The war on cash continues

A feature of recent times has been the way that those in authority are becoming more authoritarian. This has come as a by-product of the fact that there has been more central planning often by central banks. The catch has come that in spite of an enormous amount of what was called extraordinary monetary action which now feels normal we are still struggling with the consequences of the credit crunch and seem unable to reach the “escape velocity” promised by the Governor of the Bank of England Mark Carney. Economic growth does not seem to be what it used to be does it?

On that road the central bankers promised success first from interest-rate cuts and then from bond buying or QE (Quantitative Easing) and more recently for even lower and negative interest-rates. That posed its own problems as of course the “innovation” of Forward Guidance had left them promising interest-rate rises but in the case of Governor Carney then delivering a Bank Rate cut whilst promising later cuts. This moved ever more central banks on the edge of or actually in the world of negative interest-rates or what has become known as NIRP (P=Policy). This then led to fear from the central planners as bank notes or cash offer 0% ( if you ignore storage costs and the like) and as official interest-rates go ever lower central banks are afraid that they will lose what power they have if people switch to cash on a large-scale. It would also be quite an own goal by the central planners as the use of electronic methods of payment has made like simpler and more efficient. In other words another possible side-effect for them to look at “another time” when they write self-congratulatory working papers.

More interest-rate cuts remain the recipe

You might think that after so many interest-rate cuts there would be the realisation that the medicine is not working yet instead we see this. From the IMF about Switzerland.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

Translating that into English means that the next time the Swiss Franc comes under upwards pressure interest-rates should be cut below the present -0.75%. Also the Riksbank in Sweden seems to have come to that conclusion itself as we note this from it.

The Executive Board were unanimous that the repo rate should be held unchanged at –0.50 per cent and assessed that it needed to remain at this level for six months longer than was forecast in September. The probability of the repo rate being cut further has also increased.

That would be intriguing as you see Sweden is perhaps the country which has advanced the most in terms of electronic payments and so a “dash for cash” would be especially destabilising.

Back on the 5th of May I pointed out that the ECB was planning to scrap the 500 Euro note and that the Financial Times was rushing to support the establishment line.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

It then went on about “gangsters” and “Greek savers” but seemed unaware that the German Bundesbank was not a fan.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity

Back in February Larry Summers was on the case in the Washington Post.

It’s time to kill the $100 bill

As a side-effect Larry seems to be keen on some weight-training.

a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.

US $20 bill as the highest denomination Larry? I have also just been contacted on Twitter by @PeterWarne29 who apparently was watching a chess show yesterday and saw the high priest of this movement Kenneth Rogoff come on and say that high-value notes were used by criminals and tax-evaders. How very Orwellian or perhaps just a bad dream or of course both!

The disappearing 500 and 1000 Rupee Note

From the Reserve Bank of India on Tuesday.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

So in terms of South Park “It’s Gone”  and this does matter because most Indian cash money was in these two notes. It came with something also a bit chilling.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

Although it was a public holiday even so it makes you think. Even now there are limits.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

Today’s press release tells us everything is fine.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

Although we may need a financial lexicon for these times version of the concept of fine.

As mentioned in RBI communications, it may take a while for the banks to recalibrate their ATMs; once the ATMs are functional, members of public will be able to withdraw from ATMs upto a maximum of ₹ 2,000 per card per day up to November 18, 2016;

How is it going?

Just for clarity those are not pictures of the queue to get into the England versus India Test Match to watch Virat Kohli bat. The banks have been told to open over the weekend.

Also there is this from the same source.

Maharashtra: Temples sealing donation boxes in Marathwada region so that people don’t try to donate their black money after


There is much to consider in India’s move and let me open with a difference from elsewhere. It has just offered a fixed-rate repo at an interest-rate of 6.25% so we are a long way from NIRP or even ZIRP. With the problems of corruption and tax-evasion in India I am sure there is a fair bit of truth in this from the RBI.

This is necessitated to tackle counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true. There is an immediate catch in that if the black economy is the size we are told it is then the gain is minor but perhaps I should not be too churlish. However there are clear side-effects as the picture above shows and the Financial Times has pointed out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Not much sign of a boost to GDP there! Also are some of those who should be caught able to slip and slide away?

The poor are hit far harder than the rich, who have credit cards and live in places where shops accept them.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin. Meanwhile here is a light-hearted suggestion for UK bank notes in the future, it is a joke right?

20 thoughts on “The war on cash continues

  1. The Central banks and TPTB endlessly make out that things are grim and that only lower interest rates and support of one form or another is required. I would argue that this benefits a select few and speculators everywhere rather than the population as a whole. Everything is doom and gloom these days if hedgies and their ilk aren’t taking home a mega bonus and asset speculators aren’t seeing ever greater gains. Those with a mortgage do benefit of course but at the same time this is a double edged sword as they are forced to take out ever larger loans on the back of increasing property prices. The even greater number of savers have been badly hit and would welcome a modest rise in rates.
    As for cash being the choice of criminals; the bankers who walked away with vast bonuses whilst decimating their banks didn’t use cash, online scammers don’t use cash, credit card swindlers don’t use cash – i could go on. These criminals take vastly more from us than small time crooks who use cash. This is all about monitoring and control and not about stopping criminal activity.

