale and Andy Haldane.
We can’t say we’re not being warned.
A debate about the pound
In the weeks ahead we’ll be exploring this idea further, including steps you can take to prepare.
For today, I’d like to finish with a couple of thoughts about the pound, which seemed to begin a new downward leg the minute I set foot on US soil two weeks ago (good job I changed money in advance!)
I’ve been taking part in a lively debate among colleagues over whether the pound has already seen its floor or whether it has further to go.
I don’t have the scope here to rehash my earlier arguments in these pages about the pound’s weaknesses (e.g. the way Britain’s current account deficit leaves the country reliant on attracting foreign investment inflows).
Suffice to say I’m in the camp that says we should be prepared for further weakness.
When that’ll occur is a trickier matter. Financial markets often fixate on one or two things at a time and push everything else to the background.
One of those things regularly involves whether the Federal Reserve will change US interest rates. We’ve just been through one of those cycles, but it won’t be long until we’re mired in the next one.
Another piece of catnip for market participants will be the US election as that draws near.
So while the pound has been under pressure lately, I suspect the market hasn’t yet got round to beginning its assessment of sterling’s long run future.
Yes, there was the initial shock of the referendum result and a repricing of the pound immediately afterwards. Since then though the market’s moved onto other things.
As it stands, the market can’t fully price in Britain’s future relationships with its trading partners because no one can be sure what they’ll look like.
At some point events will bring this uncertainty back to the forefront of the market’s collective mind.
I’m not expecting a glowing assessment of sterling’s outlook.
And on that note, my train’s pulling into Newcastle Central Station. It’s time for what anyone who goes away on business craves most – a sleep in one’s own bed.
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