The basic idea behind this article is to compare the alternatives of storing a part of personal assets (part of our wealth) using banknotes, versus using some form of gold ownership. The effects and intentions of NIRP and QE are briefly discussed, in the context of their influence in this comparison (mainly, to consider their effects on inflation). The article includes a more detailed discussion of the option for Euro banknotes, since they seem to be one of the most interesting choices for wealth storage.
Storing wealth in Gold:
Using gold as a means to store accumulated reserves of value (wealth, capital waiting for future deployment) is a time-tested, solid proposition.
However, it has a number of well-known drawbacks.
If it is stored directly by the owner, in physical form, it implicates significant costs in buying and selling, it implies reduced liquidity (one can't go to a mall and buy some cans of beans, or a shirt, paying for them with a gold bar), and it presents some problems of safekeeping.
If it is owned through a virtual financial instrument (e.g. units of a gold ETF such as GLD or SGOL, or financial derivatives), it raises problems of safety (one can't be assured of its full availability, especially if some financial meltdown occurs - and that possibility is one of the reasons to store wealth in gold, in the first place).
A third form of gold ownership is owning physical gold at a distance, through a contracted specialized gold storage company. Bullionvault is an example of the companies that provide this kind of service (and it is the one I use). This alternative presents advantages and issues that place it somewhere in between direct physical ownership and the use of virtual instruments.
Storing wealth in fiat currencies' banknotes:
Saving in banknotes, preferably stored at hand (in the proverbial mattress - or in a good, hidden safe) is also an alternative to bank deposits, etc., and presents some similarities to using gold to store savings. As with the idea of gold, storing wealth through physical banknotes represents an attempt to avoid some of the risks of virtual, distant wealth representation. One gets at least partially protected from risks such as having deposits in a bank that goes bankrupt, or a government imposed bank bail-in (think Cyprus), or a government imposed account blocking (think Argentina, or Greece), or the grabbing of bank accounts by courts, or a sudden imposition of an extraordinary tax over money in bank accounts, etc..
The greatest difference between storing banknotes at home versus storing physical gold is that banknotes, representing a fiat currency, can suffer from inflation. A secondary disadvantage of storing banknotes is that they are, by definition, associated to some nation-state issuer, and they may lose their value if that issuer suddenly has real problems (e.g. a nation that loses an all-out war - think Germany at the end of WWII).
Apart from that, one may claim that banknotes have only a "conviction" value, since they are only pieces of printed paper. However, gold only has a similar "conviction" value: Nobody eats gold, or uses it as a means of transportation, or even as a reasonable weapon for self-defense. Besides residual industrial applications and jewelry, gold is money, and it is only worth what other people are willing to give for it - and that is similar to what happens with fiat cash.
Aside from these general (mostly theoretical) considerations, there are effective advantages in storing wealth using banknotes, instead of gold. The most obvious is much greater liquidity. At present, people (still) can use banknotes to pay for almost anything, in a modern society. Another very clear advantage is the almost absolute absence of costs, both when acquiring and when disposing of banknotes. Also, as happens with gold, banknotes are pretty compact even if one considers storing a significant value, and they are quite durable. They can easily be stored in conditions that almost guarantee they will be in good shape when needed. Naturally, being storable at home, by the owner, banknotes avoid all the risks associated with distant, virtual, storage of wealth that may affect both the use of money deposits in commercial banks (or brokers, etc.) or the use of gold storage (virtual or physical) at a distance.
Given all these advantages, let's look into the two main risks of paper money vs gold: Political risks and inflation.
