Sunday, January 24, 2016

Trillion Dollar Drain - is it about bail-ins?

Yesterday I commented on Hugo Salinas Price's observation that Central Bank assets have declined by a trillion dollars in 17 months. I thought it might be caused by big money trying to get away from a potential dose of inflation as governments try to print their way out of obligations.

Of course, buying government bonds wouldn't help with that. How silly of  me to forget.

But what it would help with, is avoiding a giant cash-grab by banks as they start collapsing.

Ever since the law case Carr v. Carr (1811) it has been clearly established - but still not generally known by most people - that bank deposits are not simply left for safekeeping. [This was re-discussed in 2010 in the wake of the 2008 Global Financial Crisis, e.g. here in the Daily Telegraph.] Revisiting this issue in the courts in 1816, the judge Sir William Grant ruled that "money paid into a banker's becomes immediately a part of his general assets; and he is merely a debtor for the amount."

"Depositors" go without dividends and recently have received no or little interest to boot. In the optimistic dreamworld of the common man, it's worth it for the sake of security - but he does not enjoy preferential/secured creditor status, either. Yet he goes on happily, relying on some vague notion that he'll be made whole if something goes wrong.

But I warned in 2007 that at that time in the UK only the first £2,000 was 100% guaranteed and any excess over £35,000 had no protection at all. This was later raised (in line with an EU directive) to €100,000, translated (roughly) into British £85,000 - and from 1 January 2016 it has been reduced to £75,000 as the Euro sank. [It's a moot question: which is more nearly broke, the EU or the UK? and how will that impact relative currency values? One wonders what the maximum UK depositor compensation will be in the near future.]

In the US, the security for depositors depends on the FDIC, which Tyler Durden explained last May is in no financial condition to weather a storm, having a reserve ratio of merely 1.01% in 2014.

This is of little concern to the average American - less than half the population has anything more than $1,000 in savings and a fifth have no bank account at all. A couple of years ago a survey found a similar picture in the UK.

But ultra-high net worth (UHNW - assets > $10 million) individuals have something to worry about if the banking system turns turtle:

"UHNW households held more than $10 trillion (about 7 percent) of global private wealth in 2014, a slight increase over 2013, and will be the fastest-growing segment through 2019 [..] At a projected CAGR of just over 14 percent over the next five years, private wealth held by the UHNW segment will grow to an estimated $20 trillion in 2019," says Boston Consulting Group.

It would not be surprising if in the context of shrinking global demand and (for now) low inflation wealthy individuals were looking to bonds as a safe haven.

Let's ignore bond holding by corporations, pension fund and other fund managers, and national governments. The missing trillion dollars that exercises Hugo Salinas Price is less than 10% of UHNW household assets.

What a great time to be a bond salesman!


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1 comment:

Paddington said...

I've said before that our monetary system is a mess. More so, with most of the cash owned by people who consider is 'real'.