Typography

Earlier this month I criticized the architects of India's recent note demonetization for not using the traditional overstamping technique for replacing large quantities of banknotes. This week I want to examine another feature of Modi's demonetization: the concurrent change in note sizing. The new series of ₹500 and ₹2000 notes are smaller in size than the ₹500 and ₹1000 series that they have since replaced. This has caused huge logistical problems. Since each cartridge in an ATM must be manually configured to handle a certain note size, ATMs were not equipped hold the newly issued ₹500s, ₹2000s, or additional ₹100s for that matter. Instead, they were forced to operate at a fraction of their capacity. Indians, desperate to replace their demonetized notes with good cash, were left on the lurch. Let's explore the reduction in banknotes size. I'd argue that independent of the decision to crack down on black money, the decision to go smaller makes a lot of sense. But twinn...

The shares of the Swiss National Bank (SNB), Switzerland's central bank, have almost doubled since July, despite there being no real news. Yep, you read that right, the SNB is listed on the stock market. There are four other central banks with listed shares: Belgium, Japan, Greece, and South Africa. I discussed this odd group back in 2013. Why are SNB shares catapulting higher? This is a staid central bank, after all, not a penny stock. Let's look at the fine print. Swiss National Bank shares aren't regular shares. To begin with, the dividend is capped at 6% of the company's share capital. The SNB was originally capitalized back in 1907 with 25 million Swiss francs, an amount that hasn't changed in 109 years. Which means that the dividend is, and always has been, limited in aggregate to a minuscule 1.5 million francs per year (about US$1.5 million). Because this amount must be divvied among the 100,000 shares, each share gets just 15 francs per year. The SNB has fa...

Remember all the hoopla about Japanese buying safety deposit boxes to hold cash in response to the Bank of Japan's decision to set negative rates? Here is the Wall Street Journal: Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash--the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates. Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does. Well, three month's worth of data shows no evidence of unusual cash demand. As the chart below illustrates, the rate at which the Bank of Japan is printing the ¥10,000 note shows no discontinuity from its pre-negative rate rise. In fact, demand for the ¥10,000 is far below what it was in the 1990s, when interest rates were positive. I should remind readers that the Bank of Japan, like any central bank, doesn't determine the quantity of banknotes in circulati...

Have Swiss interest rates fallen so low that the public is finally bolting into cash? The Wall Street Journal and Zero Hedge  think so. They both point to big jump in 1000 franc notes outstanding as evidence that Switzerland has finally breached the effective lower bound to interest rates. Let's not get too hasty. Yes, the current run into paper francs may have something to do with Switzerland having hit its effective lower bound, the point at which paper francs provide a superior return to electronic francs. But Swiss francs also serve as a global safe haven asset. And this safe haven demand, operating entirely independent from effective lower bound demand, could be motivating people to amass 1000 franc notes in vaults. The effective lower bound problem is the idea that if a central bank drops rates low enough, a tipping point will be reached at which it becomes cheaper to hold 0% yielding banknotes and incur storage fees than to stay invested in negative yielding deposits. The...

Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign. What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold  whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers : reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%. But as Nick Rowe writes , negative rate tiers—which can be thought of as maximum allowed reserves—are si...

A common argument against the Fed raising interest rates next week is the asymmetry in risks that it faces. If it keeps rates low too long and sets off inflation, no problem: it can quickly hike rates a few times to bring prices back in line. However, if it boosts rates too early and an unintended slowdown sets in, the Fed won't have room to cut a few times in order to fix its mistake. That's because the Fed is at the zero lower bound , the edge of the world in monetary policy terms. To avoid this conundrum, the Fed should hold off as long as possible before raising, at least until it "sees the whites of inflation's eyes." As Paul Krugman points out , the asymmetry argument is only a recent one. Historically U.S. interest rates have hovered far above zero. If the Fed made a mistake, it didn't have to worry about falling off the edge of the world in order to fix the situation, it could simply ratchet rates down a few times. Rather than waiting till the last m...

