For over a decade the World has experienced a peculiar kind of war – the war on cash. According to governmental propaganda, the noble reason behind it is the fight against money laundering and financing terrorism. Meanwhile, the involvement of the HSBC in the biggest money laundering for Mexican drug cartels scandal was swept under the rug. The bank never formally admitted anything. It had to pay a penalty but the fact is that no employee faced charges, not to mention any jail time.
Knowing the above, can you actually believe in the war on cash being waged against criminals? No. You simply cannot. There are two true reasons behind this:
Firstly, increasing control over the citizen. I wrote about it more than a year ago in this article - 'Attack on cash = more power for the state and banks'.
Secondly, a controlled reduction of the total debt has been rising since ‘70s but the huge jump was seen in 2001 when Keynes’ theory about spending government’s way out of a crisis became fashionable all over the world. No one had enough money in their budgets to do that resulting in an orgy of debt.
Easily available credit and low interest rates made authorities, corporations and consumers borrow faster than the economies grew. Finally, we arrived at the point where the total debt (public, corporate and consumer) equals 245% of GDP. It is an absolute record. On top of that it was partially the debt itself that made it possible for economies to grow in the last 15 years.
Today our economies exhausted this avenue where markets grow with the simple application of additional debt. Credit does not generate economic growth anymore as the scale of indebtedness and servicing costs outweigh any marginal expansion.
Institutions that control monetary system understand the above and now the focus is on the inevitable – debt reduction.
There are two ways to reduce debt:
a) Direct bankruptcy (very unpopular as rioting people are hard to control).
b) Inflationary escape (much more destructive solution for the economy, lengthy in time. Preferred due to the fact that the majority of population do not understand what is happening and who is responsible for that).
Everything points to the second solution being utilised soon on a massive scale. Central banks all over the world lowered their interest rates to zero. The EBC is printing more than ever and rate hike in the US was a just one-time event and chances of returning to both ZIRP and QE are rising.
Practically all countries in the world note budget deficits (government spends more than it collects from tax revenues). The difference is paid by printed money (inflation).
We already can observe NIRP (negative interest rates policy) in Switzerland, Denmark, Sweden and Japan. Budget deficits openly announce the need of inflation. Conditions are nearly perfect to manufacture one. I used ‘nearly perfect’ as in my opinion, central planners will move even further than their idols from the USSR.
The scale of QE will grow
As of now central banks are the biggest players in the bond market. All printed funds do not end up in the real economy. Partially they are tunnelled into investment funds that sell artificially overpriced government debt. The market is fed with currency which finances the budget deficit and in the case of 10 biggest economies it varies from 0.5% to 10.3% GDP. The only exception is Germany with budget surplus in 2015. However, this year’s influx of immigrants will demolish Merkel’s budget.
In order to produce double digit inflation you need to print more money than just 3-4%. To ‘stimulate’ the economy governments can propose variety of ‘boosting programs’ and lower taxes to make sure deficits will explode. The authorities will finance it with freshly printed money leading to inflation.
More resourceful politicians instead of tax reduction could offer giving the money out – this has been mentioned already as ‘helicopter money’. Unofficial sources hint at the possibility of the EBC giving out 1300 EUR to each person if the central bank’s policy fails at delivering inflation target. Sooner or later we will experience higher inflation thanks to bankers’ crazy ideas.
Reducing the debt – second part of the plan
Let’s assume that central banks achieve what they want and real inflation reaches 8-10% with simultaneously keeping interest rates at zero or negative levels. The inflation is now higher than interest on any deposit or bond.
Investing in debt is absolutely pointless but everything is ‘under control’ because the only buyer of debt is the central bank itself. The central bank plays the long game here and the continuity of the system is much more important than the return on this investment. Even today, thanks to central bank shopping for government bonds many of those bonds can boast negative interest rates (buyer loses money). By increasing the scale of printing we can hike the difference between debt interests and real inflation – and what is important – still keep the control of the system. The devaluation of debt happens quicker than the speed of adding new debt.
In the event of NIRP, keeping your money in the bank account does not make any sense. Bank instead of giving us interest on our deposit would require payment from us. If the interest you earn from deposit is marginal it is still ok but when Mr. Smith will see that bank charges him due to NIRP he will pull his money out of the bank very quickly.
