|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
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
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
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
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
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?
De Nicolo4, G., Honhohan, P. and Ize,
H.(2003). Dollarization of the banking system: Good
or bad?(IMF Working Paper 146). Washington, D.C.: International
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at email@example.com.