    • Hi Pavlaki

      You make some good points there. What intrigued me when I had the debate with ex Bank of England staffer Tony Yates on BBC Radio 4’s Money Box was that he mentioned “markets” as if the mere use of the word justified something. Whereas I discussed what a move implied and suggested that judgement needed to be applied. After all not every market price can be right and this week’s example has been brought to us by the Mexican Peso.

  2. Hi Shaun

    No mention from the authorites regarding criminals phishing bank details or ID to steal money from your bank account. £2.5m from Tesco customers this week.

    And obviously no mention of the ‘legitimate’ banker criminals at the too big to fail banks.

    No concern regarding peoples privacy, when all electronic transactions are logged, the data analysed, and used for corporate gain.

  3. I can’t help but think that a drift into NIRP at the retail level will have quite different results from ZIRP. There may be little difference between 0.5% and -0.5% arithmetically but it means that at -0.5% you are signing up for a guaranteed loss and many folk will draw the line at this; it’s a bit too much “in your face”.

    As you imply this sort of move cannot be carried out without banning cash and this is a political matter, not merely an economic one. Add the two together and what you have financially would be a tax on saving combined with a restriction on civil liberties.

    Combine this with the coup de grace it would deliver to pensions and insurance and you have to question its ultimate practicality.

    The other thing is that it really does smack of sheer desperation; the last gasp of a failed system; the ultimate confirmation of Einstein’s definition of insanity. It will not look good at all.

    • We have been witnessing the death throes of capitalism/corporatism since 2008 as we seem to drift inexorably into some kind of inverted Marxism where losses are shared with the proletariat whilst gains are retained privately.

  4. Shaun – a splendid article. On the day when Leonard Cohen has finally hung up his pen, I thought a verse from one of his better-known songs would be apposite:

    “Everybody knows the dice are loaded.
    Everybody rolls with their fingers crossed.
    Everybody knows the war is over.
    Everybody knows the good guys lost.
    Everybody knows the fight was fixed;
    The poor stay poor, the rich get rich.
    That’s how it goes…..
    Everybody knows……

  5. A really chilling article. So, let me get this straight:
    1. I earn money and pay taxes
    2. I save any surplus in a bank
    3. They give me no interest because of QE
    4. They start charging through negative interest rates
    5. I decide to take the money out in cash to avoid the cost
    6. The government then bans the high value notes
    7. I have to convert into larger numbers of smaller notes
    And I’m lumped in with drug dealers and the mafia for all this?
    The gangsters are wearing suits, get knighthoods, have index linked pensions and are asked for their weighty opinions on everything.
    I think that I’ve just blown a gasket and need to lie down

    • Hi James

      It all sounds like a line from a song by Blondie doesn’t it?
      “One way or another I’m gonna find ya
      I’m gonna getcha getcha getcha getcha
      One way or another I’m gonna win ya
      I’m gonna getcha getcha getcha getcha”

      As to gaskets take care as they can be very expensive as I discover when one blew in my car engine some years back.

  6. Yes Shaun,

    It is a current theme and the Tesco raid along with the Indian rupee withdrawal made me think more about cash. Pavlaki calls the truth for western economies, the Indian call is probably unique to their developing world status but the re-use of that country argument for us in the west is a plain manipulation.

    I can only imagine the QE burden which has created vast money sloshing around in mis-priced assets such as property and shares means that Carney is worried that once the US raise rates he’ll be forced to follow, the higher IR’s triggering re-pricing to lower values and hardship for the those who were “formerly wealthy”.

    Perhaps the Govt does not want people who have cash or transferred to cash to attain any power in the future “reset” economy, perhaps in an authoritarian future they want to be the only agency able to hand out new money to those they consider deserving and don’t want the competition of folk who had shown responsiblity and sense with their own £ means.

    I wonder whether Handelsbanken will be immune to any TBTF reset..?

    Paul C.

    • Hi Paul C

      Yes you are right to point out the Tesco raid as of course there was financial crime not involving cash only last weekend. As to the central planners they will only be satisfied when they have complete control.

  7. I suspect the Germans won’t tolerate any politician who takes away their 500 euro notes. So the ECB can pontificate but if they act, I’d expect a new DMark from the Bundesbank.

    Likewise, banning the US$100 increases the attractiveness of alternate reserve currencies.

      • thanks for the link. I guess this means hot money flowing into property and an increase in the price of nearly new LHD luxury German cars.

        James has already commented on the ineffectiveness of this, I’d just add that London real estate is a big international laundry, purchased with funds transferred electronically through the ‘regulated’ banking system. They should first start checking whether these funds have been declared and taxed at source ….

  8. Govt. bonds are transferable and in demoninations of £100 (don’t know what it is in €-zone) and are de facto cash.
    To ban £50 notes is, in such circumstance ridiculously illogical.

    • Hi therrawbuzzin

      It may seem hard to believe now but back in my early days in the City teams of messengers were employed to take certificates from office to office. Now that all is electronic and of course so many individual transactions are going that way but governments could yet ruin it and set us back.

      It seems you used to be able to buy zero coupon bonds based on Italian BTPs is 1000 Euro denominations. That still seems to be true…

  9. Pingback: The impact of Bitcoin and negative bond yields | Notayesmanseconomics's Blog

Leave a Reply to Craig McGinty Cancel reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.