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They’re Coming to Take Away Your Cash

by Keith Weiner

Kitco Commentary (June 16 2015)

The stories are all over the Internet. Governments are forcing us into a cashless society. Supposedly the pretext is terrorism, and the real reason is to take more control. No doubt more power appeals to politicians, and banning cash seems like the next step after mandatory reporting of cash transactions. However, I think there is a more serious driver than simple power lust.

A more compelling case is that cash banning is the logical follow up to bail-ins. Most people think a bail-in is when banks steal your deposit. So it seems to make sense that governments want to force people to keep their cash in the bank. Then they are easy meat for the next bail-in.

However, a bail-in isn’t theft by your bank. There’s theft, alright, but the culprit is upstream. For example, in the case of Cyprus, the theft occurred in plain sight. The thief was Greece. That country sold instruments which it fraudulently called bonds, but it had neither means, nor the intent to repay. Those bonds are bogus paper. The Greek government stole the money, in the guise of borrowing it.

The Cypriot banks invested considerable deposits in Greek bonds. When depositors realized this, they began to withdraw their cash – a run on the banks. The banks were insolvent, so someone had to take losses. A bail-in shifts the losses from bondholders and other creditors to depositors.

It’s an example of how a corrupt monetary system causes corruption in banking. If government bonds are defined as the risk-free asset, then banks must hand depositors’ funds over to governments to spend. That can’t end well.

An honest bank will shut down operations before it burns through so much capital as to harm depositors. However, regulation obliges banks to buy government bonds (typically using short-term deposits). Thus the bail-in was devised to protect banks, though it violates law developed over centuries.

Neither control for its own sake, nor bail-ins, are the primary drivers of going cashless. Central banks don’t care about regulating the people, though they do support this new war on cash. Bail-ins are not a consideration in the US yet, though already American economists and bankers have expressed support for cash banning. So what’s really going on?

Citi’s Willem Buiter and Harvard economist Kenneth Rogoff are quite explicit. Central banks are grappling with the limit to their planning. As they push down the interest rate, more people withdraw their cash. This squeezes the banks, which make money by borrowing from depositors and lending at higher interest. Banks cannot pay a positive rate in order to earn a negative rate. If the interest rate on the government bond is negative, then the bank must set the interest on deposits at an even lower negative rate.

For some odd reason, depositors don’t like paying the bank to deposit their cash. It’s weird, I know. Instead, they withdraw their deposits. Withdrawals reduce bank funding, forcing banks to sell bonds. This pushes interest up, contrary to the plans of the central bank. It’s worth noting that bank runs and interest rate pressure are the reasons why President Roosevelt outlawed gold in 1933.

This simple preference not to lose money is dangerous to central banks. It threatens the monetary system to its foundations, because it’s an escape hatch allowing people to opt out of the central plan. If central banks don’t respond, then they accept a hard limit to their power over people. They’re stymied in their desire to set negative interest.

Thus they’re coming to take away your cash. However, they had better be careful. People will react to the central bank response, which forces another policy response, to which people will react, and so on. Central banks risk the destruction of their currencies.

_____

This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.

Keith Weiner is CEO of Monetary Metals and Founder of Gold Standard Institute USA.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Incorporated. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Incorporated nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Incorporated and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

http://www.kitco.com/commentaries/2015-06-16/They-re-Coming-to-Take-Away-Your-Cash.html

Categories: Uncategorized

EU Regulators Order Eleven Countries …

… to Adopt Bail-In Rules

Investment Research Dynamics (June 02 2015)

If there is a risk in a bank, our first question should be:  “Okay, what are you the bank going to do about that? What can you do to recapitalise yourself?”  If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank.  And if necessary the uninsured deposit holders:  “What can you do in order to save your own banks?”

– Jeroen Dijsselbloem, President of the Board of Directors of the European Stability Mechanism (March 26 2013)

The bail-ins are coming.  Reuters reported today that European Commission today gave France, Italy and nine other EU countries two months to adopt bank bail-in regulations or face legal action {1}.

The move to require bank bail-ins originated at the Bank for International Settlements (“BIS”) beginning in 2008.   In 2011, the Financial Stability Board (“FSB”) –  a sub-committee of the BIS –  drafted the boilerplate model for big bank bail-ins: Key Attributes of Effective Resolution Regimes for Financial Institutions {2}.

The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.

The bank rescue model as drafted lays out a complete systematic procedure for the rescuing and restructuring of any financial institution considered  a Systematically Important Financial Institution (“SIFI”).  In layman terms this translates into Too Big To Fail (“TBTF”). This model was endorsed by the G20 at Summit in 2011.

The “model” requires that funds required for a bail-in to prevent a TBTF from collapsing would first be taken from unsecured creditors.  This is primarily any depositor money in excess of the amount insured by the Government.  Incredibly, and this has been ratified by legislation in the United States, holders of derivative securities of the collapsing bank are considered super-secured.  In other words, those stakeholders in the banks would be the last to suffer any losses resulting from the restructuring of an insolvent bank.

In the United States there is over $4 trillion in depositor cash in excess of the amount covered by the Federal Deposit Insurance Corporation (“FDIC”) sitting in banks.

