Drumbeats for the cashless society

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:

• Abolish currency.
• Tax currency.
• 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. ...

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DoChenRollingBearing said:

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I was just about to pop-off a "Molon Labe" comment (yeah, come & take it...) when I realized that, yes, maybe they could pull it off (outlawing cash).

Even though drugs are outlawed (and readily available), cash is different. You can´t eat it, smoke it, or.............

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The war on cash is proliferating globally. It appears that the private members of the world’s banking cartels are increasingly joining the fun, even if it means trampling on the rights of their customers.

Yesterday we came across an article at Zerohedge, in which Dr. Salerno of the Mises Institute notes that JP Morgan Chase has apparently joined the “war on cash”, by “restricting the use of cash in selected markets, restricting borrowers from making cash payments on credit cards, mortgages, equity lines and auto loans, as well as prohibiting storage of cash in safe deposit boxes”.

This reminded us immediately that we have just come across another small article in the local European press (courtesy of Dan Popescu), in which a Swiss pension fund manager discusses his plight with the SNB’s bizarre negative interest rate policy. In Switzerland this policy has long ago led to negative deposit rates at the commercial banks as well. The difference to other jurisdictions is however that negative interest rates have become so pronounced, that it is by now worth it to simply withdraw one’s cash and put it into an insured vault.

Having realized this, said pension fund manager, after calculating that he would save at least 25,000 CHF per year on every CHF 10 m. deposit by putting the cash into a vault, told his bank that he was about to make a rather big withdrawal very soon. After all, as a pension fund manager he has a fiduciary duty to his clients, and if he can save money based on a technicality, he has to do it.

What happened next is truly stunning. ... SRF reports:

“Since the national bank has introduced negative interest rates, pension funds in the country are in trouble. Banks are passing the negative rates on to them. This results in the saved pension money shrinking, instead of producing a return. A number of pension funds are therefore thinking about keeping their money in an external vault instead of leaving it in bank accounts.

One fund manager showed that for every CHF 10 m. in pension money, his fund would save CHF 25,000 – in spite of the costs involved in vault rent, cash transportation and other expenses.

However, as our research team has found out, there is one bank that refuses to pay out money in such large amounts. The editorial team has gotten hold of a letter from a large Swiss bank in which it tells its customer, a pension fund:

“We are sorry, that within the time period specified, no solution corresponding to your expectations could be found.”

Bank expert Hans Geiger says that this “is most definitely not legal”. The pension fund has a sight account, and has the contractual right to dispose of its money on demand.

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So how come the unnamed “large bank” (they should have named it, just to see what happens…) is so bold as to break the law by refusing to pay out funds in a demand deposit? Note here that it is indeed breaking the law, as there is nothing in Swiss legislation that states that banks are allowed to refuse or delay servicing withdrawals from demand deposits upon request.

The answer is that it has probably received a “directive” from the Swiss National Bank. Note here that these directives are not legally binding. SFR further:

“The president of the pension funds association ASIP, Hanspeter Konrad, has been irritated for weeks that pension funds are suffering from negative interest rates. He says: “We simply cannot understand that the banks are butting in here”. Konrad suspects that the National Bank is exerting its influence.

Indeed, the SNB confirms that it doesn’t like to see the hoarding of cash to circumvent its negative interest rate policy. “The National Bank has therefore recommended to the banks to approach withdrawal demands in a restrictive manner.”

Hans Giger, professor eremitus at the University of Zurich, says to this that the question how far the SNB can go is legally complicated. While the SNB is not allowed to influence the contract between a bank and a pension fund, it can however “issue directives to the banks in the collective interest of the Swiss economy”. What banks do with the SNB’s directives is however up to them.

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It is undoubtedly a huge red flag when in one of the countries considered to be a member of the “highest economic freedom in the world” club, commercial banks are suddenly refusing their customers access to their cash. This money doesn’t belong to the banks, and it doesn’t belong to the central bank either.

If this can happen in prosperous Switzerland, based on some nebulous notion of the “collective good”, which its unelected central planners can arbitrarily determine and base decisions upon, it can probably happen anywhere. Consider yourself warned. ...

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A proposed new law in Denmark could be the first step towards an economic revolution that sees physical currencies and normal bank accounts abolished and gives governments futuristic new tools to fight the cycle of “boom and bust”.

The Danish proposal sounds innocuous enough on the surface – it would simply allow shops to refuse payments in cash and insist that customers use contactless debit cards or some other means of electronic payment.

Officially, the aim is to ease “administrative and financial burdens”, such as the cost of hiring a security service to send cash to the bank, and is part of a programme of reforms aimed at boosting growth – there is evidence that high cash usage in an economy acts as a drag.

