Liquidity in government bonds – differences in sovereigns and colonies

December 2, 2016

This is a superb paper which looks at bond markets in colonies and sovereigns:

In a recent paper, we study the pricing of government debt in a setup that provides both insightful institutional parallels, and an empirically much friendlier environment (Chavaz and Flandreau 2015). During what some economists call the ‘first globalisation’ era (1870-1914), 68 countries raised funds in sterling on the London Stock Exchange (LSE). With good reason: London was home to the most astute sovereign underwriters, and an ample supply of capital. Countries on the gold standard would not have to worry about exchange rate risk when they borrowed in sterling. The London market had many liquid instruments. Among them, the British government’s quasi-perpetual ‘Consol’ reigned over the largest and most liquid secondary bond market worldwide.

One unique feature of the London government bond market of the time was that it was split roughly equally between truly sovereign countries – like Argentina or Greece – and colonies of the British Empire, such as Canada or Jamaica. As with pre-crisis Eurozone members, the fiscal sovereignty of colonies at that time is best described as ambiguous. By law, colonies ran their own budget with either a quasi-full autonomy (in the case of self-governing dominions such as Canada and the Australian colonies), or a limited one (for Crown Colonies such as Jamaica). In reality there was a widely-held perception that London would prevent default, maybe by doing ‘whatever it takes’. Bond prospectuses never explicitly stated this as policy but, as British parliamentarian (and future prime minister) Benjamin Disraeli emphasised after the 1857 Sepoy mutiny in India, it would be very difficult not to bail out, in some way, a colony that threatened to default.

The consequence at the time it was that credit risk was hardly priced for colonies. This was later confirmed by econometricians (Accominotti et al. 2011). Despite this, colonial spreads over the British Consol averaged about 1%, or 100 basis points. They also varied substantially across time, and between colonies.

When investigating liquidity, a convenient feature of LSE quotations is that they provided precise information on the range in which transactions were expected to take place for any given security – not a true bid-ask spread, but a kind of measure of liquidity. We discovered that this range is a solid proxy for measuring bid-ask spreads at that time.

Hmm..

The results just show this as well. Colonies did not face credit risk but faced illiquidity risk:

Our conclusion – backed by institutional analysis, historical evidence and econometric tests – is that colonies’ semi-sovereignty significantly decreased the severity of information asymmetries between issuers and primary market investors, and among secondary market investors. In turn, this resulted in two paradoxes of semi-sovereignty.

  • Because of different information asymmetries, the two foreign debt markets (sovereigns and colonies) were characterised by different underwriting technologies. Sovereigns typically tried to buy the services of prestigious merchant banks to circumvent the pre-commitment problem inherent to sovereign borrowing (Flandreau and Flores 2009). Deep-pocketed bankers not only lent prestige at issuance, but also stood ready to promote liquidity in the secondary market. Given the absence of severe information asymmetries for investment in the colonies, this was a much less attractive business in the case of colonial debts, and merchant banks soon disappeared from colonial issuances. Instead, colonies used a variety of unusual intermediaries such as second-tier commercial banks or broker-underwriters, both with little means or interest in promoting liquidity. This is the first paradox of semi-sovereignty: it lowered credit risk, but at the price of higher illiquidity risk.
  • For related reasons, the two markets had different clienteles. The absence of asymmetries of information made colonial bonds a natural habitat for those in search of securities free from adverse selection, like insurance companies, commercial banks, and uninformed rentiers who were seeking to cash in coupon payments. This is the second paradox of semi-sovereignty: the lack of adverse selection further worsened bond liquidity by attracting investors that rarely traded.

The parallels between Eurozone and colonial bonds are important. They suggest that the pricing of liquidity and credit in government bond markets may be ‘always and everywhere an institutional phenomenon’. Our historical evidence suggests that investigating the microstructures of sovereign debt markets – their logic, operation, and segmentation – might help in interpreting bond price movements. For policymakers, our research may provide an encouragement to investigate which institutional features can explain the survival of the British imperial architecture, while that of Eurozone was deemed fragile enough to allow destructive liquidity-credit feedback loops.

