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THE VALUE
VIEW GOLD REPORT
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| 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, Patrick Honohan & Alain Ize
(2003). Dollarization of the banking system: Good or bad?
(IMF Working Paper 146). Washington, D.C.: International Monetary
Fund.
March 25, 2005
Ned W. Schmidt
Ned W. Schmidt, CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT. That report nowincludes a weekly message, TRADING THOUGHTS, to help investorsidentify timely points for buying Gold and Silver.
You can join him for the Gold Super Cycle here.
His monumental report, "$1,265 GOLD," with 255pages and 98 graphs, is now widely known, and is available atwww.amazon.com or from the author. This work has nowbeen read by investors in over twelve countries.
Ned welcomes your comments and questions. His mission in lifeis to rescue investors from the abyss of financial assets andthe coming collapse of the U.S. dollar. He can be contacted atnwschmidt@earthlink.net.
Copyright ©2006 Ned W.Schmidt... All Rights Reserved.
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