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Meet Kenneth Rogoff

Unreconstructed Statist

by Pater Tenebrarum

Acting Man (June 05 2014)

Cash is Only for Criminals

We always try to keep an eye on the pronouncements of establishment-approved intellectuals, especially economists and pundits connected with the welfare and warfare rackets. The ruling elite regularly employs them to launch trial balloons concerning its plans. Today’s intellectuals are mainly concerned with promoting establishment propaganda, often engaging in fake ‘pro and con’ debates, with the ‘compromise solutions’ that are then offered revealing what the real goal was in the first place. As Hans-Hermann Hoppe points out:

… insofar as today’s intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the State, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda {1}.

For instance, there is now a movement underway to decriminalize drugs. As the Daily Bell recently noted {2}, the effort has recently been expanding to include all ‘entertainment drugs’, even ‘hard’ ones. While this is as it should be (what people want to ingest should be none of the State’s business), there has to be an ulterior motive driving this promotion. One guess we have come up with is that the goal is to disempower the currently active criminal drug cartels and transform their illicit and untaxed profits into taxed profits that are earned by large pharmaceutical companies and/or other licensed enterprises. Very likely obtaining a license will eventually become so onerous that only big business can afford to actually pursue this opportunity, in keeping with the current state-capitalistic system. This is only one of the possibilities though. There are other goals that may be pursued, such as the ‘panem et circenses‘ aspect. According to the definition of the term at Wikipedia:

In the case of politics, the phrase is used to describe the creation of public approval, not through exemplary or excellent public service or public policy, but through diversion; distraction; or the mere satisfaction of the immediate, shallow requirements of a populace, as an offered ‘palliative’ {3}.

Or putting it into context with modern times: grant the serfs a little bit of liberty in one area, while concurrently taking away a number of liberties in others. One of the liberties that has been under heavy attack in recent years is financial privacy. We encourage readers to check out this article at Casey’s about FATCA’s ugly step-child GATCA {4}. After reading this, remember the IMF’s proposal for a giant wealth grab {5} in developed nations to ‘fix’ the insolvency of governments. It all fits very neatly.

And here comes Harvard economist Kenneth Rogoff, promoting the idea that cash currency needs to be made illegal {6}, in, where else, the Financial Times. Readers may recall that we have previously discussed this topic in the context of Sweden (see: “Sweden Discusses Cash Ban” {7}), where cash has almost disappeared by now and politicians and banks are actively promoting its complete abolition.

As we have argued at the time, it is an erosion of liberty under the cover of increasing ‘safety’ –  a well-worn etatiste tactic. Not surprisingly, Rogoff is inter alia making the argument that ‘mainly criminals’ use cash, especially drug barons. This fits neatly with everything else discussed above: there is quite a drive underway to destroy all vestiges of financial privacy, and numerous promotions have been launched to make the idea palatable to the hoi-polloi. The ‘inequality’ debate belongs with these promotions just as this latest attempt to implant the meme that cash is somehow inherently evil.

We Need to Abolish Cash to Enable Better Central Planning

However, this is not the only argument Rogoff drags up. Similar to many other Chicago School monetarists, he is actually a “left-fringe” (Hoppe {8}) statist, who is merely occasionally masquerading as a supporter of the free market. Monetarists are all for central banking, the very cancer that lies at the heart of the current state-capitalistic, anti-free market system. Rogoff wants to “kill two birds with one stone”. He writes:

Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes? Getting rid of physical currency and replacing it with electronic money would kill two birds with one stone.

First, it would eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash. Second, phasing out currency would address the concern that a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.

In other words, when central planners decide to expand their war on savers further, and outright theft in nominal as well as merely in real terms is to be implemented, the average citizen must not have any opportunity to save his hard-earned money from the insane designs of these ‘wise men’.

And evidently, the best way to persuade Joe Six-Pack to agree is by pointing out that cash currency is the sole preserve of ‘tax evaders and other criminals’. So are there any arguments against the idea? Why, yes, chiefly among them the fact that the State may lose its ‘seignorage’ income!

Yes, there are some important arguments in favour of the status quo. These include a likely loss of seigniorage revenue –  the profit central banks make by printing money –  even if anonymous paper currency is replaced with purportedly anonymous electronic government currency. Even though central bank “profits” are turned over to national treasuries, the ability to skim off expenses without having to beg can help insulate central banks from political pressures. But the real costs to governments would be much less than the loss of seigniorage revenues might indicate, because they would gain revenue by making tax evasion more difficult. There would also be savings from crime reduction.