Political risks of banknotes:
In regard to political risks, it is hard to imagine an evolution with significant probability that would make the bank notes of the presently existing major developed nations lose acceptance suddenly. Naturally, this does not mean that political facts cannot have a strong effect in exchange rates. Brexit, and the resulting drop in the exchange rate of the British Pound (GBP) in relation to most other major currencies, is a good example of this (for a simple visual check of the evolution of the GBP exchange rate against the USD, in the wake of the Brexit referendum, try this site, and chose the 1 year timeframe for the chart). However, this is fundamentally different from a politically created situation were the existence and acceptance of the Pound is at risk. Internally, one pound buys essentially the same as it did before the Brexit vote - and if it did not, it would be due to inflation (discussed below). Changes in relative valuation of national currencies (i.e. exchange rates) are normal, and sometimes strong. They also occur in relation to the gold price when measured against national currencies, which also oscillates a lot (just look at what happened in the last few years). Trying to predict these oscillations is a different issue from storing value (i.e. trying to safeguard a part of one's assets). It is trying to do market timing and market speculation (in the gold price, or in forex exchange rates). That is an interesting subject, but it is not the focus of this article.
To illustrate, the kind of political risk that is a real issue for someone that uses Euro banknotes to store value is the possibility of a sudden end of the Euro, or at least of a sudden return to a strictly national currency from the part of some of the present Euro Area countries (and this issue would potentially be more critical it the owner of the stored banknotes resided precisely in one of those countries leaving the Euro Area).
Naturally, these risks are almost non-existing in relation to the US Dollar, to the Yen, or to the Pound. Keeping our analysis within a reasonable timeframe (e.g. the next decade), the political risks in regard to these specific single nation currencies are unlikely to occur suddenly and without warning (i.e. in such a way that one would not have time to exchange their banknotes for some other form of wealth storage). Anyway, if something sudden and dramatic affected the survival of those currencies, it would most probably be so radical in other consequences that the possibility may be left out of real analysis (because it they happened, losing some stored wealth would not be the greatest concern of those involved - as examples, consider an extinction-level meteorite, or a nuclear war that destroyed those nations). However, if one considers storing wealth using banknotes of a multi-national currency like the Euro, potential political risks must be reviewed.
In my personal case, I live in an Euro-Area country and so, for me, the use of Euro banknotes presents particular convenience both in terms of costs and liquidity - besides the low inflation advantage I discuss latter in the article. For someone residing in the US, using Dollar banknotes would be more convenient - although I am not convinced that inflation perspectives are so benign in the US. For someone residing elsewhere, the choice would probably be a mix of banknotes of the national currency and Euro or US Dollars, since both are commonly used as international reserve currencies. Other national currencies, like the Yen are also used as international reserve currencies, but in smaller scale. I would avoid most of them, since they have worse inflation perspectives and for most persons they would be harder to trade, and possibly involve greater exchange costs. An exception, and a quite valid alternative, would be the Swiss Franc. In terms of value, it tends to be strongly linked to the Euro, but it has an advantage in terms of potential political risks. However, at least for some people (such as me), it also has some disadvantages: it involves greater exchange costs, it has less immediate availability, and it has more limited worldwide liquidity. Naturally, for those living in Switzerland, the Swiss Franc would be a great choice.
Specific political risks of the Euro:
For a brief discussion of the political risks of a demise of the Euro, let's discuss 3 simple scenarios:
1) A country with positive influence on the Euro value leaves the Euro Area. Let's illustrate with Germany.
