A muse on a hot day.



I was having a drink at a swell bar in the city the other night. The place was packed. My friend and I had a laugh about an old story that crossed our lives many years ago. The story of Red Money. Some time later, as we were leaving, a well-healed guy comes to me and says a bit conspiratorially, “ I believe in Red Money too”.



I am not sure where this story originated. It has been around forever. The reason it has stood the rumor mill test of time is that it is so fundamentally believable.



It goes like this. One morning we wake up and the Treasury has made an announcement that it is going to convert all US currency from green to red. The process will commence immediately and continue for a period not to exceed four months. Very few would be impacted. If you had money in a bank, money fund or brokerage account it would make no difference. If you had some green cash you would either spend it or deposit it into your account. It would not influence the value of the holdings of foreign reserves. That is all “electronic” money. Red money would only impact cash money.



The Federal Reserve reports that there is approximately $1 trillion of US coinage outstanding currently. That number is up from $570b in 2000 and $260b in 1990. As a percentage of economic activity it has risen from 4.5% of GDP in 1990 to 7% today.



For as long as I can remember the Federal Reserve has always had this disclaimer on the Coinage Outstanding line in the reported balance sheet:



16. Estimated.



In this case “estimated” could mean anything. It might be something reasonable like +/- 10%. But if you are inclined to believe in Red Money you might also be inclined to believe that this estimate could be off by 100%.



What might happen if we woke up to a red money world?



-Again, for all electric money and most of the actual cash holders this would mean nothing. The next time you went to an ATM it would come out red. The new and old would be equally acceptable. As old is spent it would work its way through retailers and Banks with no problem. After the four months money could still be changed. But it would require disclosure.



-US money is in every corner of the world. When the word gets out that it can’t be used after a given period of time it too will be exchanged back through the banks. The moneychangers around the world would have a field day for a while.



-There are many groups out there that are holding onto cash money for reasons that go in color from grey to black. You have the husband who tries to hide money from his wife. You have a million small retailers who skim cash every week to hide from the IRS. Illegal aliens in the US all have cash money. There is a ton of gambling money. On the completely illegal side we go from bad to worse. Drug dealers, drug cartels, organized crime, bank robbers and all manner of burglars. Throw in the pirates, gunrunners, crooked politicians and very bad boys that I put in the Jihadists camp.



How much of the money outstanding is in these hands? More than we want to believe. $300-500 billion would be my guess.



-You can’t deposit more than $10k into a bank and not have a “flag item” requiring disclosure and identification. While some black money will get back into the banking system the bulk of it will be stuck. This will be a global phenomenon.



-If you had a million or so in hundred dollar bills that were going to be toilet paper in a few months and the “teller window” was closed, what would you do? Spend it as fast as you could. What might you buy? Anything, including: Jewelry, uncut diamonds, gold and silver, big boats, as many cars as you could find, houses, raw land, cases of wine, art works. Anything that had a chance to hold value. Fur coats and expensive clothes would be flying off the shelf. Restaurants would be full and travel/leisure would explode.



-Red Money would have to be done with a wink and a nod. It would be understood in advance that a consequence would be that Bergdorf Goodman, Saks and Macy’s would quadrupled their cash sales overnight. That would be the intended consequence. So long as the money was going into consumption they would look the other way. But at the same time some very big (and smart) eyes and ears would be looking at the money flow. This would be a good way to flush some of those bad boys into the open.



-Counterfeit money would be burned.



-The Fed sends billions of new money out every day. This would be a massive ramp up. If you believe in this concept it is no stretch to assume that the contingency plans for how this would get done are already in a book. It would be expensive. But the jolt to the economy and the associated increase in tax receipts would offset it. How much would we pay to get a “follow the money” lead to Bin Laden? How much have we already spent?



-The most desperate characters would face the biggest risks of disclosure. They might just let the money they are sitting on turn to dust. That would not be a bad outcome either.



-This could backfire on the Fed. What would be the consequence of this if we went into it assuming there was a trillion out there and after a few months we find it is actually 2 or 3 trillion? A very big credibility problem. Economists would have to burn the mid-night oil trying to re-figure the connections between monetary grown and GDP. The old ratios would be worthless. If the number were much bigger than we are guessing at then it would be a big slap in the face of the Keynesians. Money does not multiply as fast as we thought.



-On the flip side we could get an unanticipated result. Only $500b could show up. The rest would be smoke and off the balance sheet. It would be quickly replaced by the Fed. They would love that opportunity.



-I have seen several reports of big ticket missing cash in both Iraq and Afghanistan. How much of this has not been reported? Who has this money? What are they doing with it?



-If one wanted to give the global economy a ~$300 billion of “instant demand stimulus” this would be on the list. It would be a micro burst of activity that would support another (longer) inventory cycle. Yes, a lot of this money would be re-channeled into useless things like a packet of diamonds, a Corvette or a condo in Miami. But that is what we have been doing for the past twenty years. This just picks up the pace a few notches. There is next to no cost to this. We might just catch a bad guy.



-For some this would destroy the dollar bill as a store of wealth and a medium of exchange. Roubles, Yuan, Euro’s, Yen, Aussies, Loonies and Kiwis would fill the void. That would not be a bad result either. Who doesn’t want a weaker dollar?