Fascinating…

 

Why it is important to define money correctly..

December 2, 2016

An interesting and timely piece by Frank Shostak.

He says currently we are trying to take out new measures for money just to fit their correlation with economic indicators. This is no way to define money:

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India needs a Rs 200 note, not a Rs 2,000 note and the science behind it…

December 1, 2016

One lingering puzzle behind using demonetisation to attack black money is introduction of Rs 2000 notes. It just does not make sense at all.

Earlier, Governments demonetized the  high denominated notes citing black money but did not introduce a high denomination note right away. This time it is highly unusual as we have new high denomination notes right after demonetising the same high denom notes. We did away with old Rs 500 and Rs 1000 notes but introduce a new Rs 500 and Rs 2000 note. I mean why Rs 2000?

Ravi Abhyankar ( an independent analyst and strategic advisor) has a piece questioning this quoting some science behind it as well:

Industrial design has a mathematical concept called preferred numbers. Way back in 1870s, a French engineer Charles Renard proposed a system based on logarithmic scale to produce a limited number of sizes to cover a wide range. A variant of that internationally accepted system is the 1-2-5 series, which is widely used in minting coins and printing notes.
 
The 1, 2, 5, 10, 20, 50, 100, 200, 500, 1000… is that series. The beauty of the series is that any adjacent numbers differs by a product of 2 or 2.5. As a result, they are spaced close enough but cover a wide ground. How? Let us look at an Indian street vendor who still measures the fruit he sells on old-fashioned scales. If he has weights of 100gms, 200gms, 500gms and 1 kg, he can give you fruits in multiples of 100gms by using a maximum of three weights. E.g. 800 (500+200+100), 900 (500+200+200). In no case does the seller need to use four weights. If you must follow the decimal system, this is an extremely efficient system. 
 
Now look at the Indian banknotes. Until 8 November 2016, India had currency (notes or coins) with a denomination of 1, 2, 5, 10, 20, 50, 100, 500 and 1000 rupees. Below Rs100, transactions were efficient. The gap between Rs100 and Rs500 (1:5) has been too large. Over the last few years, it has produced inconvenience (certainly) and contributed to inflation (probably). It is well known that bigger values and larger gaps can increase prices. In January 2002, when most European currencies converted to Euro, prices rose on many goods as a result of rounding up. This rounding up phenomenon has made coins below one rupee disappear from India. 
 
I had hoped that Reserve Bank of India (RBI) would use the demonetization to introduce a Rs200 note. That would have bridged the gap between Rs100 and Rs500 and made the cash economy efficient. What we got instead was a Rs2,000 note. 
 
With the death of the Rs1,000 note, the new ratio of Rs 500-Rs 2,000 (1:4) to follow the already inefficient Rs 100- Rs 500 (1:5) is not sustainable, now or in future. And since the new Rs500 note is as yet rarely available, the ratio currently is Rs100-Rs2000 (1:20). When the maximum prescribed ratio for efficiency is 1:2.5, in practice we have 1:20, which is catastrophic. That is why; we have millions of people with wads of Rs2,000 notes unable or unwilling to make a small purchase of Rs200.
 
This is pure and simple mathematical illiteracy. I expect the Reserve Bank to be aware of the Renard series, which is an ISO standard. Politics and economics can be subject to opinions, but not mathematics. You invite disaster when you do not follow the basic number rules. 
 
What India needs to do urgently is to introduce an Rs200 note. And if Rs1,000 is to be permanently abandoned, then to withdraw Rs2,000 as well. For efficient transactions, the ratio in the 1-2-5 series must never exceed 2.5. 
Perhaps one of the best pieces on the Rs 2000 note issue.
We also had Rs 2000 notes coming out first leading to it becoming like the old notes only. There was no change for the same and was just lying in wallets. More 500s and 200s would have been far better. The intent and signal both would have matched.

