Now and then

Now

... and...

Then

So how do these balance sheets compare, fourteen long years on since the birth of the euro? I thought it may be interesting to compare the numbers - so below is the list of each section of the balance sheets, with an indication of the magnitude of the change across the period. I figured someone might find it interesting, so why not share...

Assets

1. x4.40 - Gold and gold receivables
2. x1.08 - Claims on non-euro area residents denominated in foreign currency
3. x5.94 - Claims on euro area residents denominated in foreign currency
4. x2.50 - Claims on non-euro area residents denominated in euro
5. x7.37 - Lending to financial sector counterparties of euro area (5 "then", 5+6 "now")
6. x27.87 - Securities of euro area residents denominated in euro
7. x0.50 - General government debt denominated in euro
8. x3.47 - Other assets

Liabilities

1. x2.62 - Banknotes in circulation
2. x8.51 - Liabilities to euro area financial counterparties denominated in euro
3. x∞ - Debt certificates issued ("now" €0)
4. x5.05 - Liabilities to other euro area residents denominated in euro
5. x16.04 - Liabilities to non-euro area residents denominated in euro
6. x4.65 - Liabilities to euro area residents denominated in foreign currency
7. x1.66 - Liabilities to non-euro area residents denominated in foreign currency
8. x9.53 - Counterpart of special drawing rights allocated by the IMF
9. x3.72 - Other liabilities
10. x6.83 - Revaluation accounts (unrealised MTM asset gains/losses)
11. x1.62 - Capital and reserves

Of note

• The balance sheet bottom line now is x4.27 what it was back then.
• Gold and gold receivables formed 15% of the balance sheet total both then and now.
• The leverage of total assets against gold and gold receivables, "then" was x6.88, "now" is x6.68.
• Between the revaluation accounts plus capital and reserves, the total equity in the Eurosystem balance sheet is now €492,988,000,000 or so. So I figure they could handle quite a lot of stress before they would have to worry about becoming insolvent.

Meanwhile the Fed's balance sheet is currently leveraged x55 or so (but if they brought the Treasury's gold fully onto the balance sheet at floating market valuation, MTM like the ECB does, they would find themselves with a very similar leverage ratio). It could be time to reconsider the way the Fed's accounting is done?

Tell me what this says to you?

All charts courtesy of FED FRED - click to get a larger view...

1984-> 3-month Tbill yield

1984-> Monetary Base

1984-> MZM velocity

1984-> US GDP

^{I love you Fred!}

The price of real value

^{(Click image for a larger view)}
Shown above is a chart demonstrating a fairly tight correlation between the US$ price of Brent crude oil and gold, over the last three years.

Crude oil is the major input to all economic activity today — powering equipment for the production of foodstuffs; anything manufactured with machinery and/or containing plastics; anything transported long distance from where it is produced to market; any activity where the staff producing it have to travel to get to their place of work; etc. Nothing is more significant to the cost-base of everything traded in the world today. Of all the benchmark markets for the trade of crude oil, Brent crude is the most representative of real world trading, hence I have used this rather than $WTI for the chart.

If there were a tight correlation between Brent crude and the US$ (i.e.: there was price stability in US$ terms) then the line on the chart would be broadly horizontal. But what we can see is, clearly, that the prices of both Brent crude oil and gold, in US$ terms, are generally rising and doing so at a fairly similar rate. Or to look at that another way, that the value of US$ is steadily falling against both of these benchmarks of real world trading. We could also have tried charting the Brent crude price in another currency of your choice, but the picture would have been pretty much the same — because all currencies today are traded against each other and move broadly, like a herd, in the same direction: down.

To further illustrate this point, below is another chart, this time showing the ratio of GOLD:BRENT, which as we can see (taking into account the small range of values on the Y-axis) is broadly stable. The blue line is a 200 day exponential moving average of the ratio, which we can clearly see is meandering around the 15 level, marked by the red horizontal line.

(Click image for a larger view)

To summarise what the chart is saying: over time one troy ounce of gold is traded at the same value as approximately fifteen barrels of crude oil.

Real world trade is taking place denominated by broadly stable exchanges of goods in terms of real world value, rather than in stable US$ pricing. This is how trade has really taken place for millennia.

People mainly save in currency today, thinking they are preserving their purchasing power for the future. But the purchasing power of currency is, demonstrably, anything but preserved over significant periods of time. If you have savings to preserve the purchasing power of over long periods, rather than current balances that you are setting aside in readiness to make payment on your short term commitments ... please consider storing those savings in something other than currency. Spend the cash on a real world asset of enduring value, then forget about it until such time as you may need to convert it back into cash in the future. This is how to preserve the value of your savings for the long term, in real terms.

^{You may have fewer choices later.}

You would prefer a longer term perspective? Sure - who wouldn't! ;-)

• Wikipedia: Crude oil prices since 1861
  ^{(Note: log scale.)}
• MacroTrends: Gold to Oil ratio historical chart
  ^{(Note: volatile during wars and since 1971.)}

Monetary Base and $PoG

^{(Click for a larger image)}
Operation Twist didn't expand the monetary base — unlike TARP, QE1, QE2, QE3 and QE4. Without base expansion, we see deflation.

• ^{http://www.bullionvault.com/gold-price-chart.do}
• ^{http://research.stlouisfed.org/fred2/graph/?id=AMBNS}
• ^{http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions}

On ZH-scare "Buba gold repatriation to break CB paper gold system".

When I read the ZH article, it suggests to me that:

1) gold is being repatriated from France because Germany (being in the same currency union with France) will not need to pledge any gold held in custody at the BdF for foreign currency - it can get all the euros it will ever need at home or from the ECB.

2) No mention appears to be made of repatriating from London - so one assumes what is with them, around 13% of their total holdings, will remain in custody with the BoE, at least as long as Britain remains outside the Eurozone.

3) The article seems to make it clear that not ALL of the gold held in custody with the Fed will be repatriated. This suggests to me that they are happy with trusting the Fed as their custodian, but they do not feel it will be necessary to have so much available to pledge for USD liquidity in the future.

I think it is just a reassessment of what is likely to be useful to them in the future, then deciding if you don't need it to be in custody with someone else then why not just take delivery and remove all doubt anyone might occasionally express.


^{But perpetuating conspiracies is so much more of a crowd-pleaser.}

2013 - Happy New Year?

^{Bring it on}