Make no mistake about this, bail-in legislation is coming to the US.  In fact, a $1.1 trillion spending Bill passed by Congress and signed by Obama on December 16 2014 contained specific provisions drafted (and paid for) by Citibank which ensured that big bank Over The Counter (“OTC”) derivatives holdings will be covered by the FDIC (that is, taxpayer).  This is a back-door way of making the next taxpayer bailout of the big banks a legal requirement.

Anyone who keeps any cash in a bank is either completely ignorant of the ways in which that money can be “confiscated” or just completely brain-dead.  I suppose there could be a strong element of denial involved as well.  Big bank balance sheets are in far worse shape than they were in 2008, especially once you peel away all of the accounting shenanigans and include the off-balance-sheet ticking bombs. It’s not a question of “IF” –  It’s a question of “WHEN”.

 

 

We can ignore reality, but we cannot ignore consequences of ignoring reality.

–  Ayn Rand

 

 

Links:

{1} http://ca.reuters.com/article/businessNews/idCAKBN0OD14Z20150528

{2} http://www.financialstabilityboard.org/wp-content/uploads/r_111104cc.pdf?page_moved=1

http://investmentresearchdynamics.com/eu-regulators-order-11-countries-to-adopt-bail-in-rules/

Categories: Uncategorized

Another Shill …

… for Statism and Central Planning Demands a Cash Ban

by Pater Tenebrarum

Acting Man (April 16 2015)

Citigroup’s Chief Economist Joins the Cash Ban Bandwagon

We have discussed the views of Citigroup’s chief economist Willem Buiter previously in these pages {1}, on occasion of his coming out as a supporter of assorted monetary cranks, such as Silvio Gesell, to name one. Not to put too fine a point to it, Buiter is a monetary crank too.

Buiter is always shilling for more central bank intervention, and it seems no plan can ever be too silly or too extreme for him. In fact, he seems to have made the propagation of utterly crazy ideas his trademark.

Buiter has now joined one of his famous colleagues, Kenneth Rogoff, another intellectual enamored with central planning, in clamoring for a cash ban {2}. Both Buiter and Rogoff want to make it impossible for citizens to escape the latest depredations of central bankers, such as the imposition of negative interest rates. This is to be done by forcing them to keep their money in accounts at fractionally reserved banks.

As Bloomberg reports:

The world’s central banks have a problem. When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut –  they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy.

In a new piece, Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. Fundamentally, the ELB problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. Buiter’s note suggests three ways to address this problem:

1. Abolish currency.

2. Tax currency.

3. Remove the fixed exchange rate between currency and central bank reserves/deposits.

Yes, Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether. (Note that he’s far from being the first to float this idea. Ken Rogoff has given his endorsement to the idea as well, as have others.)

Before looking at the practicalities of abolishing currency, we should first look at whether it could ever be necessary. Due to the costs of holding large amounts of cash, Buiter puts the actual nominal rate at which the move to cash makes sense as closer to -100 basis points. So, in order for a cash abolition to become necessary, central banks would need to be in a position where they wished to set nominal rates much lower than that.

Buiter does not have to go far to find an example of where a central bank may have wanted to set interest rates much lower to -100 basis points. He uses (a fairly aggressive) Taylor Rule to show that Federal Reserve rates should have been as low as minus six percent during the financial crisis.

As mentioned above, no meddling by a central bank is ever too extreme or too crazy for Mr Buiter. Here is his ridiculous “Taylor rule” chart (the conclusions of which by the way would be vehemently disputed by none other than Mr Taylor himself).

This nice gentlemen who wants to either “abolish cash” or “tax currency” for the good of us all, is a typical example of the modern-day viciously statist intellectual (Hat Tip, Hans-Hermann Hoppe), who constantly pines for the authorities to implement social engineering on a grand scale. As long as they implement his plan, everything will be great.

Not Bothered by Concerns

Bloomberg tells us that “Buiter is aware that his idea may a bit controversial”. What a relief. He even lists the disadvantages of abolishing cash, only to dismiss them out of hand. With the exception of one crucial point, he is mainly erecting straw men.

Buiter is aware that his idea may be somewhat controversial, so he goes to the effort of listing the disadvantages of abolishing cash.

1. Abolishing currency will constitute a noticeable change in many people’s lives and change often tends to be resisted.

2. Currency use remains high among the poor and some older people. (Buiter suggests that keeping low-denomination cash in circulation –  nothing larger than $5 –  might solve this.)

3. Central banks and governments would lose seigniorage revenue.

4. Abolishing currency would inevitably be associated with a loss of privacy and create risks of excessive intrusion by the government.

5. Switching exclusively to electronic payments may create new security and operational risks.

Buiter dismisses each of these concerns in turn, finishing with: In summary, we therefore conclude that the arguments against abolishing currency seem rather weak.

Whatever the strength of the arguments, the chances of an administration taking the decision to abolish cash seem vanishingly small.

We are surprised by the optimism expressed by Bloomberg that “the chances of an administration taking the decision to abolish cash seem vanishingly small”. We believe that governments all over the so-called “free world” are working feverishly to make a ban of cash currency a reality.

Naturally, we couldn’t care less about the “seignorage” revenue of the State. In our opinion central banks shouldn’t even exist, and “seignorage” is nothing but a euphemism for outright theft. It’s a nice touch that Buiter also doesn’t want to “throw seniors under the bus” and gives a brief thought to the poor as well. Why would any of them ever need anything more than a $5 note?