In this case, the Euro should lose in terms of exchange rate (although, by itself, this should not make it lose acquisitive value inside the Euro Area). More importantly, would that pose some threat of banknotes being at risk of being taken out of circulation? In particular in Greece, there has been some talk of Euro banknotes with different serial numbers, indicating their original country of emission, being valued differently (e.g. Euro banknotes emitted by Germany being valued higher than Euro banknotes emitted by Greece). However this makes no sense at all. Even if Germany would take the initiative of leaving the Euro, and wanted to replace the Euro banknotes by some new national banknotes, it could never create a rule of only accepting for exchange Euro banknotes originally emitted by its own central bank. The reason is obvious. Euro banknotes emitted by different countries are only different in the serial number, which nobody cares to look at (coins are somewhat different, since they have a face indicating the country of origin), and they circulate all through the Euro Area and intermingle. Many of the Euro banknotes in the hands of German citizens, residing in Germany, have other countries of origin. Could those citizens be punished at random, by the simple bad luck of having in their possession, at the moment of exchange, banknotes emitted by other Euro countries? It seems an obvious political impossibility. So, how could our example country, Germany, decide which Euro banknotes would be exchangeable by the banknotes of the new national currency? Thinking about this shows immediately how difficult it would be for a country to leave the Euro, but I can think of several solutions, each with specific drawbacks. One solution would be to accept to exchange every banknote presented for exchange. This would probably lead most on the Euro banknotes in circulation to be exchanged, going a long way to establish the new German currency as a de facto standard for Europe, and giving the German central bank an enormous power (something akin to the present power of the FED, which can emit Dollars with the knowledge that they will be diluted through an extremely vast stock, distributed all over the world - and so it can create fresh US Dollars to be spent by its government with much reduced inflation effects than if the Dollar was exclusively used in the US and had a correspondingly smaller existing stock). This "solution" presents some political problems (as an example, it would probably be contested by the other European countries), but it would not be a problem for the owners of Euro banknotes, who could chose to exchange their banknotes for the new German issued banknotes, or to keep the old Euros (in principle remaining in circulation in the rest of the Euro Area). Another "solution" would be for the German authorities to convert to the new currency only the Euro cash belonging to residents in Germany (obviously not only German citizens, but also other residents). However, this would leave out the Euros in possession of German citizens living, if only transiently, in other countries - even active German voters, living and working (e.g. directing German companies' subsidiaries) in friendly neighbor counties. This would be another obvious political impossibility. In the end, at the very least, all the residents of Germany (citizens or not) and all the German citizens living abroad would have to be given the chance of converting their banknotes, in any quantity they owned. This would easily give all the chances for other persons to make agreements with relatives or friends living in Germany, or with German citizens living abroad, to exchange also their banknotes. It would be a mess, but even in the worst scenarios, I don't see a risk for the validity of Euro banknotes in storage at that moment, even if stored in other countries.
2) As a second scenario, let's consider that a country with a "bad influence" in the Euro value would decide to leave the common currency. Examples that come to mind are Greece, Portugal, Italy, etc..
Naturally, this would hardly be a problem for owners of Euro banknotes in the rest of the Euro Area. In theory, the Euro exchange rate should even go up, since the Euro Area would be in better financial heath after the departure of the country at stake. But would it be a problem for the owners of Euros residing that country? I don't see why that should be a great problem. One would be offered the chance of converting the cash in Euros to the new currency, but the possibility of just keeping a stash of Euro banknotes would be a good alternative. It would be like residing in a country neighboring the US and having a stash of US Dollar banknotes: They certainly could be exchanged later for any other currency, or simply spent in the US. Possibly, the holders of Euro banknotes residing in a "problem country" that left the Euro would gain appreciably by conserving most of their Euro banknotes to exchange only later (and again notice that it seems totally impractical for any country remaining in the Euro to discriminate the valuation of non-false Euro banknotes of different origins, since they are effectively disseminated everywhere - and this is not an accident, but a voluntary feature of the Euro architecture).
This second scenario has a variant: A country could misbehave enough to be "expelled" from the Euro. In this case, nothing would prevent the "expelled" country to go on using Euros. It could be "expelled" from the Euro governance, but it could not be prevented from continuing internal acceptance of Euro cash. Likewise, if the exit from the Euro was voluntary, the government of the country at stake could allow the Euro to coexist with the new currency. In fact, a full sudden prohibition Euro usage would be hard to implement since: a) it would be hard to guarantee an instantaneous supply of enough new physical cash of the new currency, b) in any case, a period of time to allow the exchange of Euros for the new currency would always be needed, and c) storing Euros, and keeping using them in parallel with the new national currency, would probably be tempting to most of the population of the country.
3) Amiable (or not-so-amiable) general dissolution of the Euro, with return no national currencies.
