In my view, the manner in which wealth is stored, preserved and grown is changing radically presently.
Many who are not paying attention to financial and economic developments remain unaware of these changes. However, anyone who chooses to be a serious observer of these developments can see that fiat currencies are weakening, and alternate wealth management strategies are quietly becoming more mainstream.
Driving these changes is wildly evolving monetary policies.
Central bankers around the world set money policies and they’ve painted themselves into the proverbial corner. They have few options left.
While the country and the world are focused on the impeachment trial and the coronavirus, wealth preservation and storage are changing before our very eyes.
After the financial crisis, central banks resorted to printing money after reducing interest rates to zero failed to produce the desired result of another boom cycle.
In the fractional reserve banking system under which we operate, as money moves from one bank to another money is created. Here’s a quick example.
I deposit $100,000 in my bank. Under the current reserving rules of 10%, my banker must reserve $10,000 and can loan out the other $90,000. In other words, money is created as money is loaned.
If money is moving fast and the velocity of money is high, more money is created. The $90,000 that my banker loaned to a home buyer was paid to the home seller who deposited the $90,000 in her bank. That banker reserved $9,000 and loaned out $81,000.
By reducing interest rates, borrowing becomes more attractive, borrowing activity increases and more money is loaned into existence. After the financial crisis, due to the level of private-sector debt that existed, borrowing did not pick up despite interest rates of nearly 0%.
So, the Federal Reserve embarked on a path of “quantitative easing” or money printing. Since money was not being loaned into existence because private sector debt levels were too high and consumers weren’t borrowing money, the Federal Reserve decided to just print it.
Whenever you hear or read that the Fed is expanding its balance sheet, it simply means the Fed is printing money.
Initially, money printing creates the illusion of prosperity. In many areas of the economy today, this prosperity illusion exists. But, in other parts of the world, new and even crazier monetary experiments are being executed.
In much of the world, bonds now have negative yields. A negative-yielding bond gives you back less than you invested at maturity.
This Negative Interest Rate Policy, or NIRP as it’s known by, is changing the dynamics of wealth storage, preservation and growth. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/negative-rates-are-forcing-german-banks-hoard-cash) emphasis added):
In the era of NIRP, “cashless societies” like Sweden are at a clear disadvantage. When banks are charging wealthy customers additional fees for storing their cash on deposit, the option to transition a chunk of one’s fortune to cash suddenly makes sense. And as Bloomberg reported Friday, this phenomenon hasn’t been lost on German banks.
(Editor’s Note: Bloomberg story here- https://www.bloomberg.com/news/articles/2020-01-31/german-banks-are-hoarding-so-many-euros-they-need-more-vaults)
To help them keep as little money in reserve accounts as possible, banks in Germany are reportedly stuffing vaults with euro banknotes in to keep them handy for customers (and avoid the additional NIRP tax on deposits). Some banks have hoarded so much cash that they’re running out of room and are searching for more storage. This behavior has been going on for years, practically since Draghi introduced negative rates almost six years ago.
But the trend has gotten so out of hand German banks are running out of space to stash the notes.
The physical cash holdings of German banks rose to a record 43.4 billion euros ($48 billion) in December, according to Bundesbank data published on Friday. That’s almost triple the amount at the end of May 2014, the month before the European Central Bank started charging for deposits and raising the pressure on Germany’s already beleaguered banks.
By the end of last year, German banks were holding a record amount of physical cash.
Andreas Schultz, who runs a German savings bank had this to say, “These days it’s better to keep funds in cash rather than park them at the ECB. That’s despite the risk, insurance costs and logistical hassle involved. It’s a ludicrous demonstration of the consequences of the ECB’s interest-rate policy.”
Frank Schaeffler, a member of the German Parliament commented, “This is just the beginning. If it continues, we’ll see a boom for vault makers and security companies.”
In my view, negative interest rates could become a worldwide phenomenon. If it happens, consumers and banks alike will look for alternative ways to store and grow wealth, likely outside the banking system.
Former Federal Reserve Board Chair Alan Greenspan stated fairly recently that it was his view that US interest rates could go negative. In a CNBC interview, Mr. Greenspan said, “You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States.” (Source: https://www.cnbc.com/2019/09/04/alan-greenspan-says-its-only-a-matter-of-time-before-negative-rates-spread-to-the-us.html)
Demand for secure storage and alternate assets is exploding in Europe. Markus Weiss, managing director at Degussa Goldhandel which sells gold and offers clients space to store their valuables said, “We’re seeing increased demand for our safe deposit boxes, frequently for storing cash. That high demand has lasted for months now and we’re continuously expanding our capacities.”
Looking ahead to the next monetary experiment, it’s quite possible that we will see helicopter money in my view. While no one knows for sure, the advent of helicopter money could likely be the last money experiment before the reset.
Helicopter money was once proposed by former Federal Reserve Chair, Ben Bernanke, earning him the moniker “Helicopter Ben”.
Helicopter money is money that is printed but rather than using the newly printed money to buy assets from banks, it is distributed directly to the public. It could come in the form of a direct bank account deposit or a tax credit.
Treasury Secretary, Steve Mnuchin recently stated that the administration is working on tax cuts for the middle class. A CNN article (Source: https://www.cnn.com/2020/01/23/politics/mnuchin-trump-tax-cuts-2020-election/index.html) quoted Mr. Mnuchin, “ They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.”
Helicopter money may indeed be on the way.
That will mean the way wealth is stored will continue to evolve. When doing your planning for 2020, think tangible for some of your assets.