April Fool's Edition

April Fools' has come and passed, but here’s our April newsletter at last.  And in honor of all the April Fools out there, we’re going to take a little detour, put our tin foil hat on, and present some conspiracy soon-to-be-fact coming to a world near you.
Here’s a story.  Not about a man named Brady.  Also not about a little guy that lives in a blue world. Well, maybe about that guy.  He definitely doesn’t live in a green world...because this is a story about the War on Cash.

Not kidding.  Like most wars, the proximate causes are a little hazy until one day, somebody shoots at Fort Sumter or Franz Ferdinand and all of a sudden you’re in the middle of a war that has been brewing for years.

This particular war is almost 10 years old now and is about...control.  So go grab yourself a sheet of aluminum tin foil (aluminium for the British readers out there), preferably heavy duty, shape it into a vaguely hat-like structure, and let’s dive in.

What

The starting point for the war on cash probably traces back to the financial crisis of 2008 and specifically the failure of central bank monetary policies to stimulate any sort of decent recovery.  Most of those monetary policies were experimental in that they had never been done before outside of academic papers (zero bound interest rates, negative interest rates, massive quantitative easing and balance sheet expansion…), and it turns out that they didn’t work all that well.  Now, modern Keynesian economics clearly indicates that the solution for something that doesn’t work is more of it.  MOAR!  But at zero or negative interest rates, the ability people have to hold physical cash outside of the banking system screws everything up.  Negative interest rates won’t incentivize people to spend money if they just hold cash in a safe and therefore don’t have to suffer the negative interest rates.  So then.  Cue getting rid of cash.

Right this second as you’re reading this (or as it’s languishing in your spam folder - ignorance doesn’t change reality!), there are fairly prominent economists talking seriously about removing higher denomination bills from circulation.  Like, prominent enough that perhaps their names may ring a bell outside the ivory tower of economics.  A soft, faraway bell that could be passed off as a mild case of tinnitus, but still.  Larry Summers?  Kenneth Rogoff? (....crickets….)  Well.  Suffice it to say these are people who have a not insignificant influence on monetary policies in the US.  And they are saying that cash is bad.  Why?  Because it enables organized crime and terrorism, of course!  Do you know how much $1 million dollars weighs?  22 pounds, if it’s in $100 dollar bills.  That’s a couple hollowed-out books in a carry-on bag, essentially.

Getting rid of cash would clearly cripple the financing systems of drug cartels, arms runners, terrorists, money launderers, tax evaders, and ne'er-do-wells in general.  Because obviously there’s no other anonymous payment method for their nefarious doings, like a bitcoin-esque cryptocurrency or, say, Amazon gift cards that are used to buy other Amazon gift cards.  (Side note: tin foil can also be used as a bib to protect one from dripping sarcasm).  Tin foil hat off for a second - there are literally serious economic papers and even entire books written about this point.  Tin foil hat back on.

So under the guise of fighting crime, we should get rid of all high-denomination bills and probably introduce a new superhero to the Marvel universe - Blockchain man! And then we should prohibit cash transactions over a certain amount to that people don’t just start hoarding Hamiltons, an act that would go unnoticed by a large portion of the population anyway.  When was the last time you were in a Starbucks?  How many people actually paid cash for their $4 skinny iced mochaccinoiato non-coffee cooler?  Approximately zero.  And at that point the war is essentially over.

Why

Why would the government (the shadowy and nefarious "they”) want this?  SO MANY REASONS.  But mainly two:

1) Taxes.  If every transaction ever conducted was recorded and monitored by a third party (VISA, MasterCard, Apple, Venmo, whatever payment system you’re using), they could tax everything.  To support ___________ (social programs or defense spending, take your pick based on political preference), and theoretically it should even allow for a lowering of the income tax rates if overall tax revenue is going up, but come on.  Is that ever going to actually happen?  