This scenario is one of the hardest to predict and analyze. Fortunately, it seems unlikely and, if it were to happen, we should have a progression of events that would give clear signs well in advance of any terminal decision. Again, one of the protections stemming from the Euro multi-national nature is that decisions must be taken by an aggregate of a significant number of quite different national groups, each of them with different agendas. This results in a framework of power sharing that guarantees significant mutual controls, and that constrains a lot the taking of disruptive decisions - at least in terms of the time needed to discuss and to agree to those decisions. A national government tends to be a close knit group of people, usually with a main figure of authority that conducts things. So, a national government can meet at a weekend, and decide (suddenly) disruptive and even surprising measures that can affect the citizens of that country (e.g. a bank holiday, followed by the freezing of the bank accounts and partial confiscation). I don't think the Euro Area government could take such fast, surprising moves without long preparation, involving information leaks, national discussions, etc.. Then, after a decision, dismounting the Euro would be an even more complex endeavor than creating and imposing it (just as the economic separation resulting from a divorce tends to be harder and more complex than the usually seamless economic intermingling that follows a marriage). And creating the Euro took several years, so we would always be talking of a lengthy dissolution process, giving ample opportunity for action.
Anyway, here again, the liquidity and fast mobilization allowed by personally stored banknotes should permit their exchange into other forms of wealth storage much faster than the implementation of any decision to terminate the Euro. And even if the banknotes were kept to the last, there would most probably be favorable exchange mechanisms into the successor currencies, and some of those successor currencies would probably also be good options for continued wealth storage. And, again, one must remember that limitations on the possible choices of currency exchange would be hard to implement restrictively in Europe, since many citizens of every country travel, study, work, retire, live, invest, etc., in other countries.
About the risk of inflation, with particular attention to the Euro:
Inflation is probably the greatest problem associated to the use of banknotes instead of gold, as a personal, direct, means of wealth storage.
In regard to inflation, I believe that the use of banknotes emitted by the ECB (i.e. Euros) has important advantages over US Dollar banknotes, Japanese Yen banknotes or, in general, any fiat currency of a single nation (except possibly for the Swiss Franc).
The ECB is much more constrained in its actions that say, the FED, because of regulations to prevent the abuse from the part of countries with "Venezuela-like" spending/printing tendencies. This is so mainly because if several nations share one currency, they have to be constrained by some common set of rules, to prevent some of the nations from ruining the others. Another (more specific) reason is that the Germans (and some others) still remember some lessons from the hyper-inflation of the XX century, and they keep pushing back from unlimited money printing. So, the ECB has some strong legal limits imposed on it in terms of direct (or even indirect) monetization of the debt of the Euro member states, and the member states have a number of criteria they need to abide to, in order to remain in the Euro. These include limits to state deficits and to maximum state debt. Naturally, we know that these constraints have been violated by the politicians that have governed most of the Euro area nations. Also naturally, the institutions that should impose compliance tend to be in the hands of the same set of politicians that govern the nations, and so they tend to be particularly flexible (or lenient) towards those that violate the rules. However, even in these circumstances, the truth is that the mutual checks imposed by a shared currency have prevented the Euro countries from over-indulging in deficits and debt. The screws of mutual vigilance have been able of prevent runaway state debt as is occurring in Japan, or as seems to be beginning to occur in the US.
To illustrate, I would contrast the recent evolution of the public deficits and debt of Portugal against those of the USA.
Portugal seems the best example to choose within the Euro Area, since it is one of the worst-off among the Euro countries in terms of the evolution of the economy and of the public finances, and it is governed by a populist socialist-communist government that rules with the stated intent of ending "austerity" and of increasing social spending. One could claim that Greece is in even worse shape, and so should be the country used has the Euro Area example. However, while the latest international official bailout remains ongoing, Greece is under the additional constraints imposed by the "quadriga" and so the compression of the Greek public deficit, and debt growth, are not only due to the "ordinary" Euro Area limitations. Portugal, on the other hand, had its own bailout, but it has ended a couple of years ago and so, at present, it is just being controlled by the Euro Area ordinary rules.
