Negative interest rates exist in Europe and Japan and remain on the table at the Federal Reserve, per its Chairman Janet Yellin this week. That’s a fact. The world wide war on cash expands on what that means and how it works.
There are two salient fats involved: First, negative interest – having to pay others to hold your money – wipes out two major economic basics: savings and holding cash for risk protection. Holding cash becomes a losing proposition; the central bankers are forcing citizens into risk asset investments. Permanent inflation devalues hard cash under the mattress, now disappearing under the advances of electronic payments. Already many stores in Scandinavia, as we wrote earlier, refuse cash payments.
There are two reasons for this trend, advantages for government and for banks. If you cannot buy or sell outside the internet, government has complete control over your economic activities; they can be conducted only with its permission and your records of them will be open to it. Government will be able easily to shut you off from any transactions at need. That has to appeal!
Bankers now must worry over the possibility of such a run on deposits and investments as most recently occurred in 2008. So much money was being withdrawn from deposits and short term investments that the demand exceeded the ability of the system to convert assets into cash quickly enough and the system did not hold enough hard cash to respond to the demand. A bank run, in other words, on an enormous scale. When a bank cannot meet its legal obligations, it collapses; so too an entire financial system. So if cash is no more, only electrons will be needed and bank runs will be a historical risk. (A bit simplified, but that’s the concept.)
That’s just background though; there is another aspect to this: Such a system is The end of capitalism. Historically there have been two systems that weren’t capitalism: No system at all or any government system. Neither has ever been very successful. Hybrids such as our present, government managed markets aren’t too successful either, as our present economic doldrums and those in Europe, China and elsewhere attest. See, political goals don’t mix well with economic ones.
The thing is, honest capitalism depends upon a free market. When government moves in to regulate a market, it isn’t free, right? The inability of the Soviets to replace market decisions with government planning is what ultimately brought Soviet collapse. The same is now beginning the Chinese collapse, though it required longer after China opened up the economy to entrepreneurs. Unfortunately, the Chinese government did not let go, continuing its corrupt government enterprises, heavy regulation and destructive central planning. China is following the Soviets down the historic tubes; unfortunately, so are Europe and the United States. And others.
And even more unfortunately but in classic political fashion, the politicians are set to cure the ills that they have cause (not admitting that, of course) by administering still more of the central planning and control that has brought about the decline. In other words, replacing the free market – or what is left of it – with the central bankers. (Even if Socialist Bernie Sanders doesn’t win.) We venture to guess that this is likely even if avowed conservative Ted Cruz wins.
We have, with this prognosis, risked our reputation, whatever that amounts to. We may well be wrong, after all. In fact, we hope that we are very wrong. Any bets out there?