How Your Dimes Are Getting Better Returns

How Your Dimes Are Getting Better Returns

Dear Reader,

As many other broke Uni students in the US, I used to keep most of my spare change in a jar while I studied there.

Dollar bills are light and easy to carry. Quarters are quite sought after for laundry. But the dimes, pennies, and nickels just weigh you down. It’s why I kept them in a container.

When the jar got too full, I would exchange them at the bank for a nice wad of cash.

But the whole thing was quite tedious and time-consuming.

First, you had to ask the bank for coin wrappers in the denomination of each coin. Each paper wrapper can hold a certain amount of coins that makes it easier for the bank to count it. The dime wrap contains US$5, the nickels US$2, and the penny wrapper was a mere 50 cents.

Then you could spend quite some time rolling your change into them before you returned to the bank to exchange them. As I said, banks didn’t make it too easy for you to swap your coins into bills.

But with the pandemic causing a coin shortage, US banks really want your coins now.

Nobody really knows why there’s a coin shortage

The Fed says they haven’t been able to mint coins to protect their employees from the virus. Another explanation is that coins aren’t circulating because people are spending less. Or it could be that people are hoarding cash.

Whatever the case, the Fed has been rationing the coins it gives out to the banks. They’ve even set up a task force to look into how to improve the situation.

The coin shortage has gotten so bad that one bank in particular, Community State Bank in Wisconsin, recently launched a coin buyback program.

The bank is paying people 5% in return for their change, up to US$500. That’s away better than savings accounts are paying!

Here in Australia, most retailers don’t want your cash, but $50 and $100 bills are in high demand.

The number in circulation of those two notes has been increasing throughout this year. In June, $100 bills circulating had gone up by 12% for the year, and up 14% for the $50 bill.

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We are staring at shortages in physical gold and cash

My bet is that people are hoarding more cash.

At a time when the Fed has been flooding the system with cash and there is an abundance of virtual money, we are staring at shortages in physical gold and cash.

It makes you wonder…

…what will be the result of this huge money increase?

Being from Argentina, you know that increasing the amount of money in the system creates inflation. So far, it hasn’t really happened. Money velocity isn’t moving very fast.

But I read an interesting interview with economist Russell Napier this week, where he answered whether the growth of broad money mattered. Here is what he said:

Investors don’t think so, as breakeven inflation rates on inflation-linked bonds are at rock bottom. So clearly the market does not believe that this broad money growth matters. The market probably thinks this is just a short-term aberration due to the Covid-19 shock. But I do believe it matters. The key point is the realization who is responsible for this money creation.

This broad money growth is created by governments intervening in the commercial banking system. Governments tell commercial banks to grant loans to companies, and they guarantee these loans to the banks. This is money creation in a way that is completely circumventing central banks. So I make two key calls: One, with broad money growth that high, we will get inflation. And more importantly, the control of money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.

During the 2008 crisis in Spain, one of the issues was that banks stopped lending. Property collapsed; the economy went into a standstill.

This so far hasn’t happened this time. Banks are still lending, the economy is still ticking, albeit slowly after governments pumped up cash. People aren’t spending, and with interest rates at record lows, there isn’t much incentive to pay back loans too quick.

But at some point, things will change.

All that money creation along with the reversal of globalisation will bring inflation.

At times like this, it’s good to have some gold.


Selva Freigedo Signature

Selva Freigedo,
For The Daily Reckoning Australia