Get Ready for the Ban on Cash

Not much to report from the  financial markets.

And things seem to have settled down in our hometown of  Baltimore, after they called out the National Guard.

So, we’ll return to our exploration of the Fed’s  fabulous fantasyland…

Yesterday, we  looked at the coming liquidity  drain.

It is roughly  what has been happening in California already. When more liquidity is being  used than is available, things dry up.

But wait…

Do the feds have  a still-untapped aquifer of cash and credit they can pump dry?

Short-term  interest rates are already as low as they’ve been. But could they go lower?

Yes on both  counts…

Ask your spouse:  ‘What will you give me if I kiss you?’ If the answer is nothing, you have  established the value of your kiss: zero.

But suppose the  answer comes: ‘If you take out the trash, maybe I’ll let you kiss me.’

Now, the value of  your kiss is even lower — below zero. You have to add something to it to make  it acceptable.

Likewise, it  appears that lenders — mainly in Europe and Japan — must add something to their  money each year in order to persuade the government to take it.

We have already  been humbled and flummoxed by zero-percent interest rates. Even when we are in  our cups…or deprived of oxygen…they  make no sense.

How could  something simultaneously have no value — or less than no value — and still be  worth anything?

Money has got to  be worth something, right?

Then how could it  be lent out for nothing…or less than nothing?

Bonds are a liability

Let’s take one  example…

Earlier this  month, the Swiss government sold 378 million Swiss francs ($354 million) of  bonds. Those that mature in 2025 carried a yield of MINUS 0.055% before accounting for  inflation.

Does this mean  what we think it means? That  the value of the money lent is less than zero?

So, if you have a  million francs’ worth of 10-year Swiss bonds, what is it really worth?

Well, if you had  to pay a mortgage of 2%, you wouldn’t have an asset, but a liability.

So wouldn’t the  portfolio of Swiss bonds also be considered a liability, not an asset?

And if it were a  liability to you, wouldn’t it have to be an asset to the Swiss government?

So, let’s get  this straight: The borrower gets an asset. The lender gets a liability.

In what kind of a  universe does that happen?

In a negative interest world, money has no meaning. You could build automobiles that don’t  run…airplanes that don’t fly…or computers that can’t add.

It would make no  difference. You could stay in business for an eternity as long as lenders were  willing to part with their cash for no return.

Attentive readers  will realize that we do not live in a zero-interest world. We live in a world  of flesh and blood. We live in a world where cash, kisses and credit still  count for something.

And in this  world, you still have to pay for what you get.

The Swiss ban cash

But little by  little, day by day, the world we live in gets stranger — thanks to this funny  money system.

And little by  little, the more curious the financial world becomes, the more people want to  hold on to cash to protect themselves.

One of the  strangest things to happen recently was that the government of Switzerland, of  all places, has refused to allow big depositors to withdraw cash.

According to  Swiss news website Schweizer Radio und Fernsehen:

    ‘The  Swiss National Bank confirms that hoarding cash to circumvent negative interest  rates is not welcome. “The National Bank has been recommending that banks with  cash demands […] act restrictively.”’

And comments  former banking insider Frances Coppola at Forbes:

    ‘The  monetary policy of the last few years has been hampered by the supposed  existence of the “zero lower bound” at which (it is assumed) everyone would opt  for physical cash instead of bank deposits and bonds […]’

But if investors  simply cannot obtain large amounts of physical cash because banks won’t issue  it to them, the slightly-below-zero lower bound cannot bind. In which case negative  rates could be very negative indeed and no one would be able to do much about  it.

Escaping the Fed’s fantasyland

We have been predicting a ‘run on the dollar’.

Now, the Swiss  are leading the way. Keeping you from holding cash appeals for governments for  three reasons:

  1. It  is hard for them to control, track and tax.
  2. It  is fast becoming irrelevant as new technologies make electronic transactions  easier. (Think Apple’s new iPay mobile payments system.)
  3. As  long as you can hold cash, you can escape the feds’ fantasyland. If you can  stay in cash, they can’t enforce negative interest rates. You can just take  your cash and hold on to it — paying nothing for the privilege.

 

Following the Charlie  Hebdo attacks in  Paris, France is planning to limit cash payment to €1,000 (US$1,100). The logic  being that the attacks were funded with cash…

Meanwhile,  Citibank’s chief economist Willem Buiter has recommended taxing cash (a form of  negative nominal interest rates). And JPMorgan Chase has sent letters to  customers, telling them it will no longer allow cash to be stored in safety  deposit boxes.

In the US cash is  not yet illegal, but it is suspect.

Show up with a large  amount of cash at a bank…and you will likely have some explaining to do. Let  the police find it on you in a routine traffic stop…and they are likely to  confiscate (thanks to the Justice Department’s Civil Asset Forfeiture rule).

It is just a  matter of time before holding cash becomes illegal in the US too.

Will that be  enough to raise liquidity levels and asset prices?

Stay tuned…

Regards,

Bill Bonner,
for the Markets and Money Australia


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.


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