I wrote yesterday that governments want to eliminate cash in order to make it easier to squeeze more money from taxpayers.
But that’s not the only reason why politicians are interested in banning paper money and coins.
They also are worried that paper money inhibits the government’s ability to “stimulate” the economy with artificially low interest rates. Simply stated, they’ve already pushed interest rates close to zero and haven’t gotten the desired effect of more growth, so the thinking in official circles is that if you could implement negative interest rates, people could be pushed to be good little Keynesians because any money they have in their accounts would be losing value.
I’m not joking.
Here’s some of what Kenneth Rogoff, a professor at Harvard and a former economist at the International Monetary Fund, wrote for the U.K.-based Financial Times.
Getting rid of physical currency and replacing it with electronic money 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.
And here are some passages from an editorial that also was published in the FT.
…authorities would do well to consider the arguments for phasing out their use as another “barbarous relic”…even a little physical currency can cause a lot of distortion to the economic system. The existence of cash — a bearer instrument with a zero interest rate — limits central banks’ ability to stimulate a depressed economy.
Meanwhile, Bloomberg reports that the Willem Buiter of Citi (the same guy who endorsed military attacks on low-tax jurisdictions) supports the elimination of cash.
Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. …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 solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether.
So are they right? Should cash be abolished so central bankers and governments have more power to manipulate the economy?
There’s a lot of opposition from very sensible people, particularly in the United Kingdom where the idea of banning cash is viewed as a more serious threat.
Allister Heath of the U.K.-based Telegraph worries that governments would engage in more mischief if a nation got rid of cash.
Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates… Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. …all spending would become subject to the surveillance state, dramatically eroding individual liberty. …Money is already too loose – turning on the taps would merely further fuel bubbles at home and abroad.
Also writing for the Telegraph, Matthew Lynn expresses reservations about this trend.
As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy? …a banknote is an incredibly efficient way to handle small transactions. It is costless, immediate, flexible, no one ever needs a password, it can’t be hacked, and the system doesn’t ever crash. More importantly, cash is about freedom. There are surely limits to the control over society we wish to hand over to governments and central banks? You don’t need to be a fully paid-up libertarian to question whether…we really want the banks and the state to know every single detail of what we are spending our money on and where. It is easy to surrender that freedom – but it will be a lot harder to get back.
Merryn Somerset Webb, a business writer from the U.K., is properly concerned about the economic implications of a society with no cash.
…at the beginning of the financial crisis, there was much talk about financial repression — the ways in which policymakers would seek to control the use of our money to deal with out-of-control public debt. …We’ve seen capital controls in the periphery of the eurozone… Interest rates everywhere have been at or below inflation for seven years — and negative interest rates are now snaking their nasty way around Europe… This makes debt interest cheap for governments…and it and forces once-prudent savers to move their money into the kind of risky assets that are supposed to drive growth (and tax receipts).
Amen. She’s right that low interest rates are good news for governments and not very good news for people in the productive sector.
Last but not least, Chris Giles wrote a column for the FT and made one final point that is very much worth sharing.
Mr Haldane’s proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest.
Especially since the central bankers are probably undermining long-run economic prosperity with short-run tinkering.
Moreover, the option to engage in Keynesian monetary policy also gives politicians an excuse to avoid the reforms that actually would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory policy.
Let’s conclude by noting that maybe the right approach isn’t to give politicians and central bankers more control over money, but rather to reduce government’s control over money. That’s one of the arguments I made in this video I narrated for the Center for Freedom and Prosperity.
P.S. By the way, Ryan McKaken at the Mises Institute identifies a third reason why politicians would prefer a cash-free society.
…the elimination of physical cash makes it easier for the state to keep track of private persons, and it assists central banks in efforts to punish saving and expand the money supply by implementing negative interest rate schemes. A third advantage of the elimination of physical cash would be to more easily control people and potential dissidents through the freezing of their bank accounts.
Excellent point. We’ve already seen how asset forfeiture allows governments to steal people’s bank accounts without any conviction of wrongdoing. Imagine the damage politicians and bureaucrats could do if they had even more control over our money.
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from zero hedge:
“So, when the dust has settled who ultimately benefits by this war on cash – government and the central banks, pure and simple.”
“Norway’s Biggest Bank Demands Cash Ban”
http://www.zerohedge.com/news/2016-01-23/norways-biggest-bank-demands-cash-ban
btw…
http://www.gatestoneinstitute.org/7214/electro-magnetic-pulse-emp
by Peter Huessy
“Peter Huessy is President of GeoStrategic Analysis of Potomac, Maryland and Senior Defense Consultant to the Mitchell Institute of the Air Force Association and a guest lecture at the US Naval Academy on nuclear deterrent policy and the founder of the 36 year AFA-NDIA-ROA Congressional Breakfast Seminar Series on Nuclear Deterrence, Missile Defense, Arms Control, Proliferation and Defense Policy.”
