Thursday, 19 January 2012

The amazing disappearing money trick


So it's clear that it's going to be a tough year. There might well be a recession here in the UK. There will probably be slow growth indeed in the Eurozone and across the world economy. It's going to hurt.

Why? Because all of the money swilling around the system is gurgling down a great big black hole.

You'll remember that central banks have been pouring money into the banking system to boost liquidity and lending. You'll remember, much further back, that most governments tried to react to the first stage of this crisis - during 2007-09 - by boosting their own spending. So there's a lot of cash sloshing around the system.

You may well be forgiven for asking: where has all the money gone? Well, take a look at the graph above for starters (copyright, The Financial Times). It's the amount of cash that European banks have been leaving with the European Central Bank overnight, and it's been rising to record levels over recent weeks. It's fallen back a little in the last day or two, but the numbers are still astronomical: over 450bn Euros every night.

Why are they doing that? Because they daren't lend to each other, in case one of them falls and a cascade of failures begins. That means they daren't lend to you, either - or any other small businessmen or citizen.

Put this together with the non-convertibility of the Chinese currency, the Renminbi, and you have the two great big black holes of our financial currency, taking in cash but emitting very little indeed. Basically, the Chinese sell a great big slice of the world's manufactured goods, absorb the world's Euros, Dollars and Pounds, and refuse to give them back. It's an imbalance caused by the fact that no-one can trade in their currency, apart from a tiny window the UK wants to make money from in Hong Kong. It helps to explain the size of the Chinese sovereign wealth fund. It's a bit like General de Gaulle's trick as President of France in the 1960s, when he basically took all the American defence dollars in Europe and sat on them, weakening the US and strengthening his own hand. Expect to see many more Congressional calls for action - to little avail.

Want to know where all the money's gone? Welcome to the amazing disappearing money trick.

1 comment:

  1. The amazing balance sheet identity, more like. The ECB balance sheet has to balance - "Total Open Market Operations" equals "Current Accounts" plus "Deposit balances" plus "autonomous factors (including Securities Market Programme". Since autonomous factors are, well, autonomous, and current accounts are largely determined by the reserve maintenance cycle, the only remaining place for a EUR200bn liquidity injection to show up was the deposit facility. It might or might not be true that banks aren't lending to each other, but you can't read it off the absolute level of the ECB statistics.

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