Need for Governance at the Central bank boards…(lessons for India?)

December 1, 2016

This is a timely piece by Ashraf Khan on IMF on the need to look at central bank boards. He says Central bank boards are no different from corporate boards and needs similar critical reviews.

This is highly relevant to India.

One of the biggest puzzles (and frustrations) has been role of Indian Central Bank’s Central Board in India’s demonetisation.

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Global war on cash: Switzerland bucks the global trend by maintaining a cash tradition

December 1, 2016

Anti-cash movement is all official and moving at a rapid pace.  There are rumors that Euroland is attempting tax on ATMS.

But then some countries are managing to maintain their sanity and believe in cash tradition. If the country happens to be Switzerland, it is a big setback for the anti-cash movement.

The Swiss are rarely late. But a new series of bank notes has been in the making since 2010. The new Swiss franc notes are finally being released, starting with the 50-franc bill rolled out earlier this year.

This latest series of Swiss banknotes arrives as alternative forms of payment are gaining popularity worldwide and cash, particularly in high-denomination notes, is being closely monitored to prevent counterfeiting and crime.

In Switzerland, however, tradition trumps trend. Cash remains the preferred method of payment and is unlikely to lose that position anytime soon. In fact, banknote circulation has increased from a nominal value of 40 billion francs in circulation in 2007 to more than 65 billion in 2015.

“Despite rapid technological developments in the payments arena, cash has yet to be superseded; indeed, it is still a widely used and popular option in Switzerland,” said Swiss National Bank Chairman Thomas Jordan earlier this year.

A recent study by the Bank for International Settlements confirms this trend: the ratio of credit card payments to GDP in Switzerland is only 10 percent, compared with 25 percent in Sweden and 34 percent in the United Kingdom.

The thinking is more on design of the currency:

The Swiss may not be in a rush to change the way they use banknotes, but it’s a different story when it comes to designing them. The new series has moved away from depicting well-known Swiss personalities in favor of more nuanced and abstract concepts.

Under the theme of “the many facets of Switzerland,” each note displays a different concept from a Swiss perspective. “Each characteristic is communicated via an action, a Swiss location, and various graphic elements,” according to the central bank.

The 50-franc note, which previously portrayed Dada artist Sophie Taeuber-Arp (the only woman in the old series of eight notes), now uses wind as the key motif to symbolize the wealth of experiences Switzerland has to offer, represented by a dandelion and a globe on the front and a paraglider traversing the Alps on the back. Other notes will embody time, water, matter, and language.

The new banknotes also include tactile features to help visually impaired people distinguish between the different denominations.

While the final design of the next banknote in the series remains to be seen—the 20-franc note is scheduled for release in 2017—it is safe to say that Switzerland will continue doing some things differently so that other traditions can be preserved.

Interesting.

I don’t know but we get too badly carried away by technology hype. I am sure there will be serious unintended (and intended) consequences of this digital drive. What should have moved as a gradual process has been made way too disruptive.

Infact, one big question is what prevents the governments from banning/restricting digital payments in future?

Demonetisation 2016: How is RBI adjusting its balance sheet..some initial trends (update and error correction)

December 1, 2016

Thanks to G (a visitor to this blog) for pointing the error. Apologies to all.

Just to reiterate, this blog pointed how RBI is accounting for the decline in Notes in Circulation. As currency had declined by 3.6 lakh crore on liabilities side. This was adjusted by showing a parallel rise in Deposits -Others by Rs 3.55 lakh crore. At that time, this blog indicated that this rise in Deposits -Others was mainly due to Reverse Repo (about Rs 1 lah crore) and Deposit Education Awareness Fund (remaining 2.5 lakh crore).

G rightly points that we need to account for different tenors in reverse repo transactions over the period. Once you look at the cumulative reverse repo transactions, you get almost the entire 3.55 lakh crore adjustment via reverse repo.