But the move could be a key moment in the advent of “cashless societies”. And once all money exists only in bank accounts – monitored, or even directly controlled by the government – the authorities will be able to encourage us to spend more when the economy slows, or spend less when it is overheating.
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Last week, the influential Financial Times newspaper ran an article calling for the abolition of cash. It was titled “The case for retiring another ‘barbarous relic.’” And it claimed that cash causes “a lot of distortion in the economic system.”

Can you believe it?

Cash causes economic distortions! From the FT:

The existence of cash – a bearer instrument with a zero interest rate – limits central banks’ ability to stimulate a depressed economy.The worry is that people will change their deposits for cash if a central bank moves rates into negative territory.

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It also repeated the familiar claims that cash also is what finances terrorism, tax evasion, and the black market. Making cash illegal, it says, would “make life easier for a government set on squeezing the informal economy out of existence.”

You see where this is going, don’t you, dear reader?

If the feds are able to ban cash, they will have you completely under their control. You will invest when they want you to invest. You will buy when and what they want you to buy.

You will be forced to keep your money in a bank – a bank controlled, of course, by the feds.

You will say that you have “cash in the bank,” but it won’t be true. All you will have is a credit against the bank. (Bank deposits are nothing more than IOUs from your bank to you.)
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The problem is that if you go NIRP and still are not able to achieve the kind of economic outcomes you were looking for by essentially forcing depositors to choose between a tax on their savings and pulling money out and spending it, well then the next logical thing to do is to stop accepting deposits, which is apparently what it’s come to in Sweden. ...

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PMBug said:

Yellen put NIRP on the table "if outlook worsened".

http://www.zerohedge.com/news/2015-11-04/yellen-says-negative-rates-table-if-outlook-worsened

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If policy makers are wise and attend to all that, they just might convince the public of a surprising truth about cash: They're better off without it.
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After the Bank of Japan cut some rates below zero last month to spur growth and inflation, strategists are weighing the Federal Reserve’s options in case of a crisis. If the world’s biggest economy weakens enough that traditional policy measures don’t help, the Fed may consider pushing rates below zero, according to Bank of America Corp. and JPMorgan Chase & Co.

That step would broaden the Fed’s toolkit beyond what was available during the financial crisis, when it slashed its overnight benchmark near zero and bought bonds to stimulate the economy. In 2012, New York Fed researchers said negative rates could prompt individuals to avoid depositing money in banks, potentially weakening the financial system.

“They’re still concerned, but not as much as they once were,” said Mark Cabana, a New York-based interest-rate strategist at Bank of America. “They’ve seen how successful they were in other countries, where there haven’t been adverse impacts on market functioning.”

Traders may be getting on board with the possibility too. The implied probability of U.S. rates sinking below zero by the end of 2017 has jumped to roughly 13 percent, the highest since at least July, data compiled by Bloomberg show. The wagers are tied to the London interbank offered rate, which partly reflects expectations for Fed rates.
Uncharted Territory

Michael Feroli, JPMorgan’s chief U.S. economist in New York, wrote in a note last week that the Fed may consider negative rates because the five central banks that have done so -- in Denmark, the euro region, Japan, Sweden and Switzerland -- haven’t faced hoarding of cash by individuals or financial-market disruption. Those were among the risks the New York Fed analysts warned about.
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Fed officials say the question of negative rates won’t arise unless the U.S. looks like it’s in a recession, which they don’t anticipate. ...

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While economists and market analysts have been raising the specter of negative interest rates in the U.S. for months, the Fed has been essentially mum on the subject.
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Still, the topic has been growing fodder for analysts, especially in the wake of Japan’s decision last week to initiate the radical strategy.
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... while in recent days we have seen op-eds by both Bloomberg and FT urging the banning of cash, the most disturbing development we have seen yet in the push for a cashless society has come from the following slide in a Morgan Stanley presentation, one in which the bank's head of EMEA equity research Huw van Steenis, pointed out the following...

... and added this:

One of the most surprising comments this year came from a closed session on fintech where I sat next to someone in policy circles who argued that we should move quickly to a cashless economy so that we could introduce negative rates well below 1% – as they were concerned that Larry Summers' secular stagnation was indeed playing out and we would be stuck with negative rates for a decade in Europe. They felt below (1.5)% depositors would start to hoard notes, leading to yet further complexities for monetary policy.

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... It’s a two-step process. First, eliminate cash as much as possible. Paper money is the best way to avoid negative interest rates. So paper money must be abolished before the elite plan can be implemented. This forces you into the digital bank system.

Step two is to impose negative interest rates as a disguised tax or wealth transfer. Once everyone is forced into the banks, it’s easy to impose negative interest rates to confiscate your money. Getting savers into digital accounts is like rounding up cattle for the slaughter. For now, it’s just talk by the Fed.

But they’re getting you used to the idea now so they can impose a negative interest rate hidden tax in 2017 or 2018. ...

