Economic Crisis

War on cash: The Curse of Kenneth Rogoff – Part I

Kenneth Rogoff, an establishment economics professor at Harvard University, is promoting his new book “The Curse of Cash”. In his one dimensional world view, he sees cash as something used by habitual criminals. His answer is to restrict it, with the added benefit it would give a free hand to governments to confiscate wealth via negative interest rates. As I’ve witnessed, his plan will turn ordinary people into unwilling criminals.

First let’s be clear about one thing. Despite many reports to the contrary, physical cash is not dying out. At least not of natural causes. But it is being hunted down by the likes of Rogoff.

There’s plenty of evidence that cash continues to thrive. Bad luck Ken.

According to the US Federal Reserve, the value of US dollar currency in circulation rose 6.7% in the year to July 2016. According to the Bank of England the value of pound sterling “notes and coin” in circulation was up 9% over the same period.

In the case of Britain, the value of all notes and coins has tripled in the past 20 years. Even more than that, the value has increased in relation to the size of the economy. See the blue line on this chart from a recent Bank of England report (NIC means “notes in circulation”).


You can see that the ratio of NIC/GDP has increased from around 25% in the early 1990s to over 40% by the end of 2015.

And it’s not just in Britain where the volume of physical money has risen. US dollars, euros, Australian dollars, Canadian dollars…and no doubt many more besides…all have been circulating in greater and greater amounts.


Of course the Swedish krona is on a downtrend. Sweden is hunkered down in the front trenches of the battle for cash, and the Swedish people seem to be on the point of surrender. These days, very few transactions there are for cash. Bad luck for them.

Let’s focus on the US dollar for a minute. After all, this is still the world’s reserve currency – although Rogoff’s plans would speed up the demise of that privileged position.

Physical US dollars are obviously used in the US economy. But they’re also used for transactions around the world, or as a place to shelter savings from weak local currencies.

Here in Argentina most people with any savings sell local pesos, which are rapidly losing value, and buy US dollars (legally and easily, under the new government). Typically those take the form of convenient US$100 bills. Property transactions, such as buying an apartment or farm, also use dollar prices.

The value of physical dollar currency issued by the US Federal Reserve doubled in the 12 years between 2002 and 2014 (see previous chart). That’s about 5% a year compound average growth rate. Don’t fight the trend, Ken!

Clearly physical cash isn’t dying out. But what can be said is that physical cash is being used for a smaller share of consumer purchases.

Clearly physical cash isn’t dying out. But what can be said is that physical cash is being used for a smaller share of consumer purchases. More and more people are using payment cards, or new technologies on their phones (such as Apple Pay). After all, you can’t pay cash over the internet.

This next chart shows the trends in the UK, which I suspect are representative of most developed countries.


You can see that the volume of cash transactions has stayed pretty steady since 2000. Cheques have collapsed as a means of payment. Credit cards have risen slowly. Debit cards – the kind that are charged straight to your deposit account – have gone up five times.

So if there’s no more cash being used for transactions, how come there is more and more cash in circulation?

The answer is simple: more and more private individuals and investors are storing a greater amount of their wealth in the form of physical cash.

And why shouldn’t they? The global financial crisis reminded people that banks go bust from time to time, even in complacent developed countries. Bank deposits are a loan to a bank, which could default. And with ever lower interest rates the returns on bank deposits are now so low their only value is access to convenient payment services.

The natural reaction is to get hold of more physical cash. Evidence from the Capgemini World Wealth Report shows that this is exactly what’s been happening – at least amongst the world’s wealthy, or so called “high net worth individuals” (HNWIs). HNWIs are people with US$1 million or more of investable assets (ie assets excluding their home).

Back in 2002, the earliest data I could find, the Capgemini study reported that the wealthy had 25% of their financial assets in cash and deposits. That was a high level, and understandable given that stock markets had crashed over the previous two years – after the technology bubble.

By 2007 that had fallen to just 11% of financial assets. But in 2016 it’s back up to 24% again, meaning wealthy people the world over are playing it safe and sticking to cash.

