The curse of cash

More alarming news on two fronts today. First, there is movement on the Japanese front. Bonds have sold off and something big may be in the offing. Then, an intellectual defence for the “phasing out” of cash has been published by an influential Harvard economist. It’s happening even faster than I thought.

But first a correction from a note from yesterday. The note said that EU banking laws that went into effect on 1 January (the Bank Recovery and Resolution Directive, or BRRD) allows “bail-ins” on depositors with more than £100,000. Let me be absolutely clear about what that means.

The Financial Services Compensation Scheme (FSCS) is the UK’s way of providing deposit insurance to British savers who have accounts with British financial institutions that have a banking licence. In the event of a banking crisis, the new EU banking law covers depositors up to €100,000 (not pounds).

In the UK, because of the strength of the pound (at the time), the level of cover was dropped from £85,000 per person (per banking license) to £75,000. It’s £150,000 per couple (per banking license). The Bank of England would normally review the level every five years under its agreement with the EU. But Brexit allows the UK and the Bank of England to change the level of compensation higher or lower as it sees fit.

My point yesterday is the same: deposit insurance doesn’t prevent “bail-ins” on any cash balance above the insured amount, as far as I can tell. And my larger point was the same: if and when there’s another banking crisis, it won’t be the bankers that pay. It will be the savers. Same as it ever was.

Widowmaker on the ropes?

Now to the rumblings from Japan. Remember last week when I told you that the Bank of Japan had admitted defeat in the money wars? I showed you that the “comprehensive review” of the bank’s QE programme could signal the end of the programme and the beginning of a new assault on cash. There’s evidence today that it’s already begun happening.

First, Bloomberg reports that “Benchmark sovereign notes in Japan headed for their biggest loss in three years on speculation the central bank will amend its unprecedented debt-purchase plan as soon as September.” That’s right people. Japanese bond prices fell and yields rose!

Mind you, yields on Japanese 1, 2, 5 and 10-year bonds are all still negative. But is there an earthquake in the Japanese bond market? Do traders now think they can’t make money front-running the Bank of Japan? And if the market is no longer convinced the BoJ can or will buy bonds, is there a monumental shift in capital allocation coming up from Japan?

Tim Price wrote about this last week. Betting against Japanese government bonds has been such an attractive and losing trade for so long it’s been dubbed “the widowmaker.” Time after time, analyst after analyst has looked at Japan’s public debt figures, demography, and monetary policy and concluded that bond yields couldn’t go much lower and bond prices couldn’t go much higher. Tim wrote the following (emphasis added is his):

But if Japan fails in its reflationary efforts, bond investors around the world may start to collectively lose faith in the now deeply discredited efforts of central banks to boost their economies. The Emperor will be revealed, once and for all, as having paraded through the streets entirely naked.

And then all hell could break loose. Tim reckons that within Japan’s capital markets, bond money could flow into equities, which he reckons are under-owned by Japanese institutions (based on historic asset allocation models). And the banks?

Charlie Morris has shown The Fleet Street Letter readers that bank shares correlate with rising bond yields. He reckons the smart move is to own banks if you want to hedge your exposure to bonds. The key point is that banks make money when inflation rises. Bonds, obviously do not. Further, a flat yield curve is bad for lending (and banks). A steeper yield curve – where long-term bond yields finally rise again – ought to be better for bank lending and profits.

Of course the only reason we’re talking about a potential shift in asset allocation in Japan and a renaissance in UK and US bank stocks – or a bear market in bonds – is the point I made to you all last week: the monetary endgame has begun. Japan has reached the limits of QE. Something else is coming next. What something?

The “phasing out” of paper money

If you want to fundamentally transform the economy so governments have more control over private economic behaviour, you have to get rid of cash. Cash is anonymous. Cash can be hoarded. Cash is harder to track. Cash must be destroyed.

But governments and central banks know they can’t just force you to turn in your cash for something new. Mind you, the US government ordered the confiscation of gold on 5 April 1933 with Executive Order 6102. There is ample precedent that what you think is yours can be taken from you quickly and without legal recourse.

Yet as Tim has argued in his latest remarks, the financial authorities are likely to be more subtle about replacing cash. I urge you to take the argument seriously while you still have time to do something about it. And if you think I’m exaggerating, then pre-order a copy of Harvard economist Kenneth Rogoff’s new book, The Curse of Cash. According to Rogoff’s website (emphasis added is mine):

In The Curse of Cash, Kenneth Rogoff, one of the world’s leading economists, makes a persuasive and fascinating case for an idea that until recently would have seemed outlandish: getting rid of most paper money. In the aftermath of the recent financial crisis, central banks have been unable to stimulate growth and inflation by cutting interest rates significantly below zero for fear that it would drive investors to abandon treasury bills and stockpile cash. This constraint has paralyzed monetary policy in virtually every advanced economy, and is likely to be a recurring problem in the future. The Curse of Cash offers a plan for phasing out most paper money–while leaving small-denomination bills and coins in circulation indefinitely–and addresses the issues the transition will pose, ranging from fears about privacy and price stability to the need to provide subsidized debit cards for the poor.

Do you believe me now? Like the Bank of England paper about central bank issued digital currencies, the financial elites are all lining up behind the idea that cash should be abolished. It gets in the way of them doing what they want to do. And what they want to do is spend more money and take financial independence away from ordinary citizens.

You don’t have to take my word for it. Rogoff says it himself. He argues that phasing out cash, “will allow central banks to engage in much more aggressive stimulus with unfettered and open-ended negative interest rate policies… phasing out cash is perhaps the most elegant and durable solution.”

For me, those are disturbing sentiments: “aggressive stimulus”, “unfettered and open-ended negative interest rates policies”, a “durable solution” the problem of cash and cash hoarding. These are the phrases used by someone who is at war with you and your financial independence.

In normal times, you’d expect the public to react with outrage to these kind of sentiments. But these are not normal times. For one, many people will buy the Rogoff line that cash is for criminals, drug dealers, and terrorists. They will argue that cash is inconvenient and technology has made it irrelevant.

But the more worrying point is that by now, the financial authorities simply don’t care what you think. Brexit revealed the contempt with which elites view the political rights of ordinary people. If they have such contempt for long-held and deeply-valued political rights, will they think twice about stripping you of your economic liberty?

Dan Denning's Signature

Category: Central Banks

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