Economic Crisis

The case for outlawing cash

A reader has written in asking exactly what we mean when we talk about “cash”. It’s something that we think should be part of every investor’s asset allocation. That’s especially true when value is hard to find. 

We’ll return to the question in more detail later in the week. But in the meantime today’s guest essay by our friend Bill Bonner takes a look at a specific issue that has been gaining a lot of attention in recent months.

He’s concerned about the future of the kind of cash that you can hold in your hands: folding paper bills. Specifically there seems to be a rising chorus of voices advocating for governments to cease producing it. Or even outlawing it. 

We aren’t especially worried. Governments could stop issuing their own currency, but we give credit to human ingenuity. People will find alternatives. But Bill is more worried, so we invite you to take a look at his genuine concerns. We’ll come back to the issue with our own perspective in the near future. 

Last week, the influential Financial Times newspaper ran an article calling for the abolition of cash. It was titled “The case for retiring another ‘barbarous relic.’” And it claimed that cash causes “a lot of distortion in the economic system.”

Can you believe it?

Cash causes economic distortions! From the FT:

“The existence of cash – a bearer instrument with a zero interest rate – limits central banks’ ability to stimulate a depressed economy.

The worry is that people will change their deposits for cash if a central bank moves rates into negative territory.”

It also repeated the familiar claims that cash also is what finances terrorism, tax evasion, and the black market. Making cash illegal, it says, would “make life easier for a government set on squeezing the informal economy out of existence.”

You see where this is going, don’t you, dear reader?

If the feds are able to ban cash, they will have you completely under their control. You will invest when they want you to invest. You will buy when and what they want you to buy.

If the feds are able to ban cash, they will have you completely under their control. You will invest when they want you to invest. You will buy when and what they want you to buy.

You will be forced to keep your money in a bank – a bank controlled, of course, by the feds.

You will say that you have “cash in the bank,” but it won’t be true. All you will have is a credit against the bank. (Bank deposits are nothing more than IOUs from your bank to you.)

A Tax on Your Bank Deposits

As it is now, your bank will have some cash on hand in its vaults, but not nearly enough to satisfy all the claims against it.

If this new attack succeeds, by law, it will have no access at all to cash. And neither will you…

You will be completely surrounded. If the feds want to force you to spend… or invest… your money, they will simply impose a “negative interest rate.” They will do this by simply imposing a fee, or tax, on deposits greater than the interest rate you receive on your savings.

In 2001 in Argentina, they closed the banks. When they reopened, dollar holdings had been converted to pesos, with a loss of roughly two-thirds!

In 2001 in Argentina, they closed the banks. When they reopened, dollar holdings had been converted to pesos, with a loss of roughly two-thirds!

In 2013 in Cyprus, they whacked large accounts with a 50% tax to help recapitalize the banks.

And in the U.S., JPMorgan Chase recently sent a letter to its large depositors telling them that, as of May 1, it would start charging what it called a “balance sheet utilization fee” of 1% a year. This pushed the net interest rate those depositors were earning into negative territory.

As stocks decline, you can expect more and more people to want to hold cash. If stocks go down 10%, the “opportunity cost” of holding cash goes down by the same amount.

People will want to hold cash. But if this encirclement maneuver works, you will be unable to get your hands on it. All you will have is a claim against some of the most insolvent debtors in the whole economy.
Cut Off from Cash

In 2008, almost every major U.S. bank was on the edge of bankruptcy.

But if the feds succeed in cutting us off from cash, that will never happen again. Because the banks will just whack us all – with the full approval of the Fed, the cronies in Congress, and zombies everywhere – to make themselves whole again.

Already, several Diary readers have reported that they have had trouble getting cash from their own accounts. (You can read the most recent account in last Friday’s Mailbag.)

Banks stall. They impose withdrawal limits. They want you to come in person, etc., etc.

Right now, being unable to get cash promptly is merely a nuisance. But just wait… It won’t be long before new initiatives are announced to “stimulate demand.”

Perhaps negative interest rates will do it. Maybe a more general tax. But sooner or later, the next credit crisis will hit hard…

Then your inability to get cash will be more than a nuisance. It will be a deathblow. You will be locked into a bank account with a bankrupt institution.

And the feds and their bank cronies will tell you when and how you can have access to your own money.

The feds will announce a “bank holiday.” They may ban transfers to gold sellers or foreign currency accounts. Or maybe it will just take time – while your money loses value rapidly – to get your money out.

If this new campaign succeeds, it will be almost impossible to protect yourself.

Regards,

Bill

If you enjoyed Bill’s thoughts you can find more of his daily musings at Bill Bonner’s diary.

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