Hold on. Those figures include bank deposits, and not just physical cash. But here there’s a surprising finding. The wealthy people surveyed by CapGemini reported having nearly 15% of their investable wealth in physical cash in 2016.

What’s even more interesting is that the figures are pretty consistent whichever region you go to, as shown in this chart of where they are keeping their money and investments. The orange parts show physical cash.


You can see there’s not much difference between the regions. And it’s not like Capgemini was sending surveys to drug cartels and people traffickers, let alone getting responses back from organised criminal gangs.

These are just ordinary, if fairly wealthy, people. Yet if you believe Rogoff’s propaganda then it’s only criminals that use large amounts of physical cash. Wrong again!

But even so, obviously these are averages. Some people will have practically no physical cash, and others will have most of their money in that form.

Certainly, here in Latin America, there are plenty of people who stash tens or hundreds of thousands of dollars in safety deposit boxes. But I was surprised to see such high percentages in North America (13.4%) and Europe (14%).

After all, these are people with at least US$1 million of investable assets, but perhaps much more. Fifteen percent of one million is US$150,000 in cash. That’s a big number for most people.

There’s plenty of evidence that the amount of physical cash continues to increase, that people are keeping large and growing amounts of their wealth in that form, and that most of the uses are legitimate.

This is a big problem for the authorities. Interest rates are already ultra low but developed economies are still weak. Next time there’s a big recession or financial crisis they’d like to cut rates even more – their theory (and it is a theory) being that this will stimulate economic activity. That potentially means going hard into negative territory, including negative interest rates on bank deposits.

In other words, they would like the option in future of charging you money when you lend it to the bank. But they know that people aren’t stupid. If this happens the masses will turn to physical cash, which at least has no income but also no interest cost.

If money floods out of bank deposits and into physical cash it would cause some huge problems.

First of all the negative interest rate policy would fail. People would sit on physical cash instead of spending deposits.

Second, the commercial banks wouldn’t have enough funding for their balance sheets. It would be like a gigantic bank run – albeit perhaps a slow and steady one. They would have to be bailed out with lending from the central banks (again).

Thirdly there’s a simple logistical issue. Bank deposits dwarf physical cash by value. For example, dollar deposits in the US are 8.1 times as big as physical dollar currency in circulation in the world (if you add in dollar deposits outside the US the figure is undoubtedly much higher).

Deposits in pounds sterling are over 30 times as big as the value of all those pounds notes and penny coins. Imagine how much would have to be printed and distributed if everyone went back to paper!

Kenneth Rogoff, Harvard professor of Economics. He’s got a dangerous idea and a book to sell, “The Curse of Cash”. He wants to phase out the physical, starting with the larger bills.

Enter the villain of the piece, Kenneth Rogoff, Harvard professor of Economics. He’s got a dangerous idea and a book to sell, “The Curse of Cash”. He wants to phase out the physical, starting with the larger bills. (If you insist on buying a copy, please make sure you go to the store and pay with a crisp US$100 bill.)

He’s realised, no doubt along with his establishments chums in banking and government, that the current state of affairs simply won’t do. He surmises that if the powers that be want to confiscate money via negative interest rates then they should be able to. Never mind that it won’t work to stimulate the economy (although he probably doesn’t realise that).

Rogoff is a dangerous man with dangerous ideas. He provides the “respectable” intellectual cover for governments to set up a banking system where they can confiscate your savings at will

Rogoff is a dangerous man with dangerous ideas. He provides the “respectable” intellectual cover for governments to set up a banking system where they can confiscate your savings at will, via negative interest rates.

This puffed up professor of pseudo-science says that cash is a curse. I say that he’s the real curse. He’s just another establishment leech that wants to suck all wealth and freedom from the general populace. I’ve seen unreasonable financial repression up close and personal under the last government of Argentina, and it ain’t pretty.

Next time I’ll look at how Rogoff’s crazy plans are likely to turn us all into criminals…who is fighting back against his line of thinking…more reasons why negative rates won’t work to stimulate the economy…and what you can do to protect yourself from the threats.

In a meantime, a curse on Kenneth Rogoff.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.