"Expect
more 'imaginary money – with or without negative bank rates – often
and soon..."
IT'S
NOT OFTEN that Sweden
gets to lead the world. Saab mimicked BMW. Ericssonimproved
on Motorola. Abba took The
Carpenters and added a hi-hat.
In monetary matters, however, Sweden
remains an occasional trail-blazer. The world's first central bank, beating
even the Bank of England by 26 years, the Riksbank then copied the Old Lady
by when it abandoned the Gold Standard in September 1931. But the Swedes
chose to mimic Great Britain
before anyone else, quitting the metal within two weeks of London's
monetary bomb-blast.
That's why, according to academic consensus, Sweden
recovered from the Great Depression before anyone else. (A more likely cause,
we guess here at BullionVault, was the resulting 30% drop in the Krona, but
economists hate publicly backing competitive devaluation today.) And Sweden
really did break new ground in the Thirties by making an explicit rate of
inflation its target – six decades before New
Zealand, the UK,
Eurozone and US caught up.
Inflation targeting wasn't the first or last
time the Riksbank got ahead of its colleagues. But it did prove the least disastrous to date.
"A charge was drawn up against Goertz,
who was accused of speculation, of having ruined public credit by imaginary
money, of having formed a design to destroy the king..."
Thus relates a 19th century history of the
first central banker ever to lose his head to an axe, rather than merely
losing his head to some new tom-fool theory. Baron George Heinrich de Goertz,
a successful minister in the early 18th century, was dumped into the Riksbank
to fix more than 100 years of monetary madness.
Sadly for Goertz, his madness served to cap
the whole show.
"He minted a representative currency in
copper, validated with the king's head and a legal tender face value of a
Daler," wrote Paul Tustain, director of BullionVault, on his popular Galmarley gold site back in 2004. "Goertz did not
limit the issue, nor ensure the quality of the coins, which were beneath the
technical capabilities of the day. Moreover, he attempted this exercise on
behalf of an administration which had lost virtually all financial credit with
its population, and compounded the error by allowing to
develop a widely-held belief that at some unspecified time in the
future, collectors would refuse the coins as legal tender payment of taxes.
"In other words he broke every rule in
the central banker's book. The coins were detested, and sloshed around the
Swedish economy depreciating rapidly"
Poor Goertz! His scheme collapsed with the
death of his King and protector, Charles XII, in 1718. The new monarch
– Charles' sister, Ulrica Elenora – abolished Goertz' paper
money, and had his copper coins re-minted at something approaching their true
commodity-price value. Forced to a show trial and denied counsel in court, he
tried but failed to defend himself against execution, beheaded in front of a
cheering crowd on 3rd March, 1719.
Just like today (as we'll see in a moment),
such monetary madness was hardly unique at the time. Destroying public credit
with imaginary money was also ruining both England
and France,
where John Blunt's South Sea Bubble and John Law's Mississippi Bubble would
explode in due course in 1720. But just like 2009, the Riksbank was only just
ahead of the game. Because the success of its thinking still clearly
impresses today.
"The UK
should follow the Swedish model," said ex-Bank of England
policy-maker Charles Goodhart at a forum last week, "so that for
commercial banks reserves held at the central bank of above, say 2%, they are
charged 0.5% to hold their balances.
"This would then encourage the banks to
buy short-dated gilts or commercial paper, increasing liquidity."
Simple, right? It's now six weeks since Sweden's
central-bank governor, Lars Svensson – a great pal of Ben Bernanke's at
Princeton – "broke the zero
bound" on monetary policy. Yet the world still turns on its axis,
despite the Riksbank knocking the interest paid to its commercial-bank users
down below nothing, into a brave new world of negative rates.
Cash-hoarding in London is also more weighty
at £161 billion ($264bn) than Sweden's
own stock – now down 19% from SEK 48 million ($6.7m) just before the
fateful decision. And like the US Fed's hoard of commercial bank cash, which
rose 40 times over in 2008, the consensus view is that unused bank money
is "socially useless"
to quote another former Old Lady, Willem Buiter of the Financial Times.
But there's way more at stake, we fear, if the
US and UK
choose to buck history and now follow the Swedes. Starting with the outright monetization of their
government debt.
"There have been suggestions that the
Bank of England could introduce negative interest rates on deposits to
encourage the commercial banks to lend as the Swedes have done," says
one London
analyst, RBC Capital's Russell Jones
"This could also encourage banks to buy
more short-term gilts."
As it was at the start of this month, the
latest Bank of England policy-vote shocked the currency and bond markets by
unleashing a fresh £50 billion of imaginary money for use in its
Quantitative Easing. Analysts, investors and savers already fear it's simply
funding state debt, passing the new cash straight to the government and
walking us all straight to hyper-inflation. Yet today's release of the policy-team's minutes, however, showed the governor –
one-time inflation hawk Mervyn King – actually voting for a still-greater
injection of money from nowhere, hiking the Bank's total money creation to
£200 billion.
That would been equal
to half the entire government gilt market, and greater than this year's
entire UK
state deficit – currently forecast at £175bn, precisely where the
Bank of England capped its money creation for now. Still deflation looms,
Dr.King said this week, and still the Pound rises...back above $1.65 to the
Dollar today.
If this central banker's scheme works, and he
keeps his head until, say, the end of this year, how might the US Fed or ECB
answer? On both sides of the Atlantic, and all across Europe
we guess, expect more "imaginary money" – with or without
negative bank rates – often and soon.
Adrian Ash
Head of Research
Bullionvault.com
Also
by Adrian Ash
City
correspondent for The Daily Reckoning in London,
Adrian Ash is head of research at BullionVault.com
– giving you direct access to investment gold, vaulted in Zurich, on $3 spreads
and 0.8% dealing fees.
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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