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

In Germany too, negative interest rates are considered intolerable, banks are increasingly being seen as risky prospects, and physical cash under one’s own control is coming to be seen as an essential part of a forward-thinking financial strategy:

First it was the news that Raiffeisen Gmund am Tegernsee, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, with a population 5,767, finally gave in to the ECB’s monetary repression, and announced it’ll start charging retail customers to hold their cash. Then, just last week, Deutsche Bank’s CEO came about as close to shouting fire in a crowded negative rate theater, when, in a Handelsblatt Op-Ed, he warned of “fatal consequences” for savers in Germany and Europe — to be sure, being the CEO of the world’s most systemically risky bank did not help his cause.

That was the last straw, and having been patient long enough, the German public has started to move. According to the WSJ, German savers are leaving the “security of savings banks” for what many now consider an even safer place to park their cash: home safes. We wondered how many “fatal” warnings from the CEO of DB it would take, before this shift would finally take place. As it turns out, one was enough….

….“It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout. Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”….

….Unlike their more “hip” Scandinavian peers, roughly 80% of German retail transactions are in cash, almost double the 46% rate of cash use in the U.S., according to a 2014 Bundesbank survey….Germany’s love of cash is driven largely by its anonymity. One legacy of the Nazis and East Germany’s Stasi secret police is a fear of government snooping, and many Germans are spooked by proposals of banning cash transactions that exceed €5,000. Many Germans think the ECB’s plan to phase out the €500 bill is only the beginning of getting rid of cash altogether. And they are absolutely right; we can only wish more Americans showed the same foresight as the ordinary German….

….Until that moment, however, as a final reminder, in a fractional reserve banking system, only the first ten or so percent of those who “run” to the bank to obtain possession of their physical cash and park it in the safe will succeed. Everyone else, our condolences.

The internal stresses are building rapidly, stretching economy after economy to breaking point and prompting aware individuals to protect themselves proactively:

People react to these uncertainties by trying to protect themselves with cash and guns, and governments respond by trying to limit citizens’ ability to do so.

If this play has a third act, it will involve the abolition of cash in some major countries, the rise of various kinds of black markets (silver coins, private-label cash, cryptocurrencies like bitcoin) that bypass traditional banking systems, and a surge in civil unrest, as all those guns are put to use. The speed with which cash, safes and guns are being accumulated — and the simultaneous intensification of the war on cash — imply that the stress is building rapidly, and that the third act may be coming soon.

Despite growing acceptance of electronic payment systems, getting rid of cash altogether is likely to be very challenging, particularly as the fear and state of financial crisis that drives people into cash hoarding is very close to reasserting itself. Cash has a very long history, and enjoys greater trust than other abstract means for denominating value. It is likely to prove tenacious, and unable to be eliminated peacefully. That is not to suggest central authorities will not try. At the heart of financial crisis lies the problem of excess claims to underlying real wealth. The bursting of the global bubble will eliminate the vast majority of these, as the value of credit instruments, hitherto considered to be as good as money, will plummet on the realisation that nowhere near all financial promises made can possibly be kept.

Cash would then represent the a very much larger percentage of the remaining claims to limited actual resources — perhaps still in excess of the available resources and therefore subject to haircuts. Not only the quantity of outstanding cash, but also its distribution, may not be to central authorities liking. There are analogous precedents for altering legal currency in order to dispossess ordinary people trying to protect their stores of value, depriving them of the benefit of their foresight. During the Russian financial crisis of 1998, cash was not eliminated in favour of an electronic alternative, but the currency was reissued, which had a similar effect. People were required to convert their life savings (often held ‘under the mattress’) from the old currency to the new. This was then made very difficult, if not impossible, for ordinary people, and many lost the entirety of their life savings as a result.

A Cashless Society?

The greater the public’s desire to hold cash to protect themselves, the greater will be the incentive for central banks and governments to restrict its availability, reduce its value or perhaps eliminate it altogether in favour of electronic-only payment systems. In addition to commercial banks already complicating the process of making withdrawals, central banks are actively considering, as a first step, mechanisms to impose negative interest rates on physical cash, so as to make the escape route appear less attractive:

Last September, the Bank of England’s chief economist, Andy Haldane, openly pondered ways of imposing negative interest rates on cash — ie shrinking its value automatically. You could invalidate random banknotes, using their serial numbers. There are £63bn worth of notes in circulation in the UK: if you wanted to lop 1% off that, you could simply cancel half of all fivers without warning. A second solution would be to establish an exchange rate between paper money and the digital money in our bank accounts. A fiver deposited at the bank might buy you a £4.95 credit in your account.

To put it mildly, invalidating random banknotes would be highly likely to result in significant social blowback, and to accelerate the evaporation of trust in governing authorities of all kinds. It would be far more likely for financial authorities to move toward making official electronic money the standard by which all else is measured. People are already used to using electronic money in the form of credit and debit cards and mobile phone money transfers:

I can remember the moment I realised the era of cash could soon be over. It was Australia Day on Bondi Beach in 2014. In a busy liquor store, a man wearing only swimming shorts, carrying only a mobile phone and a plastic card, was delaying other people’s transactions while he moved 50 Australian dollars into his current account on his phone so that he could buy beer. The 30-odd youngsters in the queue behind him barely murmured; they’d all been in the same predicament. I doubt there was a banknote or coin between them….The possibility of a cashless society has come at us with a rush: contactless payment is so new that the little ping the machine makes can still feel magical. But in some shops, especially those that cater for the young, a customer reaching for a banknote already produces an automatic frown. Among central bankers, that frown has become a scowl.

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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.