That someone like Buiter doesn’t find it difficult to dismiss the concern that “abolishing currency would inevitably be associated with a loss of privacy and create risks of excessive intrusion by the government” is no surprise, but it is indeed a legitimate concern. Under the cover of the “war on drugs” and lately the even bigger government-sponsored racket known as the “war on terror”, financial privacy has been all but eradicated already.

Needless to say, we dispute the idea that central banks should ever impose negative interest rates. This policy is revolting economic nonsense that greatly harms the economy. As we have previously pointed out, given that the natural rate of interest can never be zero or negative, it is an inescapable conclusion that any imposition of negative market rates will end up destroying scarce capital and leave society poorer.

Lastly, Buiter fails to list one counterargument that we believe is extremely important. Since he works for a charter member of the world’s most powerful banking cartel, this is no big surprise either. We will make up for his oversight.

The 2008 crisis has not shown that anyone needs “negative interest rates” as Buiter erroneously claims. It has mainly shown how rickety and de facto insolvent the fractionally reserved banking system really is. If not for the introduction of an accounting trick (under immense political pressure, the FASB allowed the banks to dispense with mark-to-market accounting, which suddenly made them “whole” again), a huge taxpayer bailout and money printing by the central bank on an unprecedented scale (in the post World War Two era), several of the biggest banks would have gone the way of Lehman.

It was a good reminder that although fiduciary media –  deposit money that is not backed by standard money –  are part of the money supply in the broader sense, their main characteristic is that they exist only in the form of accounting entries. Hence, fractionally reserved banks are at all times insolvent, since they cannot possibly pay all demand deposits on demand. This obvious violation of what once used to be a bailment contract has been sanctioned by the courts in the nineteenth century under the influence of banking interests. If one considers how deposit money is multiplied under this system, it should be obvious that the scheme is fundamentally fraudulent. It goes against the grain of legal traditions that have been well-established in Western culture since antiquity.

If cash were to be banned, people could no longer opt out from this system. Bank runs would no longer be possible at all. While a bank run these days only gives one government scrip that is itself an irredeemable liability of a central bank, it is at least slightly more “real” than the accounting entry known as deposit money. Most importantly, cash can insure one against a bank going under, or the breakdown of the entire banking system, which is always a potential danger. Banks would obviously love a cash ban –  quite possibly they are the only ones who would love it even more than governments.

Conclusion

We keep being bombarded by moves to restrict the use of cash and demands to ban it altogether. These demands seem to mainly revolve around two arguments: one is that “only criminals need cash”, which is on a par with the absurd assertion that we should all be fine with Stasi-like ubiquitous government surveillance “if we have nothing to hide”. The other one is that a cash ban would make life easier for the central planners who are actively undermining the economy with their policy of debasement. We would argue that central banking and fiat money have done more than enough harm already and that the eradication of financial privacy has gone way too far. Money and banking should be freed from the clutches of government-directed monopolization and cartelization and should be returned to the free market.

Links:

{1} http://www.acting-man.com/?p=4833

{2} http://www.acting-man.com/?p=30960

Addendum:

One of our readers has sent us a few links concerning recent examples of the war on cash waged by governments the world over, which we reproduce below. Indeed, there is little cause for optimism on this score. Given this increase in attempts to restrict the use of cash, the danger that possession of gold will one day be declared illegal again can no longer be so easily dismissed either.

http://www.silverdoctors.com/louisiana-bans-cash-transactions-on-used-goods/

http://www.infowars.com/feds-urge-banks-to-call-cops-on-customers-who-withdraw-5000-or-more/

http://www.bloomberg.com/news/articles/2012-11-19/spain-cash-transaction-ban-begins-as-rajoy-targets-tax-fraud

http://www.bloomberg.com/news/articles/2011-12-22/italy-attempts-to-kick-the-cash-habit-as-monti-cracks-down-on-tax-evaders

http://www.forbes.com/sites/jonmatonis/2013/02/14/france-plans-to-prohibit-cash-payments-over-e1000/

http://www.reuters.com/article/2010/02/09/greece-finmin-highlights-idUSLDE61824V20100209

From our own archives:

http://www.acting-man.com/?p=2710

http://www.acting-man.com/?p=2867

There are also restrictions in place in Mexico, Argentina, the UK, Russia and Belgium. It is only a small step from “restriction” to “outright ban”.

http://www.acting-man.com/?p=36914

Categories: Uncategorized

The Death of Cash

Could negative interest rates create an existential crisis for money itself?

by Peter Coy

Bloomberg Businessweek (April 23 2015)

JPMorgan Chase recently sent a letter to some of its large depositors telling them it didn’t want their stinking money anymore. Well, not in those words. The bank coined a euphemism: Beginning on May 1, it said, it will charge certain customers a “balance sheet utilization fee” of one percent a year on deposits in excess of the money they need for their operations. That amounts to a negative interest rate on deposits. The targeted customers – mostly other financial institutions – are already snatching their money out of the bank. Which is exactly what Chief Executive Officer Jamie Dimon wants. The goal is to shed $100 billion in deposits, and he’s about twenty percent of the way there so far.

