War On Cash

When the term first made it into the mainstream media, about 6 years ago, to describe the rise of anti-cash regulations, it was hard to predict the international snowballing effect that would today establish it as one of the most powerful monetary policy waves in modern economic history.

At first, national governments started gently “nudging” citizens to embrace more modern and convenient alternatives, initially by transitioning state-related payments and services, like tax collections and welfare payments, into the banking system. Soon thereafter, they also began placing restrictions on cash transactions. Starting in 2011, Spain and Italy outlawed cash transactions over certain limits, €2500 and €1000 respectively, then Belgium and Portugal followed suit and France reduced the limit from €3000 to €1000 in 2015, while Germany, to the public’s great displeasure, announced plans to ban cash payments of more than €5000. As shown in the chart below, the regulatory wave effectively swept through Europe and soon became the “new normal”. In the meantime, Norway’s biggest bank DNB called for a total ban on cash, while Sweden’s plan for a cashless society, meant that now in more than half of the branches of the country’s largest banks, no cash is kept on hand, nor are cash deposits accepted. However, the term “war on cash” was really catapulted into the headlines this February, when ECB President Mario Draghi announced his plans to scrap the €500 note. The very next day, Harvard economist and former Secretary of the Treasury, Larry Summers called for the elimination of the £50, the €500, the Swiss CHF 1,000, as well as the $100.


Official narrative vs. Counter-narrative

The reason given for the escalation of governmental efforts to restrict or, indeed, outlaw cash transactions is the same in all of the above-mentioned cases: cash is the ”instrument of choice” for terrorists, drug lords, money launderers and tax evaders; law-abiding citizens have no real use for it anymore. With the rise of credit and debit cards for everyday payments, online banking and wire transfers for large sums, all being embraced as modern alternatives to cash, the average citizen is now actively being encouraged to abandon physical currencies and digitalize all their transactions, for the sake of transparency. In other words, the official narrative, reading between the lines, roughly translates to “you have nothing to fear, if you have nothing to hide”.

“Without being able to use high-denomination notes, those engaged in illicit activities — the ‘bad guys’ — would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their ‘business models’,” argues Peter Sands, the former chief executive of Standard Chartered.

Upon closer inspection, these arguments generally fail to stand up to factual scrutiny. The abolition of €500 banknotes or $100 bills is unlikely to have any effect on serious crime or terrorist operations. Merely switching to another denomination, or any other currency for that matter, be it conventional or not (blood diamonds, drugs, art, etc), would not significantly impact organized crime operations, nor would it make any real difference in the fight against terror. Only last November, the official investigation into the horrific Paris attacks, revealed that the IS-affiliated terrorists used prepaid bankcards to rent hotel rooms outside the capital the night before. As for money laundering and tax evasion, both most commonly involve sneaking “ill-gotten” gains into the conventional financial system in the form of real estate, stocks, bonds or other assets, or as the Panama Papers showed us, often using obscure regional legal loopholes, intricate “Russian doll” schemes of shell companies and creative accounting. So far, no scientific evidence, nor research findings, other than anecdotal, have been presented to substantiate these claims as the basis of the anti-cash crusade.

Another way, however, to look at this policy trend, is to juxtapose the so-called War on Cash with the concurrent and increasingly widespread adoption of negative interest rates by central banks worldwide. The core rationale of this measure is rather simplistic: Negative interest rates are, in essence, a tax on bank deposits, ultimately aiming to discourage depositors from saving and to incentivize spending instead, thereby stimulating economic demand. In this light, cash is the fatal flaw of this plan, as it places serious constraints on the central banks’ power to practically enforce the strategy. As long as paper money is available as an alternative store of value, customers have leverage against the bank’s negative interest rates. They can simply withdraw their deposits to avoid being penalized for saving and just hoard cash instead of spending it; a course of action greatly simplified by using large-denomination bills, that would allow for efficient storage. Naturally, such a choice would imply shouldering various risks and expenses, mostly security- and convenience-related. However, as the penalties for saving become steeper, there comes a moment where the cost-benefit analysis would dictate that cash is the preferred vehicle of storing wealth and would provide a viable “way out”, if negative rates become “too negative”.

The only way, therefore, for the central banks’ scheme to work, is to eliminate this leverage and to block the exit route. Without a physical currency that can be withdrawn and stored outside the system, deposits would be essentially held hostage by the banks, and the customer could only either spend it or watch it shrink over time, crunched away by negative rates.

Social and economic casualties

The official narrative, and often the counterarguments as well, focus exclusively on the ex post facto effects of this policy wave, largely ignoring the invaluable role that cash plays in the lives of ordinary, law-abiding citizens today. For one thing, cash enables legal transactions to be executed efficiently and in real time, without either party paying any fees. It does so, without the risk of getting hacked, or having one’s identity stolen or being subject to disruptions due to power cuts or system failures. It also facilitates the economic inclusion of low-income or low-tech segments of the population that do not have access to an account, i.e. the “unbanked”: That’s 8% of the U.S. population according to a 2013 FDIC survey, and 2 billion adults worldwide, according to World Bank figures.

Naturally, privacy concerns take center stage in this debate. In a world where all accounts and transactions can be recorded and monitored, combined with the increasing technological capacity for big data management and manipulation, the amount of power handed over to governments and central institutions would be unprecedented. By simply tracking the spending patterns and financial activity of individuals and companies, and thus enabling profiling, a long list of potential abuses instantly springs to mind, while serious questions are raised about the future of confidential information and right to privacy.

Proactive Defense

Assuming that the rate of victories that the war on cash has scored already continues unabated, in combination with negative interest rates being adopted even more widely, it is reasonable to expect that the average saver will soon face considerable barriers in attempting to “cash out” their deposits or to store them out of the banking system. And if the single viable option in order not to lose value over time would be to spend, then the wiser choice would obviously be to opt for investment over consumption.

As a precautionary strategy, the saver’s aim should be focused at wealth preservation. This might be achieved by investing in a diversified set of conservative, low-risk investments. Of course, the “right” strategy depends on the structure and the aims of each investor’s portfolio and one size does not fit all, however in general, actively managed hedge funds with a strategy that is not correlated to the stock market, as well as gold, can provide options to fill the void of cash and facilitate the storage of wealth outside of the cash system.

Originally published on MountainVision.com

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