An interesting, curious article on the Wall Street Journal about the 500 EUR banknotes and seigniorage made me think about the headless chicken.
As no revisions to the article have been published, I assume that the information that it contains is confirmed- and I wanted to share some comments.
As for the chicken- it supposedly happened by accident, in the 1940s, when a chicken instead of being prepared for the dinner was able to survive for a couple of years without head (if you don’t believe me: this is his website), also if it was reported that he was alive for another couple of years.
Actually- he survived by being fed with occasional grains and drops through the neck.
Why the headless chicken? Because, without eyes, he would know only the paths that he already experienced before, or otherwise act on instinct and prior memories- as trying to eat using his neck.
Over the last few months the Euro has been on a roller-coaster, getting down to almost parity with the US dollar, and getting up by 30%.
It reminded me of when I was in the UK, and I read that a Japanese company was moving a production facility to France, despite the higher payroll taxes.
The reason? The plant produced mainly for export to Euroland- but with currency fluctuations between 1.1/1.3 and 1.7 EUR/GBP?
I had seen in Latvia in mid- to late-1990s the effects of a large number of 100 USD bills in circulation, and the article describes the 500 EUR banknote as a competitor to the US dollar.
What is the competition about? As eloquently said in the article: “$1 million in $100 bills weighs 22 pounds; in hypothetical $500 bills, it would weigh just 4.4 pounds”.
No need to explain in which “businesses” the weight of the cash matters.
Few years ago, there was another article about the 500 EUR banknotes- it was expressing concern that a quarter of all those banknotes were in circulation in Spain- feeding a real-estate bubble financed by money laundering.
Eventually, it became a security issue- involving highly visible arrests.
According to the new article, the aggregate value of the 500 EUR banknotes grew up to 285 billion EUR, while the profit due to the relatively lower production cost of 500 EUR banknotes, if compared with, say, 50 EUR banknotes, is generating liquidity for the ECB.
When the Euro project was started, between the political push from France and the resistance from Germany, eventually the Euro was supposed to be at least as strong as the DM had been.
The Euro started eventually to increase its presence as a reserve currency, at first with just the “weight” of the currencies it replaced (see the IMF data on the Official Foreign Exchange Reserves).
After the recent financial issues, instead of replacing the US dollar with the Euro, other countries are proposing to change the overall approach- almost getting back to XX century proposals to create a global currency, without first reducing the global development imbalance.
According to a paper from the ECB published in 2006, the top ten reserve-accumulating countries 1995-2005 were Japan, China, Taiwan, Korea, Russia, India, Hong Kong, Singapore, Malaysia, Mexico.
But after more than ten years, the Euro cannot be considered just as an experiment or a temporary fall-back position, despite what somebody wrote in 1998.
Also if the direction the currency and its management are heading to often is a mystery composed of contradictory actions based on prior experience- almost like that headless chicken.
The only certainty- while the volume is increasing (just go and visit the statistical websites), it is not on the much feared 1920s-scale.
Anyway- it has been almost 40 years since President Nixon acknowledged what was already known: that the Federal Reserve could not keep the convertibility of the U.S. dollar into gold.
If you want- what you have in your wallet does not represent any physical value: it is a statement by the issuing party, in agreement with the parties accepting those banknotes at face value.
A banknote does not represent anymore anything held in some vault: it is a virtual vote of confidence given to the issuing country (or countries) on the sustainability of its value- and its exchange rate is akin to a “poll”: increasingly more predictive than reactive.
It is the first time that so many developed countries shed their own currency, despite their differences, to adopt a new one, while experimenting with a single, unified management (the ECB looks like the U.S. Fed, but it has potentially a stronger institutional cohesion).
So, if it is not an experiment, it is at least a work-in-progress.
A currency without a country has some significant issues, including the lack of a political base to rally for support, and the associated institutional framework.
As for the European version of the IMF, it is still to be seen if the EMF will obtain from the IMF just the expertise and savoir faire, while working in a way that is adapted to each situation, or it will try to introduce the old “one size fits all” approach.
Also because the Southern American success case of the unilateral application of the old policies wasn’t exactly a democratic country: so, the idea of having a “take or leave” approach is not exactly something that EU citizens would expect- or that could be managed in the same way.
The staggering amounts that have been injected into the financial system in EU, as well as the creation of the new fund to provision for future issues, have still to produce an effect on both consumers and production.
Also the limited “stress tests” publication produced mixed results: there is still a long way to go before transparency.
Hopefully, there will be at least on the use and allocation of taxpayers’ funds.
And the 500 EUR banknotes? Probably, also if almost nobody accepts them in shops, the higher denominations will stay with us until we get rid of banknotes and move onto digital money.
The last time I saw a 500 EUR banknote in a shop in Brussels? It looked more like somebody trying to split it into smaller denominations, by buying irrelevant, small value items.
Better to leave those banknotes within the banks’ vaults, and, instead of adding more security features to avoid counterfeit, “dematerialize” (i.e. convert to digital) our money.
Anyway- there are ways and means to keep digital money as anonymous as banknotes: but, at least, this will reduce the production cost.
Tags: banknote, emf, eu, euro, european, imf, seignorage, union