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So with one regulation, the Fed - if it listens to this Harvard charlatan, and it surely will as more and more "academics" get on board with the idea to scrap paper money - could eliminate the value of 78% of all currency in circulation, which in effect would achieve practically the entire goal of destroying the one paper alternative to digital NIRP rates, in the form of paper currency.
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Over the weekend there was a flurry of commentary around the increasing use of NIRP by central banks, and the program’s declining effectiveness. Predictably the IMF - whose Christine Lagarde recently said "When The World Goes Downhill, We Thrive", came out in support, while investors Larry Fink and Bill Gross came out hammering the program.
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Starting this summer, the government will test a system in which foreign tourists will be able to verify their identities and buy things at stores using only their fingerprints.

The government hopes to increase the number of foreign tourists by using the system to prevent crime and relieve users from the necessity of carrying cash or credit cards. It aims to realize the system by the 2020 Tokyo Olympic and Paralympic Games.

The experiment will have inbound tourists register their fingerprints and other data, such as credit card information, at airports and elsewhere.

Tourists would then be able to conduct tax exemption procedures and make purchases after verifying their identities by placing two fingers on special devices installed at stores.
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It hopes to realize the system throughout the country, including Tokyo, by 2020.
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... It was when he told the audience that keeps regular contact with Stefan Ingves, Riksbank his counterpart (Central Bank of Sweden). "Today we are receiving personal advice," he said. Mention is a whole definition: Sweden is already a case study in the world as the country that has banished the use of cash.
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Arguing that cash "facilitates crime" and "is also deeply implicated in tax evasion" Harvard University's Kenneth S. Rogoff, former chief economist of the International Monetary Fund, favors"moving to a society where cash is used less frequently and mainly for small transactions."
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There's really no argument here. Cash abolitionists fully understand that cash shields individuals from the state—and they hate that protection.

"But where does one draw the line between this individual right and the government's need to tax and regulate and to enforce the law?" objects Rogoff, whose book, The Curse of Cash, came out last week. He knows where he would draw it—to encompass a lot more enforcement and much less privacy.
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Another major speech was by an economist named Marvin Goodfriend, from Carnegie Mellon University. His speech was called The Case for Unencumbering Interest Rate Policy at the Zero Bound.

On its face, the Goodfriend speech was about negative interest rates — and just because Yellen doesn’t like them now doesn’t mean they’re not coming in the future. That negative rate idea has been around for a few years. But Goodfriend’s focus was to promote “unencumbered” negative interest rate policy, which means getting rid of things standing in your way.

Specifically, the No. 1 thing standing in the way of negative rates is cash. If citizens can go to cash, that makes it difficult to impose negative rates on digital bank accounts. That’s also not a new insight. The war on cash has been going on for a while, and prominent economists from Larry Summers to Ken Rogoff have called for an end to cash. Rogoff did so just recently, in a front-page article in the “Review” section of The Wall Street Journal.

What is new in all of this are ideas that Goodfriend presented to the Fed to neutralize the role of cash. His preferred way is just to “abolish paper currency,” as his paper outlines in Section 5A. But then Goodfriend laments that “the public is likely to resist the abolition of paper currency.” He’s right about that.

So Goodfriend comes up with a new concept called the “flexible market-determined deposit price of paper currency.” (Seriously, I’m not making this up; you can find it in Section 5B of his paper.)

In plain English, this means the “money” in your bank account and the “money” in your purse or wallet would be like two different kinds of currency. There would be an exchange rate between the two, just as there is an exchange rate between dollars and euros. The Fed could set this exchange rate at whatever level it wanted and would not be obligated to “defend” that rate at any particular level.

What this means is if you go to the bank and withdraw $1,000, the bank might only give you $980 in cash because of the “exchange rate” between your bank account and cash. Or if you deposit $1,000 in cash, the bank might only credit your bank account $980 because of the same “exchange rate” between your cash and the bank account balance. In short, it’s a way to impose negative interest rates on physical cash.

It’s true that Goodfriend is an academic, not a policymaker. But Yellen and other Fed bigwigs like William Dudley and Stanley Fischer were sitting in the audience. In my experience, this is how things start. ...

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Maxibillion said:

... Does anybody believe that gold and silver will soon be a replacement currency?

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Less than a week after India’s surprise move to scrap its highest denomination cash notes, another front in the War on Cash has intensified down under in Australia.

Yesterday, banking giant UBS proposed that eliminating Australia’s $100 and $50 bills would be “good for the economy and good for the banks.”
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Most notably, two days ago, Citibank (yes, THAT Citibank) announced that it was going cashless at some of its Australian branches.
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Australia looks set to follow in the footsteps of Venezuela and India by abolishing the country’s highest-denomination banknote in a bid to crack down on the “black economy”.

Speaking to ABC radio on Wednesday, Revenue and Financial Services Minister Kelly O’Dwyer flagged a review of the $100 note and cash payments over certain limits as the government looks to recoup billions in unpaid tax.
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