A regular theme of these times is the argument that cash as in paper note and metal coins is bad for us. There are regular efforts to get such theories into the media mostly by establishment figures who somehow present a non-cash world as something of a nirvana for our economic prospects. The latest move on this front has come from the former International Monetary Fund Chief Economist Ken Rogoff who has written a book on the subject and has recently been on the BBC World Service proclaiming such a view. The program called The Inquiry though did not live up to its name as the presenter Linda Yueh only presented the views of Kenneth Rogoff and supported him. He was even allowed to claim unchallenged that arguing for a ban on large denomination bank notes was like “arguing for gun control” or “banning semi-automatic weapons” which was really rather poor unless of course such notes are killing loads of people each year in the United States.
One intriguing statistic presented was that the amount of cash is equivalent to each American or European carrying around US $4000 or 4000 Euros but did not specify the numbers.
Helicopter Money
One misfire here is that the number of establishment views in favour of Helicopter Money would be shot down by such a plan! Perhaps our Ken did not think that through. The transport section of the US Air Force would find that lifting one million dollars in US $100 bills weighs 22 pounds but doing so in the US $10 bills that our Ken would have as a maximum denomination would weigh 220 pounds. With all the Zeroes required (sorry) in Japan its air force would have a job for life!
What are the arguments for banning large denomination notes?
The one pressed hard by Ken Rogoff is shown below.
My argument centers around the fact that all the advanced countries have collectively pumped out trillions of dollars in paper currency, the vast bulk in large denomination notes that are increasingly unimportant for ordinary retail transactions, but are highly valued by those engaged in tax evasion and crime.
In an essay entitled The Sinister Side to Cash in the Wall Street Journal he really piled in.
There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism………Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income.
This poses more than a few questions. No-one would doubt that organised crime uses large denomination notes and that they are used in tax evasion. But one of the largest amounts of organised crime in recent years has come from the banking sector which has not used cash for this. The proposed US $14 billion fine by the US authorities on Deutsche Bank is an example of this and it joins a list which is both long and large. When the German Bundesbank did some research into the issue it found that it was in fact very hard to find any proof that cash did in fact help crime.
There is scant concrete information on the extent to which cash is being used to facilitate illicit activity……… the volume of notes devoted to such transactions is unknown and would be extremely difficult, if not impossible, to estimate.
Mind you perhaps in Ken Rogoff’s world Sam Allardyce would still be England’s football manager!
Negative Interest-Rates
This is of course the main course to the publicity friendly aperitif and starter discussed above. Ken sings along to
Secondarily, the book also talks about how phasing out large bills would be a major step towards more effective negative interest rate policy, although a number of fairly straightforward tax, legal and institutional changes would also have to be made. Negative interest rate policy is not for everyday use, but for dealing with very deep recessions and financial crises; the book argues that if negative rate policy were done right, it would be rare and short-lived, and vastly preferable to a decade of near zero interest rates.
Actually negative interest-rates have not been “short-lived”. It was only yesterday I was looking at Denmark which tried to escape them and then found itself sucked back into them as if the gravity of a black hole was at play, meaning that over 4 years later no escape is in sight. Also the IMF that Ken used to be Chief Economist of has just suggested that Switzerland should plunged deeper and deeper into negative interest-rate territory. Also should the ECB want to help its QE problem with German bonds one way of doing so would be to reduce its deposit rate below -0.4%.
There is another problem for our Ken if we look at this from him in the Wall Street Journal.
In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing.
You see if normal monetary policy had worked in the way he is trying to imply we would simply not even be discussing negative interest-rates now because the economic situation would be much better than it is. Indeed Ken seems rather like a snake-oil salesperson at this point.
Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession.
How many times would you keep taking the same medicine when it is not working? Ken would have both more and larger bottles.
If we look at the experience of negative interest-rates so far then this below is a combination of wishful-thinking and ignorance.
But if a strong dose of negative rates can power an economy out of a downturn, it could bring inflation and interest rates back to positive levels relatively quickly, arguably reducing vulnerability to bubbles rather than increasing it.
If you look at house prices in the countries which have negative interest-rates you would see that with West Ham fans currently being mostly silent that it is the central bankers who are taking up the chorus of “I’m forever blowing bubbles”.
Comment
We find ourselves in a world where negative interest-rates and bond yields are on the march. The tantrum which pushed bond yields higher for a while has faded as indicated by reports that the 10 year yield in Finland went negative yesterday and this morning investors have paid Germany 0.7% per annum to buy a two-year bond.
Meanwhile up in his Ivory Tower Ken Rogoff has plans to take control freakery to its maximum. He ignores the fact that his plans so far have not worked and wants to push the pedal even beyond the metal. Along the way such concepts as privacy and legitimate use of currency are ignored. Also if we banned everything used by terrorists and organised crime we would end up at food,shelter,water and oxygen. Back in February I was disappointed to see Gillian Tett offer support for such plans which were supported by this gentleman.
John Cryan, co-head of Deutsche Bank, is not a man given to hyperbole. A couple of weeks ago, however, he made a comment about money that might make ordinary mortals blink.
Speaking on a financial technology panel at Davos, he cheerfully predicted that in a decade’s time cash probably won’t exist.
Er organised crime anyone?
Meanwhile here is a song for our Ken to help pass the time in his Ivory Tower. From David Bowie
This is Major Tom to Ground Control
I’m stepping through the door
And I’m floating
in a most peculiar way
And the stars look very different todayFor here
Am I sitting in a tin can
Far above the world
Planet Earth is blue
And there’s nothing I can do
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