So this blog dug out reverse repo data from past days which either matured on 18-Nov-2016 or matured in days ahead. This is how it looks:

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Typewriters, Writing a Social History of Urban India

November 30, 2016

Here is an  excerpt from With Great Truth and Regards, a forthcoming book on the social history of the typewriter. It is edited by Sidharth Bhatia and published by Godrej.

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Non-Brahmin priests for Karnataks’s state-run temples..

November 30, 2016

This is a week old news which got lost in the demonetisation tide.

The secret world of temples and their caretakers are just a fascinating social history.

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India’s Demonetisation: Seigniorage and Cantillon Effects

November 30, 2016

Larry White and Shruti Rajagopalan have a superb piece highlighting the Cantillon effects of demonetisation.

The Cantillon effects are named after 18th Century economist Richard Cantillon. But then who reads history or cares for it. Under this, monetary policy transfers the purchasing power from those having old notes to those who get the new notes. This will lead to disproportionate rise in prices among different goods in an economy:

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The Swiss private bankers should be a model for bankers everywhere (and the lost Indian ones)…

November 30, 2016

Mention Swiss banking and we either have the image of them as hiding wealth of uber rich across the world or the UBses of the world. But the region also has a much lower profile and glamorous set of bankers called Swiss Private bankers.  They are these century old bankers which have held the principles of banking for a long time.

Marcia Christoff-Kurapovna writes about these bankers:

The strong showing in banking stocks may show some optimism following the presidential election victory of Donald Trump. But, a healthy future for US banking will only take root if that industry comes to terms with the original purpose for which banking was intended — wealth management. As such, the great American bank in generations to come will not be of the calamitous Wells Fargo or Bank of America type — or even Facebook’s Electronic Money Institution license or Google’s Mobile Wallet. The most solid banks will be remakes of that timeless classic, the Swiss private banker. It is this “back to the future” philosophy of banking, already prevalent in some of the past decade’s best performing and least known banks in the US, that must become predominant if that sector is to remain resilient……

The focus instead must be on the cultivation of localized, community-centered but nationally ambitious banks that one rarely reads about amid the stories of pointless bail-outs, fake-account scandals, ZIRP, and robo-trading. Superbly managed and often family-owned, these banks profited throughout the post-crisis period, enduring regulatory mayhem, Fed mission-creep, and the rise of ‘alternative banking” fintech and mobile-app technologies. They did it by sticking to sound fiscal fundamentals and never underestimating the “psychological” preference on the part of the public for sturdy institutions whose owners or managers are members or descendants of that founding banking family itself. Though PriceWaterhouseCoopers gloomily predicted that traditional banking would not survive beyond 2025, it is precisely highly successful banks like Beal Bank of Dallas, Texas, or the 100 year-old Bank of Fayette County in Tennessee, that will be the only banks to survive the next decades and beyond.

These Private Bankers are not Private banks:

To understand the real next-generation banking, let us look to the forefather role model that embodies the very best of ultra-traditional banking principles: Switzerland’s national legend, the unlimited liability banquier.No American bank, including the two examples mentioned above, follow this ‘severe’ Swiss model. Still, such Geneva, Zürich, and Basel-based aristocratic workhorses in the art of wealth management and no-frills (not even on-line) banking are the kinds of institutions where money still means gold and Ms. Yellen’s machinations an amusing, yet comfortably distant, American curiosity.

First off, a nuance of definition. The expression is “Swiss private banker,” and not “private bank,” or “private banking.” This first refers to a very specific institution, defined by 1934 Swiss law and, as an expression (“Swiss private banker”), is a registered trademark. These are not UBS- or Credit Suisse-type banks (which are, for all intents and purposes, American banks), nor simply lesser-known tax-evasion vehicles shrouded in glamorous secrecy. Instead, the term refers to a narrowly defined privileged few “houses,” often centuries old and almost always still family owned, that, by law, must adhere to unheard-of (on these shores) personal liability among their partners and high reserve requirements, among other standards. Indeed, in the last three years alone, the number of these banks has dwindled from twelve to six, as pressures from the global economic crisis forced several of them into limited liability companies. 