And why choose the USA as the example of a fully independent country (i.e. unconstrained by limitations imposed from the outside)? Well, it should be obvious. The USA is the world's largest economy, is one of the countries in the world that is freer to decide on its own public deficit, and is a well know example for most readers, with good available data. However, one could also use the UK (still inside the European Union, but not under the Euro Area rules) or Japan as examples of large "western civilization" countries with their own national currency, and independent enough to decide freely on their public finances. The comparison results would be similar to using the US, and perhaps even clearer (especially in the case of Japan).
So, let's compare:
(Note: If the reader wants to check hard country data I suggest using Trading Economics.)
To begin with, the USA is a much richer country than Portugal, even in a per capita basis, and is at present out of any serious specific economic hardship. As such, in 2016 the US government should be able to get standard tax revenues, should have a pretty normal public budget, and should be able to obtain a public financial balance as if, let's say, it is in "cruise mode". Moreover, at least theoretically, its government is being led by a President that in European terms would probably be considered "conventional center left", and has an history of defending limited deficits and limited public debt (even after becoming president).
Portugal is poorer, is still to recover from a very recent and very strong economic and financial crisis, has been presenting smaller GDP growth than the US, and has a long tradition of public overspending, starting with the revolution of 1974. It really is fun to check this. The best data series is only available in Portuguese - but it is mainly numbers, and so an interested English speaking reader may try to understand it. Moreover, the present government in Portugal is supported by a combination of socialist (traditional socialist, in European terms) and hard communist parties, and it has been elected on a platform of promises of lesser "obsession" with the public deficit, greater public social spending, etc., and it keeps defending those same principles, once in power. Better yet, Portugal is out of the constraints imposed by the scroogy "Troika", and at present its public debt has quite nice (i.e. low) interest rates, due to the well-known massive intervention of the ECB on the public debt markets of the Euro Area.
Thus, Portugal could everything going to present a large public deficit. However, the constraints imposed by the participation in the Euro prevent this. Every country in the Euro Area is subjected to the rules of the already referenced "Stability and Growth Pact", and if the limits on public deficit and debt are violated, an automatic "Excessive Deficit Procedure" with linked penalties is imposed.
So, in the end:
The US with its full independence, is aiming for a Federal deficit of 3.3% in 2016, and its public debt is growing strongly (it REALLY is worth looking at the interactive chart of "Debt Over Time" for the "Total Federal Debt as % of GDP", at the lower end of this official US government webpage).
At the same time, poor Portugal (in my view, effectively mismanaged by a populist socialist-communist government that would like, above all else, to increase public spending and, as could be expected, is very unfriendly to the hated "capitalists", to the rating agencies, to the bad, bad, financial markets, and to the economic activity in general) is forced by the EU to limit the 2016 public deficit to an absolute maximum of 2.5%, or face stiff financial penalties. This is really worth reading. Moreover, the deficits will have to keep being reduced in the following years (the official aim for 2016 is 2.4%, and for 2017 is 1.6%).
On a par with forced low public deficits, the Portuguese public debt is also being contained in proportion to the GDP. It is not yet being reduced, but it seems to have stabilized around 130%.
Again, it is important to stress that, in this discussion, Portugal was chosen only because it is one of the best examples of the significant results achieved by the Euro Area rules, but the same rules apply to all the Euro countries.
After the relatively recent need to bailout Greece, Portugal and Ireland, and the need to help Spain and Cyprus, I believe the flexibility that the European Commission used to show to countries that failed to honor the Euro rules is now a lot more curtailed. The healthier Euro Area countries (and their populations) are tired of contributing to help rescue those that exceed their spending limits, and the political conditions for further rescues are a lot tighter.
The Euro limits on public deficits are now regarded much more seriously.
These reasons strongly limit the risk of an unexpected significant bout of inflation in the Euro.
Besides these particular Euro-related circumstances, global inflation tendencies are also limited by:
a) The overall (i.e. worldwide) societal (and economic) decay due to overregulation and progressive statism and socialism, which tends to "cool" growth and economic activity;
b) The still ongoing correction from of the "overdebt/overcredit" bubble that started to burst in 2008;
c) The progressive recognition of production overcapacity in countries that became the effective "factories" of the world - in particular in China.
