Twenty years ago Bill Gates said,
Many central banks reduced policy interest rates to zero during the global financial crisis to boost growth. Ten years later, interest rates remain low in most countries. While the global economy has been recovering, future downturns are inevitable. Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, Australia would not have room for monetary policy to respond. In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy. While cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.
Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go below zero, which has been possible because taking out cash in large quantities is inconvenient and costly [for example, storage and insurance fees]. These policies have helped boost demand, but they cannot fully make up for lost policy options when interest rates are very low. One option to break through the zero lower bound would be to phase out cash.
There are two reasons why central banks impose artificially low interest rates. The first reason is to encourage borrowing, spending and investment. Modern central banks operate under the assumption that savings are pernicious unless they immediately translate into new business investment. When interest rates drop near zero, the central bank wants the public to take their money out of savings accounts and either spend it or invest it. Negative interest rate policy (NIRP) is a last-ditch attempt to generate spending, investment and modest inflation.
The second reason behind adopting low interest rates is much more practical and far less advertised. When national governments are in severe debt, low interest rates make it easier for them to afford interest payments. No country has proven less effective with low interest rate policies or high national debt than Japan. By the time the BOJ announced its NIRP, the Japanese government’s rate was well over 200% of gross domestic product (GDP). Japan’s debt woes began in the early 1990s, after Japanese real estate and stock market bubbles burst and caused a steep recession. Over the next decade, the BOJ cut interest rates from 6% to 0.25%, and the Japanese government tried nine separate fiscal stimulus packages. The BOJ deployed its first quantitative easing in 1997, another round between 2001 and 2004, and quantitative and qualitative monetary easing (QQE) in 2013. Despite these efforts, Japan has had almost no economic growth over the past 25 years.
The Bank of Japan is not alone. Central banks have tried negative rates on reserve deposits in Sweden, Switzerland, Denmark and the EU. As of July 2016, none had measurably improved economic performance. It seems that monetary authorities may be out of ammunition. Globally, there is more than $8 trillion in government bonds trading at negative rates. While this is great news for indebted governments, it does little to make businesses more productive or to help low-income households afford more goods and services. Negative interest rates do not create any more creditworthy borrowers or attractive business investments. Japan’s NIRP certainly did not make asset markets more rational.
There appears to be a disconnect between standard macroeconomic theory by which borrowers, investors and business managers react positively to monetary policy and the real world. The historical record does not kindly reflect governments and banks that have tried to print and manipulate money into prosperity. This may be because currency, as a commodity, does not generate an increased standard of living. Only more and better goods and services can do this, and it should be clear that circulating more bills is not the best way to make more or better things.
The main tasks of the Swedish Central Bank are the stabilization of the financial system and the provision of a means of payment for Swedish citizens. With the sharp decline in cash usage [just 2 percent of the total value of transactions] which is exceptionally low compared with other European countries. If these developments continue, private banks will generate all the money in the future and the Riksbank will no longer be able to perform its tasks. The planned e-krona as a central bank digital currency is a reaction to these developments. They are confident that Central Bank Digital Currency [CBDC] would have a stabilizing effect and ensure safe payment transactions in the event of a banking crisis.
The future of money appears to be in digitization, and most likely in the form of a CBDC, probably sparking a monetary tidal wave, away from private commercial bank money to digital central bank money. The experts agreed on two essentials regarding the concrete CBDC design: Firstly, CBDCs are not necessarily cryptocurrency, albeit the possibility exists and there are exciting technological points of reference. Secondly, a CBDC should be account based and available for retail customers. This means all citizens should have access to a central bank account and be able to switch their deposits with commercial banks into digital central bank money at any time. More information can be gained at: https://internationalmoneyreform.org
In the 2018-19 Budget, the Australian Government announced it would introduce an economy-wide cash payment limit of $10,000 for payments made or accepted by businesses for goods and services. Transactions equal to, or in excess of this amount would need to be made using the electronic payment system or by cheque. The Black Economy Taskforce recommended this action to tackle tax evasion and other criminal activities. It’s hard to take the recommendation by the Taskforce seriously when the magnitude of payments for goods and services is about 5% of payments made. The vast majority of the Black Economy is corporate, [particularly tax fraud by international miners and multinationals like Apple and Google] and criminal [including drugs and money laundering]. The new legislation will have no effect on the black economy.
The bit that will make most people upset is: It is also offence to make or accept a cash donation equal to or in excess of $10,000. The maximum penalty is up to two years imprisonment and/or 120 penalty units ($25,200).
