Greece, Spain and Phantom Bank Runs
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A lot has been made in the past few days about the amount of money being pulled from Greek and Spanish banks. And, while, I agree the actions of people on the ground are significant from a sociological standpoint (i.e., faith in the monetary and political system in those countries is failing rapidly), I am not convinced in a modern setting that it will in the end be anything more than sound and fury signifying nothing.
Most of the money in existence is digital credit. Numbers in computers held in accounts which themselves are nothing more than numbers in computers. Cash accounts for very little of the actual currency in circulation in most of the western world. In Asia this situation is completely different, though Visa (NYSE: V) has noted in their most recent earnings statements that even that cultural attribute is changing with increased international travel and the convenience and protection offered by digital money.
Those that bemoan fiat money forget to include in their zeal that all money is essentially fiat money, even gold. The crucial difference is not the fiat origins of the current global monetary system but rather that the money is both fiat and debt-based in nature. Those that use an American Express (NYSE: AXP) card to make purchases are engaging in the same type of transaction as a 30-day repo loan between banks; whereas with Visa the debt is open-ended, and for some eternal. Pay the vig every month and access to the perks of card ownership is yours: convenience, fraud and theft protection, etc.
Too bad Wall Street didn’t take Visa for the Facebook IPO -- there would be a whole lot fewer class-action lawsuits pending and call centers around the world would be slammed with angry Muppets.
That brings me back to the bank runs in Greece and Spain. Since money is mostly digital now, bank runs really don’t have the same impact they had in the deflationary spiral of the 1930s. Today if you are scared for the health of your bank you pull your money out of one and deposit it in another. It’s a transfer of digits from one server to another. Greeks pull their money out of Greek banks and deposit the digits in Swiss or German banks. The Swiss and German banks are then free to lend at zero interest back to the Greek banks hence negating any net effect on the liquidity of the banking system.
Even with the Euro tanking versus the U.S. dollar the main effect will be on foreign trade, not on the health of the European banks. There are open swap lines at zero-bound interest rates between the five largest central banks in the world. Liquidity issues from bank runs can be absorbed and the reserves rebalanced.
Where the real danger lies then is when the banks are afraid to lend to each other. The credit markets are only just starting to act up. Credit default swap rates for the countries doing the bailing out have risen but they are not critical yet. U.S. debt carries a 48 basis point risk (in Euros), Germany 98 points. The problem has not reached unmanageable levels but at the current rate of ascent along with the OIS Swap rate pushing up to the 0.16% level, there will be a need to flood the system with more liquidity soon or the central banks will be flirting with a systemic seizure.
Who will benefit in all of this? The USD rally is a Euro-centric occurrence. This is not the secular bull run, though we have seen a serious unwinding of the dollar/Aussie carry trade in the past three months due to the popping of commodity prices. The CurrencyShares Australian Dollar ETF (NYSEMKT: FXA) has dropped from $108.82 to $97.82 since Feb. 29. The Singapore dollar, which has been reported to have high exposure to European debt, has appreciated versus the Euro, while it has devalued versus the U.S. dollar. This devaluation has caused the CPI in Singapore to rise to nearly 5.5% and the MAS is considering having tightening monetary policy to combat this.
The real beneficiary in all of this capital flight has been the U.S. treasury, which is seeing record demand for its long-dated instruments. The 10-year note yield is 1.76%. The benchmark 30-year bond is trading at 2.85%. It’s becoming a very crowded trade. With the Fed sterilizing some of its balance sheet expansion from 2008 to cool off commodity prices and force the ECB to accept responsibility for this round of bailouts for Greece and Spain, they are making room for the next round of QE to deal with U.S. domestic problems should things get any worse.
But, no matter what happens, there will be no real bank runs. A slow trickle of capital into tangible assets like gold and resource-rich land, but the modern banking system is a prisoner’s dilemma and any chance of escape is an illusion.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Express Company and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