Pause for a second and marvel at how strange this is. Banks have always paid interest to depositors. We’ve entered a new era of surplus in which banks – some, anyway – are deigning to accept money only if customers are willing to pay for the privilege. Nick Bunker, a policy analyst at the Washington Center for Equitable Growth, was so dazzled by interest rates’ falling into negative territory that he headlined his analysis after a Doors song, Break on Through (to the Other Side).

In recent months, negative rates have become widespread in Europe’s financial capitals. The European Central Bank, struggling to ignite growth, has a deposit rate of -0.2 percent. The Swiss National Bank, which worries that a rise of the Swiss franc will hurt trade, has a deposit rate of -0.75 percent. On April 21 the cost for banks to borrow from each other in euros (the euro interbank offered rate, or Euribor) tipped negative for the first time. And as of April 17, bonds comprising 31 percent of the value of the Bloomberg Eurozone Sovereign Bond Index – 1.8 trillion euros ($1.93 trillion) worth – were trading with negative yields. (Although dollar interest rates are higher, JPMorgan Chase’s balance sheet utilization fee fits the pattern: In today’s low-rate world, the only way it can shed deposits in response to new regulations is to go all the way to less than zero.)

It’s not unusual for interest rates to be negative in the sense of being lower than the rate of inflation. If the Federal Reserve pushes interest rates below inflation to stimulate growth, it becomes cheaper to borrow and buy something now than to wait to make the purchase. If you wait, inflation could make prices go up by more than what you owe on the loan. You can also think of it as inflation reducing the effective amount you owe.

It’s a new era of banks deigning to accept money only if customers are willing to pay for the privilege

What is rarer is for interest rates to go negative on a nominal basis – that is, even before accounting for inflation. The theory was always that if you tried to impose a negative nominal rate, people would just take their money from the bank and store cash in a private vault or under a mattress to escape the penalty of paying interest on their own money. When the Federal Reserve slashed the federal funds rate in 2008 to combat the worst financial crisis since the Great Depression, it stopped cutting at zero to 0.25 percent, which it assumed to be the absolute floor, the zero lower bound. It turned to buying bonds (“quantitative easing”) to lower long-term rates and give the economy more juice.

Over the past year or so, however, zero has turned out to be a permeable boundary. Several central banks have discovered that depositors will tolerate some rates below zero if withdrawing cash and storing it themselves is costly and inconvenient. Investors will buy bonds with negative yields if they believe rates will fall further, allowing them to sell the bonds at a profit. (Bond prices rise when rates fall.) Global investors are also willing to put money into a nation’s negative-yielding securities if they expect its currency to rise in value.

Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.

The idea of abolishing or even constraining physical bank notes is anathema to a lot of people. If there’s one thing that militias and Tea Partiers hate more than “fiat money” that’s not backed by gold, it’s fiat money that exists only in electronic form, where it can be easily tracked and controlled by the government. “The anonymity of paper money is liberating”, says Stephen Cecchetti, a professor at Brandeis International Business School and former economic adviser to the Bank for International Settlements in Basel, Switzerland. “The bottom line is, you have to decide how you want to run your society”.

As long as paper money is available as an alternative for customers who want to withdraw their deposits, there’s a limit to how low central banks can push rates. At some point it becomes cost-effective to rent a warehouse for your billions in cash and hire armed guards to protect it. We may be seeing glimmerings of that in Switzerland, which has a 1,000 Swiss franc note ($1,040) that’s useful for large transactions. The number of the big bills in circulation usually peaks at yearend and then shrinks about six percent in the first two months of the new year, but this year, with negative rates a reality, the number instead rose one percent through February, according to data released on April 21.

Bank notes, as an alternate storehouse of value, are a constraint on central banks’ power. “We view this constraint as undesirable”, Citigroup Global Chief Economist Willem Buiter and a colleague, economist Ebrahim Rahbari, wrote in an April 8 research piece. They laid out three ways that central banks could foil cash hoarders: One, abolish paper money. Two, tax paper money. Three, sever the link between paper money and central bank reserves.

Abolishing paper money and forcing people to use electronic accounts could free central banks to lower interest rates as much as they feel necessary while crimping the underground economy, Buiter and Rahbari write: “In our view, the net benefit to society from giving up the anonymity of currency holdings is likely to be positive (including for tax compliance)”. Taxing cash, an idea that goes back to German economist Silvio Gesell in 1916, is probably unworkable, the economists conclude: You’d have to stamp bills to show tax had been paid on them. The third idea involves declaring that all wages and prices are set in terms of the official reserve currency – and that paper money is a depreciating asset, almost like a weak foreign currency. That approach, the Citi economists write, “is both practical and likely to be effective”. Last year, Harvard University economist Kenneth Rogoff wrote a paper favoring exploration of “a more proactive strategy for phasing out the use of paper currency”.

Pushing back against the cash-abolition camp is a group of people who want to make cash more convenient, even for large transactions. Cecchetti and co-author Kermit Schoenholtz, of New York University’s Stern School of Business, suggest a “cash reserve account” that would keep people from having to pay for things by sending cash in armored trucks. During the day, funds in the account would be payable just like money in a checking account. But every night they’d be swept into cash held in a vault, sparing the money from the negative interest rate that would apply to money in an ordinary checking account. In a way, physical cash would take on a role similar to that played by gold in an earlier era of banking.

Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save. “Over time, market disequilibria are dangerous”, G+ Economics Chief Economist Lena Komileva wrote to clients on April 21. Which side of the debate you fall on probably comes down to how much you trust government. On one side, there’s an argument to be made that cash has become what John Maynard Keynes once called gold: a barbarous relic. It thwarts monetary policy and makes life easy for criminals and tax evaders: Seventy-eight percent of the value of American currency is in $100 bills. On the other side, if you’re afraid that central banks are in a war against savers, or that the government will try to control your financial affairs, cash is your best defense. Taking it away “is a prescription for revolution”, Cecchetti says. The longer rates break on through to the other side, the more pressing these questions become.

http://www.bloomberg.com/news/articles/2015-04-23/negative-interest-rates-may-spark-existential-crisis-for-cash

Categories: Uncategorized

Why We’re Headed Toward A “Cashless Society”

Submitted by Bill Bonner via Bonner & Partners

Zero Hedge (June 28 2015)

Don’t Count on Your ATM Cards

Yesterday, came a report that the prime minister of Poland, Ewa Kopacz, has urged Poles traveling to Greece to take “a larger amount of cash” with them. Why? Because the situation could be “very dynamic”, she says. “Please do not count only on your ATM cards and on ATMs, but take a larger amount of cash with you”.

It’s not the dynamic situation that would worry us. It’s the dynamite that lies beneath the whole world’s money system. It is a system that is fundamentally flawed. It depends on the intelligence and integrity of its custodians. Not that we think Madame Yellen is dumb. Nor do we doubt her honesty. But she is, after all, only human.

And centrally planning an $18 trillion economy –  by manipulating asset prices and interest rates –  is a super-human undertaking. The odds that something will go wrong? 100% …

Controls on Cash

A reader asks a good question:

I have a question about the recommendation to hold cash. If countries are putting controls on real cash and banking, in what form should a person hold cash? US dollars or some other currency. If we truly go to a “cashless society” what good would having a hoard of cash do?

We would like to have a better answer, but we only have the one we have. Money is always a convention. It is an understanding. People recognize money as a stand-in for wealth.

Since the beginning of civilization, people have experimented with different kinds of money. They ended up –  almost always and almost everywhere –  with gold and silver. Why?

Because they were handy. And because they were hard to produce. They were cash that governments could not easily control. No super-humans were needed to manage them.

Governments –  the people who are able to boss other people around –  always want to control money. They put their faces on it. They mint it. They clip coins. And they print pieces of paper and call it money.

But they could never completely control cash. People hoarded gold. They hid it. They ran away with it. They used it to make trades between themselves … regardless of what the feds said. And when the feds’ money went kaput –  which it always did –  they turned back to gold, because they knew they could trust it.

And now, the feds are making a new attempt to bring money totally under their control. For example, under the pretext of cutting funding for terrorists, the French government already has a law in the pipeline banning cash transactions of over 1,000 euros ($1,120).

There’s nothing stopping governments from banning cash transactions altogether … and ending the usage of paper money. Economists pretend it is a matter of convenience to the consumer (no more waiting for the clerk to make change for the fellow in front of you).

… or they try to sell it as a useful macro tool for central planners (they will be able to stimulate demand by imposing negative interest rates) …

… or they say a cashless world will be safer –  you won’t be held up at gunpoint, and terrorists will find it harder to get financing.

But the real reason is control. If governments can eliminate cash, they can easily track, tax, and confiscate your money.

When You Need a Stash of Cash

And if the feds can control your money, they will be able to control you. Do you voice an opinion they don’t want to hear? Do you belong to a group they want to get rid of? Do you want to know what happened to your tax money? Watch out … With a keystroke, you could be “disappeared”.

“Sometimes, when the government tells you to do something, it’s best to do the opposite”, says a French neighbor. In 1944, her father was the adjutant mayor of a small town in southwestern France. The Allies had landed in Normandy and the Germans were pulling their forces back to the Rhine. Our friend tells the story:

Someone had blown up a German truck as it went through town. People were doing that. Taking pot shots at the Germans. The SS didn’t like it. They would gather up the mayor and a few other people. If they didn’t turn over the guilty person, they would kill the mayor. Or sometimes the whole town.

My father got a message that told him he was supposed to go to the town square. Instead, he went into the woods. It’s a good thing he did. Otherwise, I wouldn’t be here.

When do you need a stash of cash? When the feds try to outlaw it. Hold some dollars. And some gold. We realize that our answer to the reader’s question is insufficient. After all, what good will cash be after it is declared illegal?

We’re not sure. Maybe we’ve spent too much time in Argentina, where people have more supple and more subtle attitudes to monetary regulations. Trading pesos for dollars, on the black market, is illegal. Do it and they take you for a scofflaw. Don’t do it and they take you for a fool.

More to come on this in future updates. Stay tuned …

http://www.zerohedge.com/news/2015-06-28/why-were-headed-toward-cashless-society

Categories: Uncategorized

The War on Cash

Officially Sanctioned Theft

How Banks & the Government Are Diminishing Your Savings

by Charles Hugh Smith

Peak Prosperity (June 12 2015)

You’ve probably read that there is a “war on cash” being waged on various fronts around the world. What exactly does a “war on cash” mean?