They are in a class of their own, synonymous with unbounded responsibility. The six remaining are: Baumann et Cie.; Bordier et Cie.; E. Gutzwiller et Cie; Mouge d’Algue et Cie; Rahn & Bodner; and Reichmuth & Co. “Private bankers” as these are: (1) exclusively organized in the legal form of a partnership or limited partnership; (2) run by partners who are usually family descendants of the banks’ founders; (3) invest their own capital in their banks and maintain high cash reserve ratios; (4) defined by a special private-banker status that is dependent upon the presence within management of one or several partners with unlimited liability for investment obligations. This last is their greatest distinction. Other Swiss banks offer wealth management services but their maximum liability is confined to equity capital. With private bankers, liability is not solely limited to the company equity, but partners are additionally liable with their private assets.

Thus, their primary duty is to their clients, to their own families, and to their own vested responsibilities — a quaint notion these days, to be sure. They are run by a flat management structure; decision-making chains are short; they do not develop their own products and are therefore not subject to any conflicts of interest in investment advice. Investments must be tradable and liquid at all times; bankers can’t act as brokers and they are not on-line banks. They are not allowed to sell their own instruments, tend not to invest in global real estate, and, as mentioned before, have strict rules on reserves.

India too had these bankers which were called as indigenous bankers. They were called as Shroffs, Multanis, Marwaris, Chettiars and so on. But they have all disappeared from the mainstream banking scene. They were mostly given bad names by the media and experts alike failing to look at how some of them actually excelled in banking for many years and even centuries. Some of them like Chettiars in Madras even used their banking skills  to form joint stock banks like Indian Bank, Indian Overseas Bank, Karur Vysya Bank and Laxmi Vilas Bank and so on.

There was this tiff between the Government/RBI and Indian Private Bankers. The former wanted them to be regulated as per banking regulations which latter refused as they found the regulations highly restrictive and so on. Till the 1970s there were efforts between the two but now we hardly hear about them.

Demonetisation 2016: Meet Bengaluru’s Bunty aur Babli

November 29, 2016

This is one of the most interesting stories that have emerged from Demonetisation 2016. How a couple planned a heist and almost pulled it off. It has great similarities to the Bollywood movie Bunty aur Babli.

Bunty was a driver of one of the cash vans and ran away with the cash. He then moved different towns with the new cash along with Babli. They were ahead of the police on most occasions and then Babli gave up due to Police pressure. Bunty continues to abscond and  ACP Dashrath Singh is on the trail to catch him..

 

Estimation of the size of the Black Economy in India, 1996-2012

November 29, 2016

As we confuse terms like Black money,Black income, Black wealth and so on, time to read some experts.

Prof Arun Kumar of JNU has a paper looking at size of black economy in 1996-2012:

This article attempts to make an advance in the estimation of the size of the black economy in India by bringing in the institutional aspects of black income generation and taking the macroeconomic variables they affect into consideration. It is not a one-point study, as earlier studies based on the fiscal approach have been. Unlike studies based on the monetarist approach, the fiscal approach recognises that black incomes are generated through many different ways in different sectors of the economy. Hence, the size of the black economy in India is projected on the basis of data on the share of the services sector and trade in GDP and the crime rate representing the extent of illegality.

Finally, after 1995–96, estimates based on the fi scal approach are not available, and this article therefore estimates the size beyond that year. The analysis points to two major difficulties in estimating the size of the black economy. First, the lack of official studies that can provide additional data points. Second, the lack of proper econometric techniques to incorporate the missing or mis-specified variables required to carry out the estimation. All the offi cial data series are in error due to the existence of the black economy, and all the studies using such official data suffer from this.

Given the many limitations concerning data mentioned, the relative size of the black economy in 2012 turns out to be 62.02% of the GDP. The average rate of growth of the black economy in the five-year period up to 2012 was about 20%. Clearly, since projections have been made from 1996 onwards, the further out in time one goes, the larger is the likely error in the estimate. New methods of estimation of the size of the black economy are needed, and this article has made one such attempt.

