European money is on the move. Storm on the horizon?

1. Money supply growth alert  [Money is on the run from Europe. Mr. Larry]
Sunday, August 14, 2011, California Beach Pundit Blog
“This is a follow up to some posts from last month, in which I noted the surprising jump in M2 growth. As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event. Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don’t know what to do with all the money coming in. The last time M2 growth approached these levels was in the first quarter of 1983, at a time when inflation was still very high but starting to collapse, the dollar was booming, and the economy was just beginning its first of what would prove to be seven years of exceptionally strong growth. Rapid M2 growth back then was driven by a surge of confidence in the U.S. economy, but that is clearly not the case today. The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe, as money flees a banking system that is loaded to the gills with PIIGS debt. In short, it looks like there is a run on the European banks, and the U.S. banking system is the safe haven of choice. Given the lags between real time and when data hit M2, it’s quite likely that Europeans already have shifted substantially more than half a billion into U.S. banks in the past two months. I suspect we haven’t seen the end of this story either.

2. Some banks now charging for deposits  [Europeans are so afraid of Euro problems they are willing pay to store their money in US banks-in funds covered by American paid FDIC. Mr. Larry]
Aug 4, 2011, Financial Post, by John Greenwood
“As corporations and institutions move their assets to safe havens such as cash, players such as BNY Mellon are seeing a surge in deposits. Faced with a torrent of cash from customers looking for ways to escape the market turmoil, some banks have begun charging major depositors to hold their cash. Bank of New York Mellon Corp., a leading U.S.-based custodial bank, said in a note to clients this week that it will introduce a new fee on large cash balances effective Aug 8. As corporations and institutions move their assets to safe havens such as cash, players such as BNY Mellon are seeing a surge in deposits.
Between mid-June and mid-July demand deposit and commercial savings deposits grew by nearly US$200-billion according to Barclays Capital analyst Joe Abate. Such deposits typically earn no interest but are covered by U.S. deposit insurance, a cost the banks must cover. BNY Mellon said it will charge .13% on abnormally large cash deposits with an additional fee if the yield on a one-month U.S. Treasury Bill falls below a certain point. Custodial banks safe-guard a variety of customer assets but do not normally charge for holding cash. Many players have been affected in recent months as skittish customers began liquidating stock and bond investments in a bid to escape fallout from the debt crisis in Europe and ongoing trouble around the U.S economy. In normal markets custodial banks make a profit by investing cash from deposits but with interest rates pushing closer to zero that’s becoming a lot more difficult.”

3. How the euro might collapse [A scenerio that may come to pass. Mr. Larry]
May 20, 2010, Reuters,  Felix Salmon
I had a little three-minute fantasia this morning on Radio 4 in the UK; if you prefer text to audio, here you go. The idea was to give an idea of one way in which the euro might fall apart, but I had no idea, when I recorded it, that markets would plunge again today.

August 18, 2010: [Stock markets are expected to plunge. Mr Larry]
Markets around the world plunged on Wednesday, after Spain announced that the cost of bailing out its beleaguered mortgage lenders would amount to more than 250 billion euros. The country was immediately downgraded by both Standard & Poor’s and Moody’s, triggering fears of default or devaluation in both Spain and Portugal. Stocks fall by more than 5% in all major markets, including the US.

August 19, 2010:
Chancellor Angela Merkel of Germany, in an unprecedented joint public appearance with Jean-Claude Trichet, the head of the European Central Bank, railed against “speculators and hedge funds” who were damaging European unity and threatening the viability of the common currency. She said that Europe would provide up to 500 billion euros in support of Spain, Portugal, and Greece, to help them bail out their banks during a period when investors have simply stopped lending them any new money.

August 22, 2010:
In the largest set of coordinated demonstrations since the run-up to the war in Iraq, angry voters and opposition parties across Europe came out in their millions, protesting the hundreds of billions of dollars being spent on southern European countries, and the painful austerity measures being demanded of Greece, Spain, and Portugal by the IMF.
Opinion polls show that an overwhelming majority of Eurozone members oppose the current bailout plans, both in northern European countries like Germany, which don’t want to see their money spent abroad, and in southern European countries like Greece and Spain, which refuse to be told how to run their countries by Brussels bureaucrats and the IMF.
The riot photos from Greece are becoming depressingly familiar, but now we’re seeing riots across Germany, too.

August 23, 2010: [Stocks are expected to continue their decline. Mr. Larry]
As markets continued to plunge around the world today on civil unrest across Europe, governing coalitions across the continent broke apart, with no parties seeing any political upside in supporting the most unpopular policy that has ever been implemented in European history. Even Angela Merkel started backtracking from her earlier statements, saying that no democracy could unilaterally act against its citizens’ wishes.

August 24, 2010:
A solution, of sorts, was found to the European crisis today, when the governments of Greece, Spain, Portugal and Italy announced that they would no longer accept EU or IMF funds as part of the bailout program, and would solve their problems on their own. The joint statement was taken by markets as tantamount to default, since none of the four countries has access to the liquidity needed to roll over their debts.

August 25, 2010:
Greece has announced a debt restructuring that will push back the maturity of its bonds by three years.

It will swap existing debt for new bonds denominated in New Drachmas, which the Greek government is introducing at a 1-to-1 exchange rate but which are already trading in the “grey market” at just 50 euro cents each.

September 13, 2010:  [The general market slide continues through the third week. Mr Larry]
Markets were shocked once again today as France joined, at the last minute, the joint restructuring offer from Italy, Spain, and Portugal. All four countries are offering to swap their old euro-denominated debt for new obligations denominated in a currency they’re calling “neuros”. Other eurozone countries have indicated that they, too, will leave the euro for the neuro, cutting their debt at a stroke. In the grey market, the neuro is already trading at 75 euro cents, while the new drachma is holding steady at 45 euro cents.

Today was the last day of the euro as we knew it for a decade: Europe is returning to a system of multiple floating currencies. And that means that political ties are much weaker, too. With the death of the euro, the future of the European Union itself looks very uncertain.

This is not a prediction, it’s just one way of many in which things could go wrong. There’s always a worst-case scenario. And although I didn’t have time to spell things out here, this really is a worst-case scenario, and would cause legal chaos with respect to the redenomination of assets and liabilities in what might be called the neurozone.

Which means that questions like this one, which I got via email this morning, are simply unanswerable:

What happens to the euros which I have in my travel wallet (or under the mattress or where ever) if the euro splits into various neuros? More importantly, what happens to euros held by a British bank? Answer needed!

Most likely, in this kind of a scenario, the euros would transform themselves into the currency of whatever country they’re on deposit in. You can see where the flight-to-quality trade comes from: cash flows away from euro-periphery banks and into German banks, and away from euros and into dollars, lest it end up forcibly converted into something else. Physical euros should be pretty safe: you could probably convert them into neuros at an advantageous exchange rate, assuming that it’s the weaker countries which leave the eurozone, rather than Germany and a few others deciding that they’re going to create a smaller, stronger, super-euro.

Returning back to reality, the euro itself could still fall further, especially if questions over its long-term survival continue to be raised. And all this uncertainty is bad for assets generally around the world. Expect lots more volatility going forwards.”


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