My post, “Whither the $100 Bill?,” was well-timed.
The Wednesday Wall Street Journal had a lengthy story spinning off of Larry Summers’s proposal to eliminate the $100 bill (and the €100 note too), “Is Now the Time to Kill the $100 Bill?” by John Carney and Joshua Zumbrun. It followed that up with an editorial on Thursday, “The Political War on Cash.” (I’d link to both but they are gated behind the WSJ pay wall.)
Both hit the points that I made and dig deeper into the negative interest rate angle.
A money quote from the article: “Many economists believe the ability of central banks to implement negative interest rate policies is hampered by the ability to hold cash.” Much of this impetus to do away with cash is centered on turning an unusual financial position, negative interest rates, into some kind of permanent situation. The article continues, “Even in places like Switzerland, where rates have gone negative on government bonds, banks don’t pass on negative rates to retail depositors for fear depositors will withdraw their cash.”
Why this sudden infatuation with negative interest rates and enabling them? It seems to be pretty much centered on central banks. From there it filters downward to retail banks and certain investors. Central bankers would love to enable a negative interest rate regime, make it an acceptable alternative and then a permanent scenario.
Imagine, if you are a banker, you get people to pay YOU to hold their money rather than you pay them (the traditional interest rate relationship). And if you can eliminate the depositor’s alternative, stuffing their cash under a mattress by eliminating most cash, essentially forcing them to keep their money in banks, you’ll be assured of guaranteed income.
To give you the reverse, imagine forcing banks to pay you to take out a loan. The more you take the more they pay you each month, rather than you paying them an interest rate. Wouldn’t that be grand? Absurd, but grand. It’d be better than successfully puling off the carry trade. Well, that’s how a negative interest rate regime works in the opposite direction (i.e. favorable to you).
The article also notes that most $100 bills are not involved in criminal conduct. It needs to be understood that in the three decades since the fall of communism, many countries have essentially dollarized their economies. The dollar is the lingua franca of the world economy. Even third world America-hating hellholes have to use the dollar for international trade. This is even more important since tradable high-value commodities, notably gold and platinum, have been undermined by essentially valueless financial paper instruments. This revolution has only increased since the troubles of 2008.
The crush on oil has also exacerbated the effect lately for several countries as well (though the fall in oil prices is a legitimate supply-demand equation not a financial shenanigan).
When physical items lose their inherent value to electronic blips and paper instruments such as futures, puts, calls, options, swaps, etc., the atmosphere is optimal for things like negative interest rates.
The article also summarizes the tax angles on the war on cash. Taxing authorities throughout the world are as dogged as Inspector Javert. They want your money! But make no mistake, the heart of this movement is really about control. All these points are merely tentacles of that octopus.
That is what the editorial focuses upon. It says, “The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them.”
It notes that in Italy and France it is illegal to use cash for any purchase over €1,000 and British businessmen have to register with tax authorities if they might handle cash transactions greater than €15,000.
The point, as if it needs to be made again, “The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new world of negative interest rates.”
Money quote: “By all means people should be able to go cashless if they like. But it’s hard to avoid the conclusion that the politicians want to bar cash as one more infringement on economic liberty. They may go after the big bills now, but does anyone think they’d stop there? Why wouldn’t they eventually ban all cash transactions much as they banned gold and silver as mediums of exchange?”
Politicians seek to control money and people. If your money is held hostage in a bank, banks under the thumb of governmental “regulators,” then you are controlled. But if you have your money in your hands, you can maintain a high degree of independence. Modern governments do not like that.