All these issues (and some others, less relevant) work against inflation.
The only counter to these "fundamental" tendencies ("fundamental" as opposed to the direct workings of governments and central banks - such as "printing" and spending newly issued fiat money) seems to be renewed increase in energy costs (in particular, coming from an expected future increase of the prices of crude oil). However, the overall effect of crude oil prices in inflation is limited for most countries (and is particularly limited in Europe, where the extremely high taxation imposed on fuels means that an increase in base prices is much less felt by the final consumers).
Finally, it seems important to discuss the inflationary results of the NIRPs and QEs. An in-deep discussion of ZIRP, NIRP and QE is obviously outside the scope of this article. So, let's be simple and direct. As many of us now, the effective reasons for the imposition of Negative Interest Rates and for launching Quantitative Easing measures are not the harebrained Keynesian beliefs (i.e. the belief that by forcing the banks and the savers to lend, and/or to spend, the economy will start to grow as if it was healthy)! Those are the more palatable reasons, those that can be publicly expressed - one may seem dumb by pretending to believe in an economic fantasy that has utterly failed in every country that has been trying it (just look at Japan), but a politician can deal with that, since he is protected by numbers (keynesianism is still the mainstream religion) and by most Nobel laureate authority figures (and being socialist and keynesian is one of the main requirements to receive a recent "Nobel" prize - even if only for a proxy Nobel, in the case of Economy).
Inflation, the effect of the NIRPs:
The real reason for NIRP is that our financial overlords know that public debts of 240% of GDP (the case of Japan) or simply over 130% of GDP (cases of Greece, Italy, Portugal…) simply cannot be repaid in full, especially considering that the indebted countries are the most advanced in the ongoing economic decay due to increasing statist/socialist policies. (And the problem of the public debts of these countries is compounded by the debts of the corporations and families, that are over-indebted everywhere - reducing their debts at same time as the public debts would be nice, too. Damn those who did the mistake of lending!)
The traditional solution to solve this problem would be for the most indebted countries to simply print money and use it to pay part of their public debt (obviously, a solution only valid for countries that are indebted in their own currency). Then, that printing creates inflation that lowers the real value of the remaining debt.
However, in the case of the Euro, that is expressly forbidden due to the nature of the Euro rules. In the case most of the other developed nations, similar (if softer) rules exist and, anyway, even a central banker understands the drivers that lead to hyperinflation.
The only alternative for a Central Banker that wants to intervene and to do the equivalent to printing to pay back state debt, and to clear the rest of the debts by inflating them away, is to lower the interest rates to non-natural, politically imposed extreme low levels.
Exactly as with a bout of inflation, that punishes the savers and helps the debtors (in particular, that avoids the need to pay a fair interest rate both for new debt, and for the already incurred debt - since it will be progressively rotated into lower yields). Pushed by that need to intervene, the ZIRPs became the NIRPs. From that point on, for the governments, having large state debs can bring a string of positive income (through negative interest on that debt) instead of the need to pay interest for the debt. The government finances of the nations with greater public debt will be in better financial situation than the nations with lower debt! At the limit, the nations with a large enough public debt could be able to finance their government expenses through the negative interest in their extremely high debt, without the need to collect taxes!
Obviously, all that magic needs to be paid for by the lenders (the banks with central bank deposits, and the companies and families that saved and bought bonds) and, in the last instance, even by those that saved even if they did not lend anything to anyone, but have money or valuable assets. This not only sounds like madness, but it really is destructive madness. Still, with enough political clout from the new socialist ethics of "social justice" (so favorably accepted by the voting masses), and with strong support from the mainstream media and from high priests of the economic mismanagement (the Krugmans, the Rogoffs, etc.), the current political overlords of the "western" nation states are easily being able to apply it in progressive intensity.
For our purpose, in relation to the present article, the main lesson is: NIRPs are a tax on the savers, applied in first instance through the commercial banks. It will not drive economic growth, nor inflation - quite the opposite.