2) Control.  As mentioned previously, how are the central planners at the Fed supposed to manage the economy properly if people keep messing up their plans?  Seriously though.  The Fed lowers rates to encourage spending to stimulate the economy.  But those darned people just save money and don’t spend it!  You know how interest rates over here were at zero for the last 7 years?  Well they were actually negative in Japan.  Because if you had to pay to keep your savings (that’s what happens with negative interest rates), then clearly it incentivizes spending, right?  Guess what happened.  It worked!  People bought all the safes.  And then started keeping their savings outside the banking system.  How dare they.  In a world without cash, such a thing wouldn’t be possible.  And then there would be nothing to derail the perfect planning and execution of micromanaging the economy that central banks are known for.  (Wipes off sarcasm with tin foil bib.)  More on this below.

How

This is a nice theory you’ve got going here, but is any of this actually happening anywhere?  Why yes it is, thank you for asking.

• Singapore eliminated its highest-denomination note ($10,000) in 2014
• The ECB (European Central Bank) has stopped producing new 500 euro notes, and distribution will stop entirely by 2018
• Australia proposed a ban on the $100 last December
• South Korea is eliminating all coins in circulation by 2020
• The US wants to abolish the $50 and $100 notes
• Norway’s biggest bank called for a ban on all cash last year
• Swedish banks are removing ATMs from rural areas
• Greek citizens must declare all cash over 15,000 euros held outside of banks, and the cash limit for transactions is 500 euros
• France and Spain have cash transaction limits of 1000 euros.  Want to pay cash for that Chanel handbag you buy on the Champs Élysées?  Sorry, illegal.  À la prison pour vous!​

And then there’s India.  Late last year, Prime Minister Modi got rid of the 500 and 1000 rupee notes.  This accounted for 86% of the cash in circulation.  They could be exchanged for other denominations of notes, but only up to 4000 rupees per person.  Anything above that had to go through a bank….in a country where only about 50% of the population has a bank account.

So Then

Tin foil hat off, rose-colored glasses on.  India’s transition to a digital society is actually doing some really amazing things.  The cash ban is about stage 4 or 5 of what they’ve been doing over the last decade...if you have half an hour or so, google “Aadhaar” and jump down the rabbit hole.  (For a real rosy picture, read John Mauldin’s “Outside the Box” on India authored by Raoul Pal.)  In short, the cash ban has forced everyone into this digital economy.  And on the bright side, that does reduce corruption, improves the health of the banking sector which allows more loans to be made - not to mention more people having access to loans,  and increases tax revenue for the government which can be used on infrastructure improvements and allow for future economic growth.  The possibilities are really pretty staggering - India could look more like South Korea or Japan in just a couple decades.

But. Glasses off.  It’s April.  Tin foil hat on.  And this note is more Black Mirror than Ray Kurzweil.  So then.  Where does that leave us?

In a world where your money is no longer your own.  The next time there’s a 2008-style banking crash, guess what happens?  Well, not a run on the banks, because you can’t get your cash out.  But the bank still needs money to stay viable...so instead of a government bail-out like we had last time (funded indirectly through taxes), the banks get a bail-in from depositors!  That’s right folks, 10% of everyone’s account just disappears and goes to the bank in order to keep it solvent.  Chalk one up for centralized control!  And while we’re at it, let’s just keep interest rates negative to stimulate spending and economic recovery.  So now you, the depositor, get the privilege of paying the bank (the same bank that just took 10% of your money) to hold your savings for you.  Win-win, right?

In a world of zero privacy, in which the government (or some other third party) monitors every transaction you ever make.  And probably taxes it as well.  And in which your personal information is as strong as the Target/Home Depot/Sony/DNC/Office of Personnel Management firewall.

So next time you’re staring down at Benjamin Franklin in your hand, just appreciate the irony of the fact that he himself once said, “They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”  And then maybe contribute to a kickstarter for Lin Manuel Miranda to do Franklin next.