“◾The recent North Korean nuclear and the Iranian ballistic missile tests are serious deadly threats to the United States. North Korea’s latest bomb test is being widely dismissed by “experts” because the apparent yield is around 10 kilotons or less – which just so happens to be exactly the right amount for an electromagnetic pulse (EMP) explosion.
◾An EMP attack on the U.S. would leave the country with no electricity, no communications, no transportation, no fuel, no food, and no running water.”
no electricity = no electronic currency… {not there would be anything to buy with cash in the event of an EMP attack….} estimates are that it would take up to 18 months to restore the power grid…
http://www.gatestoneinstitute.org/7214/electro-magnetic-pulse-emp
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Having a government institution issue “cash” is a government intervention in a free market economy. Getting central banks out of the hand-to-hand currency business is a market reform.
By taking off the blinders, and realizing that when credit demand is very low, it is likely that the supply of currency by the private sector would likely be zero, it becomes pretty obvious that having the government issue currency in that circumstance is a subsidy to those who want to save by lending short and safe.
[…] This is a guest post by Dan Mitchell. […]
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The world governments have lost their freaking minds. A cashless society is the last step before the mark of the beast. If the masses will not embrace the cashless system voluntarily it will be forced upon them by a financial crash not seen in the history of the world. Honest money is the root of free men. Fiat money is the root of all evil men.
The Totalitarian Democracy advances step by step.
This has nothing to do with economy, It has to do with power.
what if the new electronic currency could only be used to make government approved purchases? no gambling… or porn… no firearms… no ammunition… only items deemed of value to a progressive politically correct society could be purchased using the new system… an extra tax could be automatically levied on items that the government deemed inappropriate… jumbo sodas… for example… I would imagine there would be a lock-out option as well… perhaps activated when a person was found to be on a government watch list…. an enemy of the state could be prevented from using the system to make any purchases whatsoever.. and the lock out could be bio-metrically activated… financial institutions would of course collect the appropriate fees to monitor and oversee these purchases and transmit the information directly to the federal government for review… consumers would gladly pay these fees for the convenience and security of such a well conceived… efficient… and universal system… after all… if we can’t trust the government to act in our best interests with our money………………………………….. who can we trust?
Eliminating cash would certainly provoke a flight in alternate stores of value such as Bitcoins, krugerrands (do they still exist) etc.
[…] MORE FROM DAN MITCHELL on the war against cash. […]
Our government says that it wants to upend an entire system of banking and credit to nudge (ok, force) people to buy more stuff now. The theory is that this extra money will run around creating extra demand, increasing production (GDP), and increasing prosperity.
People are clearly not sitting on piles of money, except money saved for retirement, to meet the sensible fear of losing jobs, and in the hands of the 5%. Does government want everyone to spend down their retirement and emergency savings? Really? People are saving too much (hah!) so we are all going to die?
These bankers are sensible men. They don’t expect people to throw more parties and go on more vacations. They expect people to bear a new form of tax, the 2% to 10% (or beyond) that negative interest rates would take from them and transfer to the government, reducing the real resources needed to pay back the government debt. This is beautiful, a yearly wealth tax on the people selfish enough to hold any cash. That is everyone with any resources to tax.
I say bring it on! There would be a line item at the bottom of every bank statement showing a negative number, the amount of savings taken by the government. I like this more than inflation, a taxing scheme which has the advantage of being silent.
I would run TV ads congratulating the Democrats and economists for bringing this delight to the people. Soon, there would be no Democrats elected or economists that anyone would listen to.
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Engage in delayed gratification by lending your money to the government, … …so that the government, in turn, can serve the people by upholding the promises made to voter lemmings in the last election.
Your reward for this delayed gratification? Strongly negative real interest rates! I.e. Not only you get nothing in return for delayed gratification, you actually get eroding purchasing power.
Well, you know, life may be finite, but I’m going to wait ten years on buying that Porsche, on sending my daughter to college, on buying that house on the lake, on traveling the world, on cutting down on work so I can go fishing, because …because … I want to lend my money at a negative real interest rate, so I can serve the public.
Once savers realize that this negative interest rate rate is not simply a foolish temporary Keynesian trick but actually the new intended permanent normal, we’re in for a new and even larger economic correction. Correction? But why? What is the distortion?
The distortion is the majoritarian voter-lemming’s delusion that developed world people will work surrendering a majority of their vitality to serve the community,… distant others in other neighborhoods, other cities, other states, other countries. AND will do so with enough enthusiasm to outcompete the rest of the world and thus keep developed world voter-lemmings at the top of the international prosperity scale.
As a pedestrian economist, isn’t planned, or socially accepted, inflation of 2 to 4 percent, a ripoff by the banking system, and the government of savers? Another thing: If LDCs and the underground economy use printed dollars to do business outside national banking systems, is the U.S. treasury getting free loans based on that float in that dark economy? Third, is government that bad that we are spooked over their presumed use and knowledge of our electronic financial activity? Isn’t that hyper-Snowdemism?
Reblogged this on Scoop Feed.