JULY 29, 2015 — Charles Hugh Smith
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 Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.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.”
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” (i.e., 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.
Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks (i.e., a bank holiday).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.
Inflation and Negative Interest Rates
Mr. Buiter, for example, recently opined that the spot of bother in 2008–09 (the Global Financial Meltdown) could have been avoided if banks had only charged a 6 percent negative interest rate on cash: in effect, taking 6 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?
Why They Hate Cash in Hand
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, i.e., 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 repressionof 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 mechanism 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 90 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, by some measures, small business has been in a six-year recession.
The bottom 90 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 (i.e., 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.
A War on Cash Is a War on Capital
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. Everyone else — the bottom 99.5 percent — 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, 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:
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 1 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.
So, when the dust has settled who ultimately benefits by this war on cash, government and the central banks, pure and simple.
- The decline of ordoliberal influence in the Mont Pelerin collective. Röpke’s Occident, the “Hunold Affair” and the rise of the Chicago School
- The situation in banking is much worse than people think
- Cameron should learn lessons from the past over EU referendum
- Jersey’s Microstate Housing Policies
- Power, Corruption and Lies. The vortex of ‘Frozen Conflict’
- Why is Labour Still so obsessed with the German Model?
- Russia Closes Ranks with Syria, Iraq, Jordan: supplants Washington’s Phoney War on ISIS
- The Case for Outlawing Cash
- The Central Bankers’ Malodorous War on Savers
- Economics is Dead, and is being Killed
- The Great China Ponzi – An Economic and Financial Train Wreck Which Will Rattle the World
- The Eurozone has failed, both Politically and Economically
- Frederic Bastiat had it right: the vast unseen consequences of ZIRP are the true evil
- Unseen Consequences of Zero-Interest-Rate Policy
- Japan gets ready for more military spending
- Ron Paul’s Foreign Policy of Peace is central to the message of freedom
- The War on Cash: Why Now?
- Central Banks and our Dysfunctional Gold Markets
- the Austrian School
- The Great Greek Fire Sale, Or Not?
- Norbert Elias Blog: How does Historical Sociology see Europe?
- The Curse of the Euro: Money Corrupted, Democracy Busted
- Germany benefits from the Euro
- David Stockman on the euro crisis: Links
- Greece’s capitulation reveals deep conflicts within the Eurozone
- David Stockman posts
- SHORING UP THE SHANGHAI & GANGING UP ON GREECE: A WORLD FULL OF GOOD MEN DOING NOTHING
- Why the eurocrats are petrified: what the falling dominoes of ‘Grexit’ look like
- Good on you, Greece – but don’t waver now (Part 2)
- Good on you, Alex Tsipras (Part 1)
- Message to Merkel: Shut-up Und Setzen Sie Sich!
- Posts on Sweden’s Armed Neutrality
- 1972: First Impressions of Sweden
- Swedish Armed Neutrality: what it involves
- Switzerland is the ultimate safe haven for liberty and wealth
- Its Official: leading German Keynesian Economist calls for cash ban
- Government using subprime mortgage to pump housing recovery
- Young and American? You’re Out of Luck
- THE BOND YIELD SPIKES: Why they happened…and what happens next
- Germany and Economics: of rules and order
- Subprime mortgages being used to pump housing recovery
- What is – or rather was – Sweden’s armed neutrality?
- Sweden’s Anti-Russian Hysteria
- Swedish Armed Neutrality
- Danish Ordoliberalism
- The Recycling Myth
- THE FRIDAY GOLD MASSACRE: WILL GOLD BE WORTH $500 AN oz BY APRIL 10th?
- The Austrian School of Economics
- Ordoliberalism in Housing Markets: an overview
- The subprime mortgage crisis
Blogs I Follow
- A Brit In Sweden
- Universe Today
- Louis Proyect: The Unrepentant Marxist
- Eurasia News Online
- Society for the Study of Symbolic Interaction Blog
- Russian Universe
- Everyday Sociology Blog
- Washington's Blog
- Liberty Blitzkrieg
- The Slog.
- JohnPilger.com - the films and journalism of John Pilger
- Symbolic Interaction Music Blog
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- September 2013
- July 2013
- Admin (3)
- Australia (2)
- Austria (1)
- Brazil (3)
- China (1)
- Class (1)
- Dance (2)
- Denmark (1)
- EU (24)
- Gareth Dale (1)
- Germany (6)
- Greece (3)
- Housing (4)
- Hungary (1)
- Karl Polanyi (12)
- Micro-states (1)
- Mises (10)
- NATO (1)
- Necolonialism (1)
- neoliberalism (20)
- Ordoliberalism (21)
- Paris (2)
- Society for the Study of Social Problems (1)
- Subprime Mortgage Crisis (4)
- Sweden (20)
- Switzerland (1)
- Symbolic Interaction (1)
- Ukraine (1)
- Uncategorized (8)
- Unitary Rental Market (3)
- US Global Hegemony (11)
- Acting Man Blog
- Ambrose Evans-Pritchard
- Armed Neutrality
- Austrian School of Economics
- Bildt Government
- boom-slump cycles
- cantonal banks
- Cold War
- Contra Corner
- Dagens Nyheter
- David Stockman
- Der Spiegel
- Die Wende
- Dolores Hayden
- Dual Monarchy
- E.P. Thompson
- Economy of Sweden
- European Central Bank
- European Empire
- European sovereign debt crisis of 2010–present
- European Union
- Frank Castles
- Fred Block
- Fred L. Block
- Free market
- Fritz Scharpf
- Gareth Dale
- German Re-unification
- Great Transformation
- Göran Persson
- History of the Jews in Hungary
- Joint Decision Trap
- Jozef Tiso
- Karl Polanyi
- Karl Polanyi Digital Archive
- Karl Polanyi Institute of Political Economy
- Ludwig Erhard
- Margaret Somers
- market fundamentalism
- market manipulation
- military expenditure
- Million Programme
- Mises Daily
- Mises Institute
- New Zealand
- Ordo Journal
- quantitative easing
- Reinfeldt Government
- Stefan Löfven
- Stefan Lövfen
- sub-prime mortgage crisis
- subprime mortgage crisis
- Swedish Ordoliberalism
- Swedish Peace and Arbitration Society
- Symbolic Interactionism
- the European Empire
- The Really Big Tradeoff
- Thomas Theorem
- Tom R. Burns
- Treaty of Trianon
- Unitec Institute of Technology
- used cars
- Washington's Blog
- Wilhelm Röpke
- World Economic Forum
- 10,443 hits