War On Cash: The Wealth Grab Continues

Ah, the ‘war on cash’ continues.

According to Bloomberg:

Australia should follow India’s lead and scrap its biggest bank notes, UBS Group AG said.

“Removing large denomination notes in Australia would be good for the economy and good for the banks,” UBS analyst Jonathan Mott said in a note to clients on Monday. Benefits would include reduced crime and welfare fraud, increased tax revenue and a “spike” in bank deposits, he said.

Unfortunately for Mr Mott, the rationale for scrapping large notes becomes redundant if he truly believes that doing so will increase bank deposits.

We’ve seen this argument used around the world to justify abolishing large bank notes — and eventually all forms of cash.

The theory is that only pimps, drug dealers and master criminals use large denomination bank notes.

The Bloomberg article concludes by saying:

The European Central Bank in February said it was considering withdrawing 500-euro notes because of an “increased conviction in world public opinion” such high-value notes are used for criminal purposes.

The problem is, if criminals really are responsible for keeping billions of dollars in bank notes out of the system, what makes anyone think they would suddenly choose to turn up at a bank to deposit their cash? Or open an online account to deposit their ill-gotten gains?

It doesn’t make sense.

Besides, our bet is that most of Australia’s $100 notes just reside somewhere within the economy. Mostly likely comprising the ‘float’ of various cash-heavy businesses.

A reasonable number no doubt sit in the cash registers of foreign exchange bureaus in Australia and around the world.

And since the near collapse of the world’s money and financial systems in 2008, we equally have no doubt that more than a few $100 notes lay under mattresses, in shoe boxes, and in safety deposit boxes…in preparation for when things take a turn for the worse again.

The reality is that the whole idea of eliminating large denomination notes has nothing to do with eliminating criminal activity. It’s all about protecting the banking system.

The giveaway appears elsewhere in the Bloomberg article:

If all those notes were deposited with banks, household deposits would rise by about 4 percent, Mott estimated. That would likely be enough to fill the big banks’ regulatory-mandated net stable funding ratio and reduce reliance on offshore funding, he said.

There you have it. Once upon a time, the banking was supposed to help support the rest of the economy — to be an intermediary between savers and borrowers.

No more. Now it appears to be the role of individuals and businesses to help support the banks.

Yet again, the general public is on the hook for underwriting the banks. And as thanks for doing so, the bankers cash their fat paycheques while slugging consumers and businesses for obscene fees and interest rates.

What a lark!

The wealth grab continues

When commodities prices were going through the roof from 2004 to 2011, there was a regular refrain about how these commodities were owned by ‘all Australians’.

It was a neat piece of jingoism.

Of course, all that iron ore, copper, and bauxite in Australia’s outback is owned by everyone.

It’s only right, therefore, that governments should levy taxes and royalties on those resources, and then redistribute the revenue to its rightful owners — all Australians.

That was the theory behind Kevin Rudd and Wayne Swan’s ludicrously infantile ‘super profits tax’.

The fact that they didn’t appear to be able to define the difference between a ‘super profit’ and a ‘normal profit’ made the whole thing even more ludicrous.

However, while it may have a nice ring to it, to say that ‘all Australians’ own Australia’s resources is not really true.

To claim that ‘all Australians’ own undiscovered and unexploited resources deep beneath the ground is the equivalent of saying ‘all Australians’ own your physical labour. (Technically, thanks to income taxes, we guess they do. That doesn’t make it any less ridiculous.)

The real owners of the resources are the capitalists, businesspeople and investors who put their money at risk.

Until these people get involved, the resources in the ground only have a theoretical value. Their actual value is nothing — until someone invests millions of dollars to dig them up.

In recent years, the claim that ‘all Australians’ own these resources has tailed off. It probably has to do with the fact that commodity prices have taken a dive.

Everyone had their hands out when iron ore was US$180 per tonne. When it fell to less than US$50 per tonne, nobody wanted a bar of it.

But government budgets are tight, and, this year, commodities prices have rebounded. That perhaps explains this from Bloomberg:

Western Australia’s Nationals party leader Brendon Grylls has proposed raising levy on BHP and Rio operations to A$5 a tonne from 25 Australian cents.

At the current price of US$79.81 per tonne, that would represent an increase from 0.3%, to 6.26%.

The Minerals Council of Australia says it would slash the workforce in WA’s Pilbara region by 4.3%.

It may very well do that. Or it may not. Either way, the one thing it definitely means is a further redistribution of wealth from the private sector to the public sector.

It means higher costs to the end users of the iron ore, or if BHP and Rio can’t raise prices, it means less in the pockets of investors by way of dividends.

The era of the wealth-grab lives on.


Kris Sayce,
For Markets and Money

Editor’s note: This is an extract from an article originally published in Port Phillip Insider.

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.

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