Negative Interest Rates And The War On Cash (Part 2)

However, even without a specific crisis to draw on as a justification, many other countries have also restricted the use of cash for purchases:

One way they are waging the War on Cash is to lower the threshold at which reporting a cash transaction is mandatory or at which paying in cash is simply illegal. In just the last few years.

  • Italy made cash transactions over €1,000 illegal;
  • Switzerland has proposed banning cash payments in excess of 100,000 francs;
  • Russia banned cash transactions over $10,000;
  • Spain banned cash transactions over €2,500;
  • Mexico made cash payments of more than 200,000 pesos illegal;
  • Uruguay banned cash transactions over $5,000

Other restrictions on the use of cash can be more subtle, but can have far-reaching effects, especially if the ideas catch on and are widely applied:

The State of Louisiana banned “secondhand dealers” from making more than one cash transaction per week. The term has a broad definition and includes Goodwill stores, specialty stores that sell collectibles like baseball cards, flea markets, garage sales and so on. Anyone deemed a “secondhand dealer” is forbidden to accept cash as payment. They are allowed to take only electronic means of payment or a check, and they must collect the name and other information about each customer and send it to the local police department electronically every day.

The increasing application of de facto capital controls, when combined with the prevailing low interest rates, already convince many to hold cash. The possibility of negative rates would greatly increase the likelihood. We are already in an environment of rapidly declining trust, and limited access to what we still perceive as our own funds only accelerates the process in a self-reinforcing feedback loop. More withdrawals lead to more controls, which increase fear and decrease trust, which leads to more withdrawals. This obviously undermines the perceived power of monetary policy to stimulate the economy, hence the escape route is already quietly closing.

In a deflationary spiral, where the money supply is crashing, very little money is in circulation and prices are consequently falling almost across the board, possessing purchasing power provides for the freedom to pursue opportunities as they present themselves, and to avoid being backed into a corner. The purchasing power of cash increases during deflation, even as electronic purchasing power evaporates. Hence cash represents freedom of action at a time when that will be the rarest of ‘commodities’.

Governments greatly dislike cash, and increasingly treat its use, or the desire to hold it, especially in large denominations, with great suspicion:

Why would a central bank want to eliminate cash? For the same reason as you want to flatten interest rates to zero: to force people to spend or invest their money in the risky activities that revive growth, rather than hoarding it in the safest place. Calls for the eradication of cash have been bolstered by evidence that high-value notes play a major role in crime, terrorism and tax evasion. In a study for the Harvard Business School last week, former bank boss Peter Sands called for global elimination of the high-value note.

Britain’s “monkey” — the £50 — is low-value compared with its foreign-currency equivalents, and constitutes a small proportion of the cash in circulation. By contrast, Japan’s ¥10,000 note (worth roughly £60) makes up a startling 92% of all cash in circulation; the Swiss 1,000-franc note (worth around £700) likewise. Sands wants an end to these notes plus the $100 bill, and the €500 note – known in underworld circles as the “Bin Laden”.

Cash is largely anonymous, untraceable and uncontrollable, hence it makes central authorities, in a system increasingly requiring total buy-in in order to function, extremely uncomfortable. They regard there being no legitimate reason to own more than a small amount of it in physical form, as its ownership or use raises the spectre of tax evasion or other illegal activities:

The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?

The assumption on the part of government today is that possession of large amounts of cash is indicative of involvement in illegal activity. If you’re traveling with thousands of dollars in cash and get pulled over by the police, don’t be surprised when your money gets seized as “suspicious.” And if you want your money back, prepare to get into a long, drawn-out court case requiring you to prove that you came by that money legitimately, just because the courts have decided that carrying or using large amounts of cash is reasonable suspicion that you are engaging in illegal activity….

….Centuries-old legal protections have been turned on their head in the war on cash. Guilt is assumed, while the victims of the government’s depredations have to prove their innocence….Those fortunate enough to keep their cash away from the prying hands of government officials find it increasingly difficult to use for both business and personal purposes, as wads of cash always arouse suspicion of drug dealing or other black market activity. And so cash continues to be marginalized and pushed to the fringes.

Despite the supposed connection between crime and the holding of physical cash, the places where people are most inclined (and able) to store cash do not conform to the stereotype at all:

Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy. The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money. With economic growth an anemic 1%, many Swiss withdrew cash from the bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia’s GDP.

Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination ¥10,000 notes rose 6.2% last year, the largest jump since 2002. But 10,000 Yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves. Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week.

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Gary Anderson 4 years ago Contributor's comment

This of course, is a brilliantly written article that infuriates me. The statists want complete control. They are not yet in the majority, but we are heading their direction. This article is a must read that should be shared among the young people of this nation.