It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.

These limits are broadly called capital controls.

The War On Cash: Why Now?

Why are governments suddenly acting as if cash money is a bad thing that must be severely limited or eliminated?

Before we get to that, let’s distinguish between physical cash – currency and coins in your possession – and digital cash in the bank. The difference is self-evident: cash in hand cannot be confiscated by a “bail-in” (that is, officially sanctioned theft) in which the government or bank expropriates a percentage of cash deposited in the bank.  Cash in hand cannot be chipped away by negative interest rates or fees like cash held in a bank.

Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks, that is, a bank holiday.

When pundits suggest cash is “obsolete”, they mean physical paper money and coins, not cash in a bank. Cash in the bank is perfectly fine with the government and its well-paid yes-men (paging Mr Rogoff and Mr Buiter) because this cash can be expropriated by either “bail-ins” or by negative interest rates.

Mr Buiter, for example, recently opined that the spot of bother in 2008 and 2009 (the Global Financial Meltdown) could have been avoided if banks had only charged a six percent negative interest rate on cash: in effect, taking six percent of the depositor’s cash to force everyone to spend what cash they might have.

Both cash in hand and cash in the bank are subject to one favored method of expropriation, inflation. Inflation – the single most cherished goal of every central bank – steals purchasing power from physical cash and digital cash alike. Inflation punishes holders of cash and benefits those with debt, as debt becomes cheaper to service.

The beneficial effect of inflation on debt has been in play for decades, so it can’t be the cause of governments’ recent interest in eliminating physical cash.

So now we return to the question: Why are governments suddenly declaring war on physical cash, the oldest officially issued form of money?

The first reason: physical cash has the potential to evade both taxes as well as officially sanctioned theft via bail-ins and negative interest rates. In short, physical cash is extremely difficult for governments to steal.

Some of you may find the word theft harsh or even offensive. But we must differentiate between taxes – which are levied to pay for the state’s programs that in principle benefit all citizens – and bail-ins, that is, the taking of depositors’ cash to bail out banks that became insolvent through the actions of the banks’ management, not the actions of depositors.

Bail-ins are theft, pure and simple.  Since the government enforces the taking, it is officially sanctioned theft, but theft nonetheless.

Negative interest rates are another form of officially sanctioned theft.  In a world without the financial repression of zero-interest rates (ZIRP – central banks’ most beloved policy), lenders would charge borrowers enough interest to pay depositors for the use of their cash and earn the lender a profit.

If borrowers are paying interest, negative interest rates are theft, pure and simple.

Why are governments suddenly so keen to ban physical cash? The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft.  The escape from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age – that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.

Forcing Those with Cash to Spend or Gamble Their Cash

Negative interest rates (and fees on cash, which are equivalently punitive to savers) raise another question: why are governments suddenly obsessed with forcing owners of cash to either spend it or gamble it in the financial-market casinos?

The conventional answer voiced by Mr Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it.  The solution to recession is thus to force all those stingy cash hoarders to spend their money.

There are three enormous flaws in this thinking.

One is that households and businesses have cash to hoard.  The reality is the bottom ninety percent of households have less income now than they did fifteen years ago, which means their spending has declined not from hoarding but from declining income.

While Corporate America has basked in the glory of sharply rising profits, small business has not prospered in the same fashion. Indeed, but some measures, small business has been in a six-year recession.

The bottom ninety percent has less income and faces higher living expenses, so only the top slice of households has any substantial cash.  This top slice may see few safe opportunities to invest their savings, so they choose to keep their savings in cash rather than gamble it in a rigged casino (that is, the stock market).

The second flaw is that hoarding cash is the only rational, prudent response in an era of financial repression and economic insecurity. What central banks are demanding – that we spend every penny of our earnings rather than save some for investments we control or emergencies – is counter to our best interests.

This leads to the third flaw: capital  –  which begins its life as savings  –  is the foundation of capitalism. If you attack savings as a scourge, you are attacking capitalism and upward mobility, for only those who save capital can invest it to build wealth. By attacking cash, the central banks and governments are attacking capital and upward mobility.

Those who already own the majority of productive assets are able to borrow essentially unlimited sums at near-zero interest rates, which they can use to buy more productive assets, while everyone else – the bottom 99.5% – is reduced to consumer-serfdom: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest payments, goods and services.

This inversion of capitalism dooms an economy to all the ills we are experiencing in abundance: rising income inequality, reduced opportunities for entrepreneurship, rising debt burdens and a short-term perspective that voids the longer-term planning required to build sustainable productivity and wealth.

Physical Cash: Only $1.36 Trillion

According to the Federal Reserve {1}, total outstanding physical cash amounts to $1.36 trillion.

Given that a substantial amount of this cash is held overseas, physical cash is a tiny part of the domestic economy and the nation’s total assets. For context: the US economy is $17.5 trillion, total financial assets of households and nonprofit organizations total $68 trillion, base money is around $4 trillion, and total money (currency in circulation and demand deposits) is over $10 trillion (source).

Given the relatively modest quantity of physical cash, claims that eliminating it will boost the economy ring hollow.

Following the principle of cui bono – to whose benefit? – let’s ask: What are the benefits of eliminating physical cash to banks and the government?

