Tag Archive for War on Cash

Top Five Monetary Policy Issues To Watch In 2017

With a new year come new opportunities as well as new issues to take into consideration. Here are the five most important issues to keep an eye on in 2017.

1. Trump Presidency

The most important issue facing monetary policy, at least in the United States, will be the incoming Trump Administration. The Federal Reserve Board of Governors is currently operating with two vacancies and has been for quite a while. With majorities in both the House and Senate, it is highly likely that President Trump will be able to successfully nominate two candidates to the Board. Depending on who he picks, that could put additional pressure on Chairman Janet Yellen to continue to raise the federal funds target rate throughout 2017.

2. Ongoing Weakness in Europe

The PIIGS are returning. The Greek debt crisis is still unresolved, the Italian banking sector is weakening with Monte dei Paschi likely facing a bailout this year, and Portugal is showing signs of a weakening banking sector. Add to that the difficulties continuing to face Deutsche Bank and 2017 could be a perfect storm facing the Eurozone banking sector. The big question then would be to what extent bank failures and bailouts in Europe would cause spillover effects in the United States and worldwide.

3. China Is Still a Wild Card

While the yuan continues its march towards becoming a global reserve currency, the Chinese economy faces continued difficulty and slowing growth. Private sector debt loads are high, the insurance and banking sectors are built on matchsticks, and the government is beginning to sell off some of its foreign exchange reserves to defend the yuan. 2017 could be a very interesting year for China, and for the rest of us if a Chinese collapse spills over to the West.

4. The Relentless War on Cash

As India’s demonetization demonstrated, the war on cash is ramping up around the world. While there likely won’t be major moves towards eliminating high-denomination bills in the United States or Europe, there will be continued actions that chip away at the use of cash and the financial privacy that cash affords. Expect more legislative and regulatory action against cash transactions under the guise of fighting against money laundering, terrorist financing, and tax havens as governments continue to try to squeeze as much money as possible from taxpayers.

5. A Coming Financial Crisis

The most important thing to watch for in 2017 is the possibility of another financial crisis. With the trillions of dollars of new money pushed into the financial system over the past several years by central banks around the world, financial bubbles growing, popping, and leading to financial crises are inevitable. Contrary to the thinking of Ben Bernanke and others of his mindset, it doesn’t take a central bank actively removing liquidity from the financial system to pop bubbles or create financial crises. All that is required is for the central bank to stop or slow its monetary easing and the effects of the newly created money will soon be evident.

As the reality sets in that massive amounts of resources have been malinvested in unproductive sectors of the economy, the bubbles that were blown will inevitably burst. While monetary policies around the world remain historically loose, the Federal Reserve’s raising of its federal funds rate target has been accompanied by talk in other countries about raising interest rates. Given the anemic recovery in the aftermath of the 2008 financial crisis and continued low interest rates, central banks don’t have much room to maneuver when the next crisis hits. It’s always tricky trying to predict when a crisis will occur, but given economic data in various sectors that show similarities to the last crisis, it’s not out of the realm of possibility for 2017 to be the year of the next crisis.

The War on Cash in South Korea

The South Korean government is preparing to move to a cashless society as the Bank of Korea plans to phase out all coinage by 2020. Apparently not all governments are proceeding as quickly as the Indian government. South Korea’s government hopes to get its citizenry to deposit their coinage onto electronic travel passes that are widely accepted throughout the country. The Bank of Korea will undoubtedly watch to see how smoothly the phaseout of coinage proceeds in order to set a deadline further in the future for the eventual phaseout of paper notes. Since only 20 percent of South Korea’s purchases use cash, the phaseout will likely be less severe than it would be in countries more dependent on cash, such as Germany, India, or the United States. Still, even though there are advantages in certain situations to using non-cash means of payment, an all-electronic payments system is fraught with danger. The BOK’s decision shows us that the war on cash is a worldwide phenomenon that governments are undertaking under a variety of different pretenses. This particular decision demonstrates the roadmap that will most likely be used by most governments: gradual phaseouts of coinage, followed in the future by eventual phaseouts of paper notes. Unless this creeping gradualism is able to be stopped, the war on cash may result in victory for governments and defeat for consumers and their financial privacy.

The War on Cash in India

The Indian government last week demonetized its 500- and 1000-rupee notes. Overnight, the 500-rupee ($7.36) note and the 1000-rupee ($14.73) note were banned from use in commerce. Those holding the notes were allowed to exchange their notes for smaller denominations, but only to a total sum of Rs 4000, and only one time. That sum has now been reduced to Rs 2000. The alleged reason for the demonetization of the notes was to crack down on corruption, tax evasion, and black markets. The results of the demonetization, as should have been easily predicted, were horrendous.

ATMs throughout India began running out of cash, tourists found themselves stranded, and long lines formed at banks around the country. Many Indians turned their notes in to black market currency traders or purchased gold so as not to have to deal with the banks or with the authorities. More than 85 percent of the bills in circulation in the country were Rs 500 and Rs 1000 notes, so the effects of this demonetization are widespread. Although the government has introduced new Rs 500 and Rs 2000 notes to replace the demonetized notes, that doesn’t do much good for those who may have had significant amounts of savings held in cash, and the delays in provision of the new notes have caused further difficulties.