The paper is an extension of earlier interviews of Prof Arun Kumar (one and two) who pointed who this demonetisation exercise will hardly achieve much. It will just be increased trouble for the poor and marginal..

Demonetisation: 1978, the Present and the Aftermath

November 29, 2016

This is the title of a new EPW paper  by J Dennis Rajakumar S L Shetty of EPW Research Foundation, Mumbai.

Sudden demonetisation of ₹500 and ₹1,0000 notes, an elimination of existing money stock that enables economic transactions, is bound to have an economic impact, apart from penalising those who hold this money as store of their tax-evaded illegal wealth. Considering various possible scenarios, a loss of gross domestic product will be inevitable. 

Whether demonetisation this time will achieve its stated purpose can be understood only when more statistics become available. The extent of demonetised high denomination currency that finally fails to be exchanged for new notes or be deposited in banks will be an important indicator.

There are some interesting trends and analysis here.

 

Saving the world from econocracy…

November 28, 2016

Three students Joe Earle, Cahal Moran and Zach Ward-Perkins have written this book – The Econocracy. They say we need to save the world from too much of economic advice and frameworks.

Mark Buchanan of Bloomberg endorses the book:

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Digging through India’s Demonetisation History Part -III: Why were high denominated notes demonetised in 1946 restarted in 1954?

November 28, 2016

This blog had earlier pointed to insights from the two historical episodes of India’s demonetisation in 1946 and 1978. There was another post on how Pakistan demonetised the Indian Rupees in its country post Partition.

One thing which keeps striking you all the time why does the Government keep reintroducing these high denomination notes? Infact, the first time they were demonetised in 1946, they were reintroduced as early as 1954! I was (once again) scanning RBI History volume (1951-67) to understand what was the thinking behind the reintroduction.

It says:

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Demonetisation 2016: Impact on money supply…some initial trends..

November 26, 2016

The data for Nov. 11 2016 shows that M3 declined by Rs 38320 Crore in the fortnight.

 

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Demonetisation 2016: How is RBI adjusting its Balance Sheet? Some initial trends..

November 26, 2016

RBI released its Weekly Statistical Supplement for week ended 25 Nov 2016. It has RBI balance sheet and Reserve Money data for week ended 18 Nov 2016 and Money Supply data for 11 Nov 2016.

What are the initial trends?

In the RBI Balance Sheet, we see a marginal rise of Rs 8539 Crore. The major changes are mainly on items in Liabilities side and marginal ones in Assets (as expected):

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India’s 2016 Demonetisation: Quoting John Stuart Mill and lessons from Milton Friedman….

November 25, 2016

Milton Friedman’s one of the most famous and widely read papers is – The Role of Monetray Policy , American Economic Review, March 1967. Each time you read it, you learn something new.

In the paper, he quotes John Stuart Mill (page 12):

My own studies of monetary history have made me extremely sympathetic to the oft-quoted, much reviled, and as widely misunderstood, comment by John Stuart Mill.

“There cannot . .. ,” he wrote, “be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labour. It is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order” [7, p. 488].

True, money is only a machine, but it is an extraordinarily efficient machine. Without it, we could not have begun to attain the astounding growth in output and level of living we have experienced in the past two centuries-any more than we could have done so without those other marvelous machines that dot our countryside and enable us, for the most part, simply to do more efficiently what could be done without them at much greater cost in labor.

But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines. The Great Contraction is the most dramatic example but not the only one. Every other major contraction in this country has been either produced by monetary disorder or greatly exacerbated by monetary disorder. Every major inflation has been produced by monetary expansion-mostly to meet the overriding demands of war which have forced the creation of money to supplement explicit taxation.

The first and most important lesson that history teaches about what monetary policy can do-and it is a lesson of the most profound importance-is that monetary policy can prevent money itself from being a major source of economic disturbance……

The words are just so profound. They sum up monetary history and experiments across world and across time in very few words.