Benefits To Banks and the Government of Eliminating Physical Cash

The benefits to banks and governments by eliminating cash are self-evident:

1. Every financial transaction can be taxed

2. Every financial transaction can be charged a fee

3. Bank runs are eliminated

In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash.  Thus a bank might only have one percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.

The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.

But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.

While the benefits to banks and governments of banning physical cash are self-evident, there are downsides to the real economy and to household resilience.

In Part Two: What To Do With Your Cash Savings {2}, we’ll look at the most influential forces in play in this war, and consider strategies for preserving purchasing power, avoiding bail-ins, fees and other threats to cash savings.

Click {2} to read Part Two of this report (free executive summary, enrollment required for full access)

Links:

{1} http://www.federalreserve.gov/faqs/currency_12773.htm

{2} http://www.peakprosperity.com/insider/93051/what-do-your-cash-savings

http://www.peakprosperity.com/blog/93050/war-cash-officially-sanctioned-theft

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China Syndrome

Why the PCR Won’t Get Sucked Into a Pointless War with the United States

by Mike Whitney

CounterPunch (June 23 2015)

China is reaching deep within the world island in an attempt to thoroughly reshape the geopolitical fundamentals of global power … Its two-step plan is designed to build a transcontinental infrastructure for the economic integration of the world island from within, while mobilizing military forces to surgically slice through Washington’s encircling containment … If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly … “the empire of the world would be in sight”. {1}

The future of politics will be decided in Asia, not Afghanistan or Iraq, and the United States will be right at the center of the action. {2}

China’s meteoric rise has Washington worried, not because China is a threat to its neighbors or to US national security, but because China’s influence is expanding across the region. It’s creating the institutions it needs to finance its own development (AIIB and New BRICS Bank), it’s building the infrastructure needed to connect the continents with state-of-the-art high-speed rail (New Silk Road), and it’s attracting allies and trading partners who want to participate in its plan for growth and prosperity. This is why Washington is worried; it’s because China has transformed itself into an economic powerhouse that doesn’t conform to the neoliberal model of punitive austerity, pernicious privatization,  and madcap asset inflation.  China has slipped out of the empire’s orbit and charted its own course, which is why Washington wants to provoke Beijing over its negligible land reclamation activities in the South China Sea. Washington thinks it can succeed militarily where it has failed economically and politically. Case in point; check this out from Bloomberg News {3}:

The US and Japan are conducting separate military drills with the Philippines near the disputed South China Sea … The annual CARAT Philippines joint exercise started Monday off the east coast of Palawan island and will run until June 26, according to US Navy spokesman Arlo Abrahamson. The Philippine and Japanese navies are holding drills around the same island through June 27, Japan’s Maritime Self-Defense Force said last week.

The US has backed Southeast Asian nations including the Philippines as tensions escalate with China over territorial claims in the South China Sea, while Japan is providing patrol vessels to the Philippine coast guard …The drill includes a sea phase with the littoral combat ship USS Fort Worth, diving and salvage ship USNS Safeguard and a P-3 Orion surveillance aircraft and at least one Philippine frigate, according to the US Navy …

Japan’s exercises with the Philippines will take place adjacent to the Spratly Islands, where China has created more than 2,000 acres of land in waters also claimed by the Philippines, Vietnam, Brunei, Taiwan and Malaysia. Japan will send a P-3C anti-submarine, maritime surveillance aircraft and twenty personnel.

The “show of force” drills are designed to harass and intimidate China. They have no other purpose. The US wants to force China to succumb to its diktats, to abandon its commitment to new institutions, to open its markets to US corporations and Wall Street, and to allow the US a free-hand in writing trade rules.  That’s what Washington really wants and that’s why the moderate Chuck Hagel was dumped for the combative Ashton Carter as Secretary of Defense. US powerbrokers wanted a scrappy taskmaster who’d bloody China’s nose and show them who’s boss. Carter fit the bill to a “T”, an icy bureaucratic leg-breaker who fancies himself the “smartest guy in the room”.  Peter Lee provides an interesting insight on Carter in a recent blog-post at China Matters. He says:

“… assertive Ash Carter is not playing bad cop to Obama/Kerry’s good cop; he’s the whole show, which will delight fans of military control of foreign policy everywhere.

We’re glad that others are beginning to see that the Pentagon has taken over US foreign policy. Carter is clearly calling the shots in Asia and Europe.

Lee seems to believe that Carter will outlast Obama’s time in office if Madame Clinton is elected president. Which is not surprising, since it was Clinton who first introduced “pivot” to the strategic lexicon in a speech she gave in 2010 titled “America’s Pacific Century”.  Clinton’s presentation laid out the basic themes that would later become America’s “top priority”, the rebalancing of US power to the Asia Pacific. Here’s an excerpt from the speech that appeared in Foreign Policy magazine {2}:

As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point. Over the last ten years, we have allocated immense resources to those two theaters. In the next ten years, we need to be smart and systematic about where we invest time and energy, so that we put ourselves in the best position to sustain our leadership, secure our interests, and advance our values. One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment –  diplomatic, economic, strategic, and otherwise –  in the Asia-Pacific region…

Harnessing Asia’s growth and dynamism is central to American economic and strategic interests and a key priority for President Obama. Open markets in Asia provide the United States with unprecedented opportunities for investment, trade, and access to cutting-edge technology … American firms (need) to tap into the vast and growing consumer base of Asia …

The region already generates more than half of global output and nearly half of global trade. As we strive to meet President Obama’s goal of doubling exports by 2015, we are looking for opportunities to do even more business in Asia … and our investment opportunities in Asia’s dynamic markets.