Possible Immediate Effects of the €500 Note’s Abolition

The ECB officially decided to end production of the €500 note yesterday, with production winding down at the end of 2018. Ostensibly this was done to prohibit the use of the €500 note by criminals and terrorists. While this is just one step in the long-term War on Cash, what might some of the more immediate effects be?

1. Increased Demand – Knowing that the €500 note is going to be phased out, expect those holding cash and those wanting to hold cash in the future to increase their demand for €500 notes. Whether the ECB will cater to this demand by allowing higher amounts of €500 notes to be printed before the ultimate phaseout date remains to be seen.

2. Premia on Notes in Good Condition – Given a finite number of notes in existence post-2018, it is not unreasonable to expect that €500 notes may trade at a premium to their face value in the future. Since they will remain legal tender and will be able to be redeemed at face value at banks for an unlimited period of time, they will be worth at least €500. But because they allow a much more compact transportation of money than €100 and €200 notes and because supply will now be fixed, they may begin trading at a premium to their face value. €500 notes in mint condition might eventually trade on black markets at €550, €600, or more. Bills in worse condition would trade at lower premia, until bills that were completely worn out would be traded in at banks for brand new lower-denomination notes.

3. More Counterfeit €500 Notes – Because the €500 note is being phased out, it will not receive any anti-counterfeiting updates that other notes will inevitably receive in the future. As counterfeiters become more adept at creating fake euro notes, they will target the €500 note since it will remain redeemable at banks and will undoubtedly be demanded even more on the black market. If counterfeiting of the €500 note occurs on a large enough scale, the ECB may eventually rescind the bill’s legal tender status and set an end date by which time all €500 notes must be redeemed.

Bitcoin Once Again Facing Scrutiny

Despite never having been linked to a single incident of terrorism, Bitcoin is once facing increased scrutiny from European politicians. The European Commission is set to update its anti-money laundering rules next month, which would force Bitcoin exchanges to comply with the same AML and Know Your Customer rules with which other financial institutions must comply. That likely won’t be the last time that Bitcoin faces scrutiny, as European governments are increasingly cracking down on Bitcoin, cash, and other payment methods that allow anonymity when making purchases. Every new terrorist attack in Europe is another opportunity for governments to crack down on Bitcoin and cash, sweeping more and more transactions within the financial system where they can be tracked and, most importantly, taxed. Talk of money laundering and terrorism is just cover for what ultimately are moves towards increasing revenue and enhancing control over people’s finances.

Bank Hackers, Electronic Money, and the War on Cash

In the aftermath of the bank heist targeting Bangladesh’s central bank, international financial network operator SWIFT has warned that its networks were compromised. Hackers have apparently accessed the network and used it to send a number of fraudulent payment orders. Why do hackers do this? In the apocryphal words of Willie Sutton: “Because that’s where the money is.” Why bother hacking individual bank accounts when you can instead hack an entire bank or even the backbone of the financial system?

RIP €500 Note

Image: Wikipedia

Image: Wikipedia

It appears that the €500 note will die a slow death. Rather than being completely demonetized, production of the note will cease, but those holding notes will still be able to deposit them and exchange them. A complete ban seems to have been stymied due to strong opposition from Germany. German opposition to the note’s removal stems from a high rate of cash usage. Anyone who has traveled to or lived in Germany knows that Germans use cash for most of their tranactions, 79 percent of all transactions in Germany using cash versus 40 percent in the United States. This stems from the experiences of the Weimar-era hyperinflation, resulting in Germans not trusting the banking and financial system as much as Americans and other Westerners. Germans don’t trust credit and debt to the same extent that other nations do, thus the decision to eliminate the €500 note met with significant opposition from Germans. It helps, too, that Germany’s economy is the largest in the EU and that its former currency, the Deutsche Mark, is what lent the euro the credibility it has today. Further opposition to the war on cash in Europe is more likely to come from Germany than from any other country.

The Financial Times on Eliminating the $100 Bill

On the heels of the ECB scrapping the €500 euro note, former Treasury Secretary Larry Summers called for abolishing the $100 bill, with the New York Times editorial board concurring. That’s not terribly surprising to see Establishment bastions supporting the government in its war on cash. So imagine our surprise upon reading some healthy skepticism in the Financial Times about the arguments that eliminating the $100 bill are a panacea that would help reduce government corruption, fight organized crime and terrorism, etc. If you have a chance, the article at the Financial Times’ Alphaville blog is well worth a read.

Swiss Starting to Hoard Cash Too?

On top of the news of increased cash hoarding in Japan comes news that the Swiss are starting to hoard cash too, as circulation of the 1,000 CHF note has increased. In all likelihood this is a response to the Swiss National Bank’s introduction of negative interest rates. This pattern has repeated itself everywhere negative interest rates have been introduced. Making it more expensive for banks to offer bank accounts and for depositors to hold cash in banks will lead to cash withdrawals from banks and increased hoarding of cash.

Japanese Starting to Hoard Cash in Response to Negative Interest Rates

In response to the Bank of Japan’s introduction of negative interest rates, the Wall Street Journal reports that sales of personal safes to store hoarded cash are soaring. It’s an entirely predictable reaction to the introduction of negative interest rates. If you’re going to have to pay to store your money in a bank, why not just store it yourself?