The great advantage would of course be –  even though Rogoff doesn’t mention it –  that just about any onerous tax rates could then be imposed. Currently governments that impose too high tax rates are faced with the fact that a lot of economic activity promptly disappears into the ‘shadow economy’, as this is often the only way people can maintain a reasonable living standard. Thus cash is actually a natural brake against government greed. Rogoff has no problem with removing it. But wait, it gets even better –  he even mentions marijuana outright, confirming once again that pot legalization is indeed an elite promotion:

Another issue is that society may want to preserve the right for individuals to make anonymous payments in certain activities, even if it is desirable to strip away the cloak of anonymity from those engaged in tax evasion and crime. Anonymity, for example, facilitates experimentation at the fringes of society with activities that might ultimately become legal (buying marijuana, for instance).

Does anyone believe even for a second he would have said this five or ten years ago? But he soon returns to his major point: namely, how without cash, central bankers can better implement their kooky theories and enable theft on a grand scale. He approvingly cites Willem Buiter in this context. Readers may remember that Buiter in turn became conspicuous during the crisis by promoting the ideas of complete monetary cranks like Silvio Gesell {9}:

The idea of finding creative ways to get around the zero bound on interest rates has been championed for more than a decade by Willem Buiter, a former UK Monetary Policy Committee member. Phasing out paper currency is by far the simplest. With electronic payments mechanisms becoming increasingly prevalent even in small transactions, and with the supply of paper currency overwhelmingly top-heavy with large-denomination notes, the case for keeping the currency status quo has weakened.

“Getting around the zero bound” of course means the imposition of penalty rates on all cash and savings deposits in order to force people to spend. This idea is based on extremely bad economic theory. It is held that economic growth is the result of ‘spending’ and consumption. This is patently not the case, in fact, it is the functional equivalent of trying to keep warm by burning the furniture.

Moreover, there can be no such thing as a ‘negative interest rate’ in real life. The ordinary interest rate must always be positive, lest people would never consume. There is no such thing as ‘negative time preference’. What these Gesellian ideas promoted by Buiter (and now Rogoff) ultimately amount to is expropriation.

Another excerpt:

True, it is likely that a significant share –  perhaps half –  of dollars and euros circulates internationally. Some portion of this is surely abetting illegal activity and tax evasion. (In arresting Joaquín “El Chapo” Guzman, the Mexican drug lord, two months ago, authorities found a room containing more than $200 million, and this was not a first.) Then again, dollars and euros, including large-denomination notes, are also used for legal purposes. Even so, there still appears to be a very large share circulating in domestic underground economies, estimated to be at least seven to eight per cent of gross domestic product for the US and considerably higher for Europe.

After skilfully reminding us that mainly criminals use cash (while grudgingly admitting that ‘some’ cash may actually be employed in perfectly legal ways), Rogoff comes back to the crux of his jeremiad: the State must be enabled not only to engage in more effective central panning but also to more effectively tax the citizenry into oblivion, by cutting off all routes to escape (not to mention that at some point in the future, this may make it even possible to simply ‘erase’ the finances of undesirables at the push of a button).

So what about Europe’s large ‘shadow economy’ (we happen to believe that Rogoff underestimates the size of the US shadow economy and that the official estimates of the size and importance of Europe’s shadow economies are probably also far too low). Europe’s economy would very likely implode without cash. Living standards would definitely plummet, as being able to afford handymen, cleaning personnel, et cetera at ‘official’ rates that include the onerous tax burden would become the exclusive preserve of a small moneyed elite.

But an even more pernicious effect is precisely that people could no longer get their money out of the banking system. There could no longer be any bank runs –  people would be forced to entrust their money to fractionally reserved banks whether they want to or not. One would no longer be able to remove oneself from what is an inherently insolvent system. After all, only a small proportion of the demand deposit liabilities of fractionally reserved banks is actually backed with standard money. The vast majority consists of fiduciary media, which are money in the broader sense, but are at the same time only imaginary numbers in accounts. The banks could not possibly pay out but a fraction of the sight deposits on their books, in spite of the contractual promise that all of this money is available on demand.