Unfathomable Depths by Ibai Acevedo Denmark's Nationalbank and the Swiss National Bank are the world's most interesting central banks right now. As the two of them push their deposit rates to record low levels of -0.75%, they're testing the market's limit for bearing negative nominal interest rates. The ECB takes second prize as it has been maintaining a -0.2% deposit rate since September 2014. At some point, investors will flee deposits into 0%-yielding cash. This marks the effective lower bound to rates. Has mass paper storage begun? The last time I ran through the data was in my  monetary canaries post , which was inconclusive. Let's take a quick glance at the updated data. To gauge where we are relative to the effective lower bound, I'm most interested in the demand for large denomination notes, which bear the lowest costs of storage. Once a central bank reduces its deposit rate so deep into negative territory that the carrying cost of deposits exceeds the...

Central bankers are usually classified as either hawks or doves. This post is devoted to a third and rare breed; today's monetary policy canaries. Having taken their respective deposit rates to -0.75%, deeper into negative territory than any other bank in history (save the Swedes), the Swiss National Bank and Denmark's Nationalbank are the canaries of the central banking world, plumbing depths that everyone assumes to be dangerous. Other central bankers, in particular the ECB's Mario Draghi, will no doubt be watching the Swiss and Danes quite closely. The information these two nations generate as they go deep into the bowels of negative rate territory will give a good indication of the level to which the others can safely reduce their own rates before hitting their respective effective lower bounds. That there is an effective lower bound to rates stems from the fact that at some negative nominal interest rate, everyone will choose to convert deposits into cash, preferring...

Swiss National Bank share certificates Gavyn Davies blames the Swiss National Bank's corporate structure for the floating of the Swiss franc. Paul Krugman intimates the same, as does Cullen Roche . Here is Davies: But the SNB is 45 per cent owned by private shareholders, many of whom are individuals, who receive dividends from the SNB. The rest is owned by the cantons, which have been complaining recently about insufficient cash transfers from the SNB. Davies goes on to say that the influence of shareholders, combined with the peg, means that the SNB is particularly concerned about balance sheet losses. The idea seems to be that currency pegs often result in large balance sheet fluctuations, forcing a suspension of shareholder dividends. I disagree, as a quick peek at the details shows: 1) The dividend to which Davies attributes so much importance is minuscule. In aggregate it comes out to just CHF 1.5 million per year, or US$1.7 million . Private shareholders, who own just 40.3%...

Two things worth noting: As many of you know by now, the Swiss National Bank (SNB), Switzerland's central bank, just reduced the rate that banks earn on deposits held at the SNB by half a percentage point to -0.75% (from -0.25%). The SNB had only recently instituted a negative deposit rate, having reduced it to -0.25% from 0% this December. The SNB will also be targeting a 3-month LIBOR rate of -1.25% to -0.25%, down from the previous range of -0.75% to +0.25% The SNB issues the world's largest paper bearer note denomination, the hefty CHF 1000 note (pictured above). It's worth around US$1143. The first is significant because as yet, no central bank has ever brought rates this deep into negative territory. The ECB's current deposit rate is set at -0.2% while Denmark's central bank, the Danmarks Nationalbank (DNB), applied a negative deposit rate of -0.2% on deposits that banks placed with the DNB in 2012. Neither of these top the SNB's ultra-low -0.75% rate. T...

Most people don't realize that the central banks of Belgium, Japan, Greece, Switzerland, and South Africa are all publicly-traded. In times past, central clearinghouses were typically privately-owned while the issuance of bank-notes was the domain of competing banks. The fact that a few central banks still retain traces of their former private nature is a good reminder that centralized banking isn't necessarily the domain of the public sector. The Swiss National Bank , for instance, was founded in 1907 to take upon itself the issuance of national bank notes, hitherto provided by private banks. According to Hübscher and Kuhn ( pdf ), efforts to establish a wholly government-owned central bank were defeated in an 1897 national referendum. Opponents of the plan drew up an alternative proposal for a privately owned bank the structure of which would, according to Bordo, "not allow for state socialism or the public control of credit policy." One fifth of the new bank's ...