Guest Post by Mark Nestmann
It might sound like a conspiracy theory spun by right-wing crazies. But judging by the increasing desperation of governments to reboot the world economy, it just might happen.
“It” is the recall or confiscation of cash, i.e., dollars, euros, pounds, etc., in physical form. And a key justification that those calling for this radical measure cite is that it reinforces the ability of central banks to impose negative interest rates.
Negative rates mean that lenders literally pay businesses and consumers to borrow money. They also penalize savers for hoarding it. The Danish and Swiss national banks have gone the farthest into negative territory, with interest rates of -0.75%. That means €100,000 in a euro-denominated account in Switzerland would be worth only €99,250 after one year. While these rates apply only to “excess reserves” banks maintain at the central bank, nothing stops banks from requiring depositors to share the pain.
But that’s not enough, according to some economists. Citicorp’s chief economist, a technocrat named Willem Buiter, thinks the US needs much lower interest rates to push the economy out of the doldrums. He thinks negative interest rates around -6% would do the job. But there’s one condition: For his plan to work, he says, the government must abolish cash.
It’s easy to understand why Buiter might not have warm and fuzzy thoughts about cash. After all, if your bank is taking 6% from your savings, $100 in your account would be worth only $94 at the end of one year, $88.36 after two years, and $83.06 after three years. On the other hand, a $100 bill with Ben Franklin’s picture on it would still be worth… well, $100. Buiter understands that as long as cash exists, no one will voluntarily keep their savings in accounts with negative interest rates.
And Buiter isn’t the only one pointing out that outlawing cash could stimulate the economy, especially in a crisis. In a recent article, Michael Pento, president and founder of Pento Portfolio Strategies, observed:
“Strategies such as pushing interest rates into negative territory, outlawing cash, and sending electronic credits directly into private bank accounts may appear more palatable in the midst of market distress.” (emphasis added)
And the Fed seems to be catching on to the prospect of negative interest rates. At the latest meeting of the Fed’s Open Market Committee, at least one member suggested that negative interest rates might be worth considering.
As for abolishing cash altogether, proposals to do so are much further advanced outside the US. Italy and France have banned allcash transactions over €1,000. Spain has banned cash transactions exceeding €2,500. Similar restrictions are in place in Belgium, Bulgaria, Greece, Mexico, Russia, Uruguay, and other countries.
In the US, cash transaction limits don’t yet exist, but de facto limits already are enforced. I’ve received reports from several clients of interrogations by banks if they withdraw more than a few thousand dollars in cash from their accounts. And depositing or withdrawing more than $10,000 in cash from an account requires that banks (as well as other “financial institutions”) file a Currency Transaction Report with the IRS. “Structuring” a single cash transaction into multiple transactions to avoid this requirement is a crime. And if the circumstances surrounding a transaction above $5,000 are “suspicious,” financial institutions must file a Suspicious Activity Report.
Federal, state, and local law enforcement agencies consider cash holdings inherently suspicious. Under the Alice-in-Wonderland legal process of civil forfeiture, they can seize your cash if they believe that it’s somehow connected to a crime. That’s easy, since nearly 100% of cash circulating today contains tiny concentrations of narcotics residues – primarily cocaine. All police need to do is bring in a drug-sniffing dog to inspect the cash. If the dog alerts, police seize the cash. And under civil forfeiture rules, it’s up to you to prove that the cash has a legitimate origin.
If the government decides to restrict cash transactions or outlaw cash altogether, how would they do it? Actually, efforts along this line are already well under way. Many airlines accept only credit or debit cards for inflight purchases. Louisiana forbids cash for some secondhand sales of scrap metal. A proposal in Wisconsin would ban cash payments for treatment at pain clinics.
But for negative interest rates to really take hold, the Fed will need to step in. One proposal is for cash to be recalled in a very short period – as little as 10 days. Anyone turning in more than a relatively low threshold – perhaps as little as $1,000 – would be required to prove that the cash was generated legally and that all taxes on the income had been paid. Otherwise, 30% or more of the cash would be confiscated.