 A Possible Consolation

The economy always finds ways to circumvent dictatorial edicts. In that sense there may be a silver lining to all of this. Abolishing cash may well hasten the demise of the current monetary system, as the shadow economy would quickly adopt alternative media of exchange. Very likely precious metals, bit coins and other non-state forms of money would be increasingly employed. If government scrip were abolished, we may well see gold and silver coins begin to circulate again.

Links:

{1} https://mises.org/etexts/intellectuals.asp

{2} http://www.thedailybell.com/editorials/35358/Anthony-Wile-Is-the-War-on-Drugs-Over/

{3} http://en.wikipedia.org/wiki/Bread_and_circuses

{4} http://www.internationalman.com/articles/the-shocking-real-reason-for-fatca-and-what-comes-next

{5} http://www.acting-man.com/?p=26642

{6} http://www.ft.com/intl/cms/s/0/c47c87ae-e284-11e3-a829-00144feabdc0.html?siteedition=intl#axzz3334wIJme

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

{8} https://mises.org/etexts/intellectuals.asp

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

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

Categories: Uncategorized

Paper Money is Unfit …

… for a World of High Crime and Low Inflation

Abolishing Physical Currency Would Achieve Two Valuable Objectives

by Kenneth Rogoff

FT.com (May 28 2014)

Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes? Getting rid of physical currency and replacing it with electronic money would kill two birds with one stone.

First, it would eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash. Second, phasing out currency would address the concern that a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.

Yes, there are some important arguments in favour of the status quo. These include a likely loss of seigniorage revenue – the profit central banks make by printing money – even if anonymous paper currency is replaced with purportedly anonymous electronic government currency. Even though central bank “profits” are turned over to national treasuries, the ability to skim off expenses without having to beg can help insulate central banks from political pressures. But the real costs to governments would be much less than the loss of seigniorage revenues might indicate, because they would gain revenue by making tax evasion more difficult. There would also be savings from crime reduction.

Another issue is that society may want to preserve the right for individuals to make anonymous payments in certain activities, even if it is desirable to strip away the cloak of anonymity from those engaged in tax evasion and crime. Anonymity, for example, facilitates experimentation at the fringes of society with activities that might ultimately become legal (buying marijuana, for instance).

The idea of finding creative ways to get around the zero bound on interest rates has been championed for more than a decade by Willem Buiter, a former UK Monetary Policy Committee member. Phasing out paper currency is by far the simplest. With electronic payments mechanisms becoming increasingly prevalent even in small transactions, and with the supply of paper currency overwhelmingly top-heavy with large-denomination notes, the case for keeping the currency status quo has weakened.

Without going into gory detail, in both the eurozone and the US there is roughly $4,000 in circulation for every man, woman and child, and it is not easy to find. In Japan the figure is almost double that. In the US and Japan, more than 75 per cent of currency is held in the largest denomination notes, the $100 bill and the 10,000 yen note. The situation in the eurozone is different only in that there is a larger range of high-denomination notes going all the way to 500 euros, but the basic point is similar.

True, it is likely that a significant share – perhaps half – of dollars and euros circulates internationally. Some portion of this is surely abetting illegal activity and tax evasion. (In arresting Joaquín “El Chapo” Guzman, the Mexican drug lord, two months ago, authorities found a room containing more than $200 million, and this was not a first.) Then again, dollars and euros, including large-denomination notes, are also used for legal purposes. Even so, there still appears to be a very large share circulating in domestic underground economies, estimated to be at least seven to eight per cent of gross domestic product for the US and considerably higher for Europe.

Of course, if governments could credibly issue an anonymous electronic currency, the problem of the zero bound would still be solved and central banks could keep pushing their product. Even if this outcome is feasible, however, it is hardly desirable. Note that if governments do stop issuing anonymous currency, then they would probably have to ensure that the private sector did not proffer a Bitcoin-like substitute. Otherwise, illegal activities would proceed unabated, and the government would forfeit even the small inflation tax revenue it gets now. Finally, a shift away from anonymous paper currency would ideally involve co-operation among governments.

Perhaps the right place to begin is by phasing out large denomination notes. This might be enough to accomplish the main objectives. It is time to consider whether paper currency is vestigial, or worse.

_____

The writer is a professor of economics at Harvard.

http://www.ft.com/intl/cms/s/0/c47c87ae-e284-11e3-a829-00144feabdc0.html#axzz3eXFnpg43

Categories: Uncategorized

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

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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
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