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Sunday, April 19, 2015

Expert Says “Banning Cash” The Only Solution to Negative Interest Market Problems

Mac Slavo

As everyone knows by now, the Federal Reserve’s main tool in economic warfare has become hyper low interest rates and, thus, extremely cheap money for large institutions vis-à-vis the controversial reign of QE – quantitative easing.

Now, the how-low-can-you-go climate has created negative interest rates, meaning not only that many investments carry no return but that many deposits cost money.

Well-known Citigroup economist William Buiter says the solution to this backwards market is to rein in the appeal of normal currencies like cash – because it is “causing problems” for central bank manipulation:

When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut — they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy.
Negative interest rates are rendered ineffective by the “effective lower bound” – essentially the point at which a reasonable person would stop depositing money into banks and bonds at cost and instead hold cash, which while it doesn’t produce interest, certainly remains liquid and tangible.

From an economist point of view, however, it is cash holders who must be reined in (not Wall Street or the central banks):

Fundamentally, the ELB [effective lower bound] problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction?
Cash therefore gives people an easy and effective way of avoiding negative nominal rates.
The solution? For these big players, it is a simple matter of banning, or at least penalizing, cash and other straightforward currencies with additional transaction fees:
Buiter’s note suggests three ways to address this problem:
Abolish currency.
Tax currency.
Remove the fixed exchange rate between currency and central bank reserves/deposits.
SHTF reported only days ago about the shift in the treatment of cash, with JPMorgan’s CEO Jamie Dimon also called to rein in cash by charging customers the “true cost” of using these everyday instruments:
Moreover, JPMorgan and other big banks are expanding their policies of charging customers to hold deposits, validate funds and make transactions – charges that JPMorgan sees as the “true cost of moving money.”
With new measures for cybersecurity, fraud protection and payment verification in mind, JPMorgan is slated to tack on new processing fees and add costs for all transactions, and especially ‘outmoded’ payments like cash and checks and the loafing “free riders” who use them.
Regarding cash, Dimon stated:
We need to build a real-time system that properly charges participants for usage, allows for good customer service, and minimizes fraud and bad behavior.
Will they really ban cash?

For his part, Buiter admits there are disadvantages to banning cash – particularly for little people who still deal in paper money, the poor, those operating in community markets and for those concerned with privacy. He lists:

  1. Abolishing currency will constitute a noticeable change in many people’s lives and change often tends to be resisted.
  2. Currency use remains high among the poor and some older people. (Buiter suggests that keeping low-denomination cash in circulation — nothing larger than $5 — might solve this.)
  3. Central banks and governments would lose seigniorage revenue.
  4. Abolishing currency would inevitably be associated with a loss of privacy and create risks of excessive intrusion by the government.
  5. Switching exclusively to electronic payments may create new security and operational risks.
But ultimately, Buiter doesn’t care. To him, these are “weak” arguments against banning cash, and apparently anything and everything should be done to keep the bizarro system of money flowing – and power over the entire economy in the hands of the Federal Reserve.

Never mind that it will only benefit those at the top, or that it will punish the poor and working classes – even in the most ordinary of transactions – while forcing the masses onto an electronic platform that can be tracked and restricted based upon rules from the top.

Apparently, that has been the agenda for decades, with plans to control the population through a digital, cashless control grid.

Once that point is reached, cash won’t just be obsolete, it will be criminal. It is coming. The question is how soon will it arrive?

You can read more from Mac Slavo at his site, where this article first appeared.

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