You go away for one single week to the Scottish Highlands to get away from it all and what happens? A Harvard economist comes out guns blazing against cash and the drug dealing perverts who use it.
Then the stockmarket Germans start giving up on banks altogether and became connoisseurs of impregnable metal fortresses. And the Italians give out culture vouchers to unemployed teenagers to stimulate the economy and prevent a demographic disaster/cultural catastrophe.
Yes. All is proceeding as we have foreseen. The war on cash is really a platform for a broader war on privacy and freedom. I’ll come back to that in short order.
First, though, is there anything cooking in markets? Not really. All establishment eyes were on that ridiculous central bank gathering in the beautiful mountains of Wyoming. Words were said. Suggestions were made that US interest rates could go up soon. Threats for something more shocking were issued.
It was all a bit of a “nothingburger” in the end. The FTSE 100 is trundling along, looking for some data to drive it. Don’t expect much of anything until Friday. That’s when the big US non-farm payroll report comes out. What about here in the UK though?
New prime minister Theresa May makes her debut on the big international stage next week. That’s when G20 leaders meet in China. Will Brexit come up? Will the PM use that venue to announce her plans to trigger Article 50 of the Lisbon Treaty? Or is the machinery of the public service still gearing up in the background, waiting for early next year to kick into motion?
Let’s table that until the upcoming Bank of England meeting on 15 September. Both could be drivers of the pound in the short term. But let’s look longer term. Let’s talk about a world where paper money as you know it no longer exists. And neither does privacy nor freedom.
The first stage of the transition
The real reason the financial authoritarians want to phase out cash is that it prevents the effectiveness of their precious monetary policy, which has, by the way, been a dog’s breakfast. Savers hoard cash at home when banks begin charging interest on deposits. A policy designed to create inflation and spending leads to more fear, less spending, and more trouble for banks as deposits flee.
But Ken Rogoff from Harvard, author of the new book The Curse of Cash, says there are three other good reasons to ban large bills and eventually phase out cash. You reduce crime, because criminals love cash. You reduce tax evasion, because tax dodgers love cash. And you – wait for it – reduce illegal immigration – because without cash you can’t employ and pay people outside the tax and wage system.
Rogoff advanced all these arguments in a piece published last week in The Wall Street Journal called “The Sinister Side of Cash”. I’m going to quote from it here so you’ll see that neither Tim Price nor I are making it up when we tell you that the authorities are coming for your cash. You can argue about the speed and severity of the grab. But you can’t dispute the motivation and the intention. “Paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems,” he writes. “Getting rid of most of it—that is, moving to a society where cash is used less frequently and mainly for small transactions—could be a big help.”
If you take away one single thing from today’s letter, remember the real motivation about the war on cash. It’s not about reducing crime, drugs, or terrorism. It’s not about more convenient payment methods driven by technology. And it’s certainly not changing the incentives for illegal immigration from poor countries to rich countries.
It’s about control. Rogoff mentions it right at the beginning. But it’s almost like he made a faux pas. He wants to get rid of cash so central planners can more effectively control your financial behaviour. Your option to own and use physical cash gets in the way of “effective monetary policy”. Cash must go.
Rogoff gets back to it later in his essay. And here I’ll let him put it in his own words. Emphasis added, however, is mine:
The tax and crime angle is reason enough to shred the world’s mountains of paper currency. There is, however, a very different and perhaps surprising rationale, having to do with the ability of central bankers to deal with financial crises and deep recessions. Why? Because monetary policy remains much the preferred first line of defence in dealing with recessions.
Cutting interest rated delivers quick and effective stimulus by giving consumers and businesses an incentive to borrow more. It also drives up the price of stocks and homes, which makes people feel wealthier and induces them to spend more. Counter-cyclical monetary policy has a long-established record, while political constraints will always interfere with timely and effective fiscal stimulus….
In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing. Unfortunately, the existence of cash gums up the works. If you are a saver, you will simply withdraw your funds, turning them into cash, rather than watch them shrink too rapidly. Enormous sums might be withdrawn to avoid these losses, which could make it difficult for banks to make loans—thus defeating the whole purpose of the policy.
Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession. People could still hoard small bills, but the costs would likely be prohibitive for any realistic negative interest rate. If necessary, central banks could also slap temporary fees on any large withdrawals and deposits of paper currency.
There is so much wrong with that, that it’s hard to know where to begin. Perhaps by vomiting or voiding my bowels. But, more seriously (and less viscerally) reading the above reminds me of why it’s so necessary to punch back twice as hard when you encounter dangerous ideas. Dangerous ideas attached to real agendas.
First off, central banks don’t create prosperity or growth. Neither does government policy. Ever.
The government only has one crude means of directing economic activity: by taking from one person and giving to another. The rest of it – stimulating growth , the wealth effect, encouraging borrowing – is pure and unadulterated claptrap.
Human beings and human action create real wealth. Not governments. Not policy. Firmly ensconced in their academic ivory tours, central bankers and the economists who enable them have gotten it exactly backwards. They believe that they create wealth by telling you what you ought to do.
Even worse, the problem they’re trying to solve is one largely of their own creation – prolonged and severe recessions. Recessions in the real economy are perfectly natural and even healthy. The recession is the cure to the misallocation of capital – the bad investment decisions and poor risk taking by investors, capitalists, and bankers.
In a healthy free-market system, failure separates fools from their money. In the system we have, failure is subsidised with low interest rates and bail outs. That’s not capitalism. That’s centrally planned financial cronyism. That’s what we have today.
It’s not my intention to vilify Rogoff personally. But it’s a profound error about where wealth comes from. And it’s a draconian response to correct a problem created by central planning itself. If free people engaging in private transactions with money they can possess are getting in the way of your growth-at-all-costs monetary policy, destroy their freedom and take away their cash.
That’s what all this comes down to. It’s why Tim started his petition to end QE and establish a new mandate for the Bank of England. It’s why we’re launching Agora Economics here in London – to provide a consistent, rational, and forceful rebuttal of what passes for conventional economic wisdom. And it’s why we’ve warned you about the day your cash could expire.
I’ll talk to you about the Germans and their safes, and the Italians and their cash-like culture vouchers. The clues are stacking up. So is the need to do something concrete about it while you still can.