It’s easy to be frightened by these proposals. But if governments think they can force us to accept negative interest rates on our savings by abolishing cash, they need to think again. It’s preposterous to assume that savers will passively accept outright confiscation of their assets via negative interest rates or a ban on cash.
Instead, people will simply revert to other stores of value. The Yapese people who inhabit some of the Caroline Islands in the Pacific Ocean, for instance, once used giant stone disks as money. Some of the disks were as large as 13 feet in diameter.
Other forms of “currency” are more convenient. For instance, at the end of World War II, a cigarette economy developed in occupied Germany. Cash was scarce, so ordinary Germans adapted by exchanging cigarettes for food and other necessities.
Indeed, barter of all kinds flourishes when money is scarce. It will flourish even more if governments make a serious effort to abolish cash. And of course, ending cash will only encourage the growth of digital currencies such as Bitcoin.
Finally, I believe that there will be significant movements of cash into precious metals – especially gold. If you don’t already own some gold in fully allocated form, now would be a good time to consider buying some.
And toilet paper.
When we started learning more about the financial crisis in 2008 and meeting with “like-minded” folks who were interested in building a body of knowledge that would help all of us in the event of a financial reset, we became aware of things we would NOT want to be without.
I decided that I really didn’t want to do without toilet paper and probably, neither would other ladies. So, I stockpiled TP as if it were going out of style. The spare room in our old house was full of huge packages of TP that I bought on sale. We hauled most of it with us, in spite of my husband’s annoyance at the space it took up in the UHaul. It made wonderful package cushioning for breakable items, so that was a PLUS.
Anyway, I truly believe that toilet paper will be extremely barter worthy.
My two cents.
Maggie
You aren’t shittin.
Maggie a post like that puts a smile on my face that can’t be wiped off .
Don’t forget cases of bottled hard spirits…… that’s a good trade too
The fact that cashless societies are even being discussed shows how bad the situation is. These are the moves of the power players in charge of the last throws of fiat currency. The big question is how long can they hang on.
@Fiatman60… I make regular runs to the Class VI store at the Army post near my son’s university. (The locals call it Fort Lostinthewoods, but it is Ft. Leonardwood.) I get the good stuff on sale and the cheap stuff in cases to take advantage of the discount on liquor sold in cases on base. Since there is no tax on the base, I save a lot of dollars and turn a lot more dollars into durable goods.
I told Nick toilet paper and booze will get us through anything one way or another.
And ammo. So I guess the “three B’s” at my house are Bullets, Booze and Buttwipes. (and a Bible for something to read.)
I see the confiscation of cash a bridge to far for our rulers…sure, they got the FSA on EBT cards, but there are still a LOT of people who use cash for a lot of things. The brain-dead US public will swallow a whole lot, but I don’t think even they would allow this.
Even if they would however, there is one overlooked reason why I don’t see this happening any time soon, and that is that very powerful people (these same rulers) use and need cash themselves all the time. If you are a Congresscritter or CEO or Lobbyist or Banker, how the fuck would you pay for hookers, blow, hits, etc.–everything that must be kept of the offical books? It is a two-edged sword and I think they will see that.
Gee, I cant wait for my implanted chip…
Maggie is long paper wealth….
white, fluffy gold.
@ DRUD…Good point about the Congresscritters and good pun.
It’s funny how the dollar has lost 99% of its purchasing power over the last 100 years. Yet we never had negative rates. So tell me again why you need negative rates?
So push everyone to consume 100% of their discretionary income . Ok sounds good . But what happens when everyone is spending 100% and that is still not enough to prop up the globull economy? These masters of finance do not understand that you CANNOT have infinite growth in a finite world .
it just gets worse every day doesn’t it?
Yep growth without savings or investment, clearly not possible other than in nominal, not real, terms. None of our academic economists actually understands people or how an economy actually works. They are prisoners of their models.
I am also going with booze and bullets, if Armageddon does not come at least you can have a lot of fun with them.
@ David… please don’t forget the TP.
Eliminating cash will be the canary in the coal mine