Separated at birth: Russian gold reserves and Switzerland's 5000 franc bill

I recently read (WSJ, 2/23/16, C2) that demand for the CHF 1000 note, currently Switzerland's largest denomination, has been increasing as Swiss central bank rates have turned negative. This raises the fear that local depositors will soon be charged for storing their money in banks. There are now CHF 45.2 bn (US$45.7 bn) in circulation, a 17% increase in the last twelve months.

Two gnome-like parliamentarians from Zug, near Zurich zeroed in on this and proposed that the SNB also Issue CHF 5000 notes, arguing that "an individual's ability to keep wealth stockpiled in cash, and out of the reach of banks, digital payment systems or the government, is a fundamental right." (WSJ's paraphrase)

Meanwhile back in the Kremlin, Bank of Russia President Elvira Nabuillina, a Tartar and worthy scion of the Golden Horde, whom Euromoney has named Central Banker of the Year in 2015, is buying all the gold she can get her hands on. (Well, almost all) In the fourth quarter, the Bank was reportedly the world's largest single buyer of gold, and in January alone it added another 700,000 ounces ($840 mn). Russia's concern is that by holding dollars in reserve it risks having them effectively cancelled by denial of access to the international transfer system, which is the only way these ones and zeroes in the their computer have any value. It is interesting that the Zug solons also expressed concern for digital payment systems in arguing for the CHF 5000 bill. (By the way, one of the ideas discussed last year by the US authorities was to close the payment system to Russia to force them to default on their external debts, which are mainly corporate, thus strewing chaos; international creditors did not like this idea, however.)

Money is a means of exchange and a store of value. In the dollar world, both of these functions are available at the pleasure, and only at the pleasure of the Fed and the US Treasury. That is why politics worry some and "unconventional policies" worry others.

Dollar dreadnaught dings dong

Yesterday’s WSJ, which I just got around to reading today, has an interesting article on the effects of the strong dollar on coffee production around the world, “Strong Dollar Skews Coffee Trade.” It leads with a touching story of Vietnamese farmer Y Kua Mlo storing his coffee crop in his bedroom rather than putting the crop on the market because the price in dong, the national currency of Vietnam which is the world’s second largest coffee producer, is depressed because the dong is tied to the dollar. The world’s largest coffee producer Brazil’s currency has, however, dropped, making its coffee cheaper. Meanwhile, production in Brazil is soaring because the real ($R) price is up. “Coffee prices have been painfully low, and none of us want to sell the beans now,” Mr. Mlo moaned. (The market price is 34,000 dong ($1.52/kilogram) but he is holding out for 40,000.) Mrs. Mlo says he should have switched to peppers, so there is probably a lot of tension in the coffee bean-stuffed bedroom.

Vietnam, like the other countries whose currencies are tied to the greenback (China, Hong Kong, Saudi Arabia, Panama, etc. – the list grows ever shorter) are in increasing difficulties, as is the United States itself. I would expect that the market will bring the dollar down soon, particularly as the 10-year bond yield differential is diminishing. (Assuming of course the Fed does not tighten further.)