Inflation, the effect of QEs:
As the reality shows (look no further than Japan), QE is a severely constrained form of money expansion that also does not really create inflation - since the "printed" money is not effectively distributed to the masses, and everybody expects a future reversion of the QE expansion (i.e., in theory, the assets being bought by the central banks should be resold in the future to private hands, offsetting the previous money expansion, and people tend to believe in this).
Officially, QE aims to create a feeling of increased wealth to bring about increased spending (again, the keynesian dream of economies growing by pulling themselves up by their own ears) but in reality it is mainly being dedicated to monetization of the debt of states such as Japan, or the Euro area countries, or even the USA. Without massive buying of government bonds by the Central Banks, interest rates would be a lot higher, and some governments would effectively be prevented of going on spending as they do. As it is, they can keep growing the state debt to clearly mad levels, and through that they can keep their voters minimally satisfied. Given human nature and the implicit rules of the political process of the western democracies, that will most probably never be reversed. It will go on for as long as our overlords can keep that game going. Then, something will have to give, and I'm afraid it will not be pretty - but that is then.
So, just as NIRP, QE is not so much about creating/increasing inflation, but more about directly saving (or, at least delaying, the bankruptcy of) the most indebted nation-states.
Naturally, QE, unlike NIRP, has the potential to create inflation in the future, since it is virtually impossible for it to be reversed as theory assumes. So, in real terms, it corresponds to an effective progressive increase of money supply. But that final inflationary effect will probably only come when the governments and the central banks finally are forced to recognize that QEs were only the first stage of a snowballing, disguised, debt monetization.
And, again, the Euro rules limit the deficits and the overall growth of the debts of the involved nations, and so they tend to force more of the adjustment to come from reduced state spending or higher taxes (which are both deflationary) than what happens in Japan or in the US.
Anyway, if we store wealth using fiat-money banknotes, we can easily exchange them in the future for any other storage form (or we can spend them, or invest them), if inflation seems to become a real risk (as I believe will happen, sooner or later - but more probably later, especially in the case of the Euro), or if a political risk to the value of the currency suddenly seems too great. Vigilance is important.
Regulatory risks of banknotes:
Naturally, storing banknotes presents a number of potential "regulatory" or "legislative" risks, running from taxation (although storing cash tends to be discrete) to some form of political discontinuity that reduces (or eliminates) the (fiat) value of the stored pieces of printed paper.
Unfortunately, storing gold also presents this kind of risks. It can be taxed (e.g. subjected to a wealth tax, especially if the governments get to know exactly who owns what, but also simply mandating a tax at the moment of future gold transactions - something from a VAT to a more arbitrary windfall tax, or anything in between). It can be confiscated by fiat (as was done in the US by Roosevelt, in the 1930s). It can be forbidden as a transactional currency, etc..
(I'm sure the reader can think of other forms of value destruction that the present state governments can impose over those that own gold - to the benefit of the common good, obviously.)
So, in this context (i.e. no near term fiat money significant inflation in sight, and reasonable safety from a sudden elimination of the bank notes in question) saving in cash in a currency like the Euro can be a valid proposition, and it can rival saving in gold.
I would claim that saving wealth in Euro banknotes (or even in US Dollars, or in other currencies of major nations - but greater vigilance may be needed with some of these currencies) is a more efficient proposition if the objective is to store wealth for limited time frames (let's say for a few years) while gold may be a better proposition for storing wealth for longer time frames.
Both approaches need a close monitoring of the evolution of the involved societies, and using banknotes may require faster action (if one anticipates significant inflation, or other risks).
However, the greater simplicity and lower costs of storing banknotes makes this approach better suited for many personal cases.
Also, obviously, both approaches may be combined and, in fact, that combined approach may be the best for many. This is precisely what I am doing.
Buy a good safebox. Mount it discretely.
Disclosure: I am/we are long SGOL, GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Besides small positions in gold ETFs, I own some gold via Bullionvault.