There is a reason why history of India’s demonetisation tells us the reluctance of Indian central bank of going ahead with the move. There is a reason very few central banks and countries have gone ahead with the move at the first place.

Infact, why go far in monetary history. Just see today’s world economy. Its major source of instability is the monetary policy conducted by central banks which has made money a major source of economic disturbance.

Demonetisation Links (25-Nov-2016)

November 25, 2016

The anti-cash movement rising across world and its unrealised wide implications..

November 25, 2016

Joseph Salerno of Mises Institute has been warning us against the rising anti cash movement across the world.

In an earlier talk Salerno tells us how these are just attempts by the State to ensure you are always under their radar.

Governments, at least modern western governments, have always hated cash transactions. Cash is private, and cash is hard to tax. So politicians trump up phony reasons like drug trafficking and money laundering to win support for bad laws like the Bank Secrecy Act of 1970, which makes even small cash transactions potentially reportable to the Feds.

Today cash is under attack like never before. Ultra low interest rates are the norm for commercial bank accounts. In Europe, as the ECB ventures into negative nominal interest rates, certain banks threaten to charge customers for depositing cash. Meanwhile, certain European bonds now pay negative yields, effectively turning them into insurance products rather than financial assets. And some economists now call for the outright abolition of cash, which shows just how far some will go in their crazed belief that economic prosperity can be commanded by forcing us to spend rather than save.

The War on Cash is real, and it will intensify. Here to explain is Dr. Joe Salerno, who spoke on the subject at our recent Mises Circle event in Stamford, Connecticut.

In this piece, Ryan McMaken sums up the talk:

As Joseph Salerno has observed, the elimination of physical cash makes it easier for the state to keep track of private persons, and it assists central banks in efforts to punish saving and expand the money supply by implementing negative interest rate schemes. 

A third advantage of the elimination of physical cash would be to more easily control people and potential dissidents through the freezing of their bank accounts.

Joseph Salerno further points that post-India, there is a similar movement in Australia as well:

The global war on cash is remarkably well coordinated. Less than a week after the Indian government announced it was withdrawing its two highest denomination currency notes (equivalent to about $15.00 and $7.50, respectively) from circulation, the Anti-Cash Axis, which comprises a witch’s brew of national governments, establishment media outlets, international bureaucracies and, especially, gigantic multinational banks, has launched a concerted attack on Australia. Two days ago, Citibank announced that it was going cashless at some of its Australian bank branches.

Yesterday, Swiss giant UBS called for the elimination of the Australian $100 and $50 bills because it would be “good for the economy and good for the banks.” The Australian government in cahoots with the media prepared the way for these brazenly self-serving antics by two of the largest banks to have failed and been bailed our during the financial crisis. Back in February a leading Sydney newspaper published a series of articles, some authored by officials from Australia’s Treasury Department, suggesting that abolishing cash would “save billions” and that  “a cashless society is the next step for the Australian dollar.” 

I have a better proposal for our brothers and sisters Down Under: don’t acquiesce in the elimination of your cash; eliminate the banks by immediately reclaiming all your cash that is “on deposit” at these institutions that cannot exist without government guarantees and bailouts.  

What is interesting to see across are huge double standards across the globe. We are hardly seeing a natural evolution towards e-payments.

There is this supposed crony capitalism where these large banks/payment providers are using Governments to push people towards their products. Then these very large corporate/financial players along with these e-payment providers build a story that how these things are about development of markets and making them efficient!

Part of the blame is on economics education as well. Earlier history of money was known to most students. Now we hardly discuss about historic evolution of money and State’s deep interest and manipulation in the matters of money. The way we have moved from commodity money to fiat money and all fiat money declared as legal tender with very little State accountability is a fascinating tale untold. And now this jump towards plastic money which gives State powers to monitor you as well. What better?

It is shocking that earlier most economists would have raised questions on this State involvement in monetary matters. Now most are backing it!