Repeat:

Harnessing Asia’s growth and dynamism is central to American economic and strategic interests … Open markets in Asia provide the United States with unprecedented opportunities for investment, trade, and access to cutting-edge technology … American firms (need) to tap into the vast and growing consumer base of Asia.

There it is in a nutshell. Having reduced the great American middle class to a lifeless, rotting corpse incapable of sustaining even meager demand or growth, US elites are packing the boats and heading for China, the shining corporate Valhalla on the hill. Clinton seems to think it should be pretty easy to penetrate these bustling Asian markets provided we back up our crackbrain aspirations with a strong dose of gunboat diplomacy – which is where Boss-man Carter comes in.

It’s worth noting that Clinton did not conjure up the pivot on her own, but was briefed on the theory by pivot mastermind Kurt M Campbell. Campbell is Co-Founder and former CEO of the Center for a New American Security.  According to the Center for a New American Security website:

From 2009 to 2013, he served as the Assistant Secretary of State for East Asian and Pacific Affairs, where he is widely credited as being a key architect of the “pivot to Asia”. In this capacity, Dr Campbell advanced a comprehensive US strategy that took him to every corner of the Asia-Pacific region where he was a tireless advocate for American interests, particularly the promotion of trade and investment.

In a recent video interview with neocon Robert Kagan,  Campbell regurgitates the same rhetoric that appears in Clinton’s speech. He opines:

Most of the history of the 21st century is going to be in the Asia Pacific region … It is in our best national interest to show that we are going to play a central role in that drama just as we have in the 20th century … (There is  bipartisan) … recognition that our military presence is our ticket to the big game in the Asia Pacific. {4}

There seems to be a growing consensus that the US military is the right tool for persuading China to cave in, but is it?

The last thing the Obama administration wants is a shooting war with China, mainly because China has the ability to strike back, and not just militarily either.  Let me explain: According to political scientist Pang Zhongying,

The current relationship between China and the US is one that has never existed in the history of international relations … The level of interdependence between China and the US is unprecedented in history. Before the 1970s, no one could possibly imagine or predict that these two countries would be interdependent to the extent of today. At that time, interdependence existed only between the US and Europe, or among the G7 at the most. The level of interdependence today did not exist between the US and China.

In other words, the two countries need each other and are bound together in a complex web of economic and financial ties, including China’s massive holding of US debt which amounts to an eyewatering $1.3 trillion.  This interdependence means that the US cannot abuse China in the same way it has Russia without putting itself at risk.  So, while the US still maintains the dominant position economically and militarily, it can’t simply throw caution to the wind by imposing sanctions or escalating hostilities beyond a certain point without jeopardizing its own security. China knows this, which is why it will continue to pursue its own agenda aggressively while deflecting US belligerence and hostility as best as it can.

The People’s Republic of China (PRC) is still committed to “peaceful development”. US antagonism is just one of the many hurtles that China will have to overcome to actualize its plan for integrating the Eurasian landmass into the world’s largest and most prosperous trading bloc. Check out this excerpt from Alfred McCoy’s seminal piece “The Geopolitics of American Global Decline” {1}:

China’s leadership began collaborating with surrounding states on a massive project to integrate the country’s national rail network into a transcontinental grid. Starting in 2008, the Germans and Russians joined with the Chinese in launching the “Eurasian Land Bridge”. Two east-west routes, the old Trans-Siberian in the north and a new southern route along the ancient Silk Road through Kazakhstan are meant to bind all of Eurasia together …

In April, President Xi Jinping announced construction of that massive road-rail-pipeline corridor direct from western China to its new port at Gwadar, Pakistan, creating the logistics for future naval deployments in the energy-rich Arabian Sea … By building the infrastructure for military bases in the South China and Arabian seas, Beijing is forging the future capacity to surgically and strategically impair US military containment …

In a decade or two … China will be ready to surgically slice through Washington’s continental encirclement at a few strategic points without having to confront the full global might of the US military, potentially rendering the vast American armada of carriers, cruisers, drones, fighters, and submarines redundant … If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly … “the empire of the world would be in sight”.

There it is, eh? The end of one empire and the beginning of another.

China’s leaders aren’t going to blow their big chance by getting sucked into a costly and pointless war with the United States. That’s ridiculous. They’re going to keep plugging away until the Silk Road becomes a reality.

Links:

{1} http://www.unz.com/article/the-geopolitics-of-american-global-decline/

{2} Former Secretary of State, Hillary Clinton,  “America’s Pacific Century”,  Foreign Policy magazine (2011)

{3} http://www.bloomberg.com/news/articles/2015-06-22/u-s-japan-join-philippines-in-south-china-sea-military-drills

{4} http://www.foreignpolicyi.org/content/obama-administrations-pivot-asia

_____

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press, 2012). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

http://www.counterpunch.org/2015/06/23/china-syndrome-2/

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