Both Central banks and commercial banks have always hated cash. When you hold cash, the banks don’t have it. And the banks want it all. Money in the bank funds the bank. Cash in your hands takes you outside their system, empowers you and reduces their profit potential.
But now this natural antipathy to cash is getting more serious. New rules governing bank insolvencies and the emergence of negative interest rates as the new cornerstone of monetary policy together make it all the more important that banks keep cash out of your hands. So, welcome to the new war on cash.
Starting with Cyprus in March 2013, central banks and governments have introduced so-called bail-in laws which enable the authorities to seize deposits held in insolvent banks rather than bailing out the banks with public funds. Bank failures will now be paid for by those who have loaned the bank money, and yes dear reader, your bank deposit is legally a loan to the bank, yes even in Canada. Bail-in regulations now apply here too.
By now, we all know that central bank asset purchases (known as Quantitative Easing or QE) have failed to boost the economies of all the jurisdictions that have done them—Japan, the Eurozone, Denmark, Sweden, Switzerland and the US. The new, more extreme central bank plan to spur economic growth is negative interest rate policy (NIRP). Europe and now Japan have implemented NIRP in a frantic attempt to push companies and individuals out of cash and into borrowing and spending. Nearly a third of the world’s sovereign debt—more than USD7 trillion—now costs money to own. You have to pay the borrower to own this stuff.
The sovereign debt market is not the only victim of NIRP. The central banks of the Eurozone, Switzerland, Sweden, and Denmark now charge interest on deposits they hold from commercial banks. Not surprisingly, these commercial banks are now beginning to charge interest on deposits they hold from their customers. Your best defense? Take out your money in cash.
So it should therefore come as no surprise that governments worldwide, as well as organizations such as the IMF, BIS and OECD, are actively promoting the idea that cash should be eliminated to cut off funding for terrorism and crime.
On February 15, 2016, the European Central Bank’s Governing Council voted to withdraw the 500-euro note from circulation. This note is the second largest denomination issued in Europe after the 1000 Swiss franc note. Of course, ECB president Mario Draghi insists that withdrawing the note has nothing to do with limiting your access to cash. Rather the decision is aimed at fighting crime because, as Draghi put it: “There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.”
Meanwhile, hang on to your $100 bills. A new report by Peter Sands, former chief executive of Standard Chartered Bank, was recently released by Harvard’s Kennedy School. The report urges governments of the 20 largest economies to ban all high-denomination notes. According to Mr. Sands, such notes are the “currency of corrupt elites, of crime of all sorts and of tax evasion. They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy. The irony is that they are provided to criminals by the state.”
Mr. Sands should know criminal activity when he sees it. While CEO, his bank helped Iran evade US sanctions which led to criminal charges, major fines and other penalties.
So, dear reader, the war on cash has begun. You can look forward to having all your savings locked into the banking system where you will be charged whatever interest rate the banks think is appropriate. Gold anyone?