We can defend ourselves against NIRP as long as we can operate with cash. If limits of cash transactions are going to be strengthened and banks are going to charge for every payment and withdrawal, society will accept NIRP as cheaper than using old-fashioned cash.
This can lead to a situation where the share of cash in the economy will be so marginal that banks can limit withdrawals over few thousand in any currency. When you want to take out any bigger amount of money (few thousands) you need to state the reason for doing so, wait few days for an appointment and then collect your funds. Europe will definitely continue in the same direction.
The elimination of cash achieves one more goal. Preventing 'bank runs'. In the past banks in bad condition used to go bankrupt when people in the fear of losing money wanted to withdraw their deposits. A sudden outflow of capital ended up in bankruptcy. In Bulgaria, two years ago all offices of one bank were closed for 30 days due to the amount of withdrawals. The panic was a result of a gossip spread among social media regarding possible bankruptcy of the bank. With no cash there is no risk of a ‘bank run’. The question is – what will then stop financial institutions from taking even bigger risks?
The elimination of cash and negative interest rates
Coupling those two factors is nothing else than a tax on capital.
Many people previously depositing money in banks will turn to investment funds only to escape additional taxing. On average 80% of people are not ready to start their experience with investing and they should stick to deposits. As a result the level of savings will dramatically plummet and society’s dependency on government will increase. Maybe this was the plan from the very beginning?
One-time, extraordinary taxes
Another big danger stemming from the elimination of cash is surrendering the rest of personal freedoms to the state. An example of Poland is useful. Two years ago when government lacked money they ‘appropriated’ billions from private pension funds and covered a huge deficit. This shows the actual level of control over masses.
What if after printing money, ZIRP and other manipulations government still lacks money? Maybe ‘one-time’ tax of, let’s say, 10% on all deposits? Why not? A ‘solidarity tax’ in the name of saving the country, right?
What if an overly leveraged bank on the brink of bankruptcy takes over 30% of our deposits? We cannot take the cash out as it has been eliminated. The ‘Bail-in’ procedure was introduced for something, wasn’t it?
The policy of central banks in developed countries clearly points out that people behind this rigged system are trying to devalue four decades of accumulated debt with inflation. The Debt is a problem of primarily developed countries. In developing countries we record very low levels of credit – and what is crucial – it is kept in check with high interest rates. After 2008 its value substantially increased but its scale is beyond comparison with the one of developed countries.
The increase of money supply rests at the foundation of the inflationary escape from the debt crisis. It is also under tight control of the BIS (Bank of International Settlements). For a period of time one central bank starts printing money and then reduces the money supply. Then another central bank takes its place. In 2008 the FED started printing then followed by the Bank of Japan and the Swiss Central Bank. Today the ‘mad’ ECB destroys the euro. The supply of money is increased in a way to make sure there is no loss of credibility of respective currency, sudden hyperinflation or losing control over the system.
In case the trend accelerates, debt can be cut by 7-10% each year. Unfortunately the debt itself does not disappear. It is being paid by a hidden inflationary tax. In other words, government creates circumstances for the creditors to be paid by using money from those people who have savings. Together with the level of savings falling, the middle class diminishes and society becomes impoverished and increasingly dependent on the state.
The perfect example of how printing money does not work is Japan’s three lost decades. Fresh example is the US where due to hidden inflation the total indebtedness fell from 374% in 2008 to 348% now. This kind of debt reduction lowered the labour participation share in the US society (increase of unemployment), decreased an average salary and lowered money velocity and share of real estate owners. As you can see, an inflationary reduction of debt has some unintended – negative – consequences.
The time will show who is right but the recent performance of Janet Yellen suggests that in the next six months the FED will cut interest rates and probably start printing again. The effect will be an increased inflation which can become harder to control, especially because the US dollar slowly loses its reserve currency status. The USD inflation is not contained in the US, this problem touches the whole world. Most of dollars are being kept as reserves in nearly all countries on the globe. The result everyone should fear is a destructive stagflation – a deep recession with heavy inflation.
I wouldn’t like to end on such a negative note. The effects of the debt reduction will be felt in every country but in different ways. The dire the consequences the higher the debt level. Many developing countries will experience very miserable times but nonetheless, some have a fantastic perspective for development in the forthcoming years.
When thinking where to put your capital, take a look at countries with low level of indebtedness and sensible demographic profile. Finally, see below chart showing the total level of indebtedness among developed and developing countries.