IMO the biggest problem with forcing a cashless society is that young people already suffer from ‘financial abstraction’. In a bid to make the visitor experience as ‘frictionless’ and ‘seamless’ as possible, Disneyland spent over $1 billion on a ‘magic band’. With this colorful, plastic bracelet visitors can access their hotel room, the park and all its rides, purchase meals, drinks, ice-creams and all that Disney memorabilia that you never knew you, or your children, wanted! Seamlessly your visit just cost a huge amount more than you had planned – but how? Disney cleverly realised that by eliminating queues and ticketing issues, the visitor experience becomes easier and more enjoyable – seamless. Families can immerse themselves in all the park has to offer and spend more time ‘making memories’ [read, ‘spending money’] as, with the magic band linked to visitors’ credit cards, purchases become frictionless. The Disney magic band and how it operates, especially psychologically, is a telling example of how increasingly disconnected from physical money we have become, and how our financial habits have changed as we move to virtual transactions.
Today’s currency is increasingly digital, and the legislation proposed will hasten the disconnect with reality with money becoming more of an idea and less of a physical reality and the theory that our relationship with money changes depending on whether it’s real or not, is a concept known as financial abstraction. Research has suggested that we spend more when we swipe or tap, with most studies finding we spend up to 18% more when not dealing with cash. And so, at the heart of financial abstraction is this – as money becomes less tangible our spending becomes greater, we are not handing over cash and so there is less sensation of loss, we don’t feel the pain associated with spending. The greater the disconnect with our money, the less real our money is to us and the more we spend.
In February 2018, Financial Sector Crisis Resolution Act 2018 was passed as further measures to extort the economy to save insolvent Australian banks in a crisis through ‘bail-in’ of bank deposits and other bank liabilities. Such measures, if widely understood by consumers, may increase the likelihood of bank-run instability at the first sign of crisis. Also, since the measures guarantee a rescue effort, they create moral hazard, encouraging the banks to take even more unnecessary risks. The current financial system is morally decrepit, structurally unsound and financially unfair. Bank depositors are being euthanized slowly by low or negative real interest rates. They bear the risk of insolvency losses from bank speculation without getting any of the rewards. Retirement savers have had their superannuation systematically stolen. Everyone, except bank executives, suffers eventually from the asset bubbles created by the financial speculation of the banks, as we are witnessing now in the deflating housing bubble in Australia. To read more go to: ‘the banking system in tatters’.
In a recent submission to a Senate inquiry Citizens Electoral Council wrote: … we hold the view that the major financial sector players are too complex to be managed effectively, scale is now a disadvantage. Thus, we believe there is a case to break up the banks into smaller units. This would involve both vertical disaggregation [separation of advice, sales and product manufacture] and horizontal disaggregation [separate of wealth, insurance, retail banking and investment banking]. In addition, there are significant risks from their operations in derivatives, and in an integrated environment, costs, risks and profits are cross linked. Given the size of the derivatives sector [significantly larger than before the GFC], the systemic risks are significant. To counter this, we advocate the implementation of a modern Glass Steagall separation, where the high-risk speculative activities are separated from the normal lending, payment and deposit functions within banking. This would have the added benefit of reducing the potential risks of a bank deposit bail-in in a time of crisis. Evidence suggests that the existence of a modern separation would reduce risk and limit systemic risk. In a post Glass Steagall world, bank lending would be more aligned with the deposits available, so their ability to make loans “from thin air” as in the current system would be curtailed. They would also be more inclined to make loans for truly productive purposes.
The Council of Financial Regulators is the peak body, chaired by the RBA, where key policy is set, with the Treasury, ASIC, APRA and others. However, other than scant minutes (a recent innovation) none of their deliberations are made public, and it appears that all entities have been sharing the same view that growing housing credit was the chosen growth lever of choice following the mining boom. It appears that the weak supervisory approach from ASIC and APRA stemmed from this policy and was supported by policy rates being set too low. As a result, the systemic risks have been underestimated, and the economic platform for the country narrowed. The Royal commission highlighted the lack of coherence, and alignment. We also would argue that APRA has myopically focused on financial stability, at the cost of good consumer outcomes and competition, that the regulations favor large players over small players, that the RBA policy rates are too low, and the ASIC so far is still perceived as a weak and ineffective regulator.
In summary, the Japanese experience has shown that negative interest rates don’t work. The proposed legislation will simply hasten financial abstraction, make ‘bail in’ easier, concentrate the payments system even further, administered by a oligopoly that is in tatters, teetering on the edge of disaster. Much better to quickly introduce disaggregation legislation and force all Australian ADI’s to maintain sufficient cash balances to meet depositors needs.
getupsolomon 