Hang On to Your Wallet: Negative Interest, the War on Cash and the $10
Trillion Bail-In
http://www.truthdig.com/report/item/hang_onto_your_wallets_negative_interest
_the_war_on_cash_20151121/
Posted on Nov 21, 2015
By Ellen Brown / Web of Debt
youasamachine / CC BY-SA 2.0
This piece first appeared at Web of Debt.
In uncertain times, cash is king, but central bankers are systematically
moving to eliminate that fact. Is it really about stimulating the economy?
Or is some deeper, darker threat afoot?
Remember those old ads showing a senior couple lounging on a warm beach,
captioned Let your money work for you? Or the scene in Mary Poppins where
young Michael is being advised to put his tuppence in the bank, so that it
can compound into all manner of private enterprise, including bonds,
chattels, dividends, shares, shipyards, amalgamations . . . .?
That may still work if youre a Wall Street banker, but if youre an
ordinary saver with your money in the bank, you may soon be paying the bank
to hold your funds rather than the reverse.
Four European central banks the European Central Bank, the Swiss National
Bank, Swedens Riksbank, and Denmarks Nationalbank have now imposed
negative interest rates on the reserves they hold for commercial banks; and
discussion has turned to whether its time to pass those costs on to
consumers. The Bank of Japan and the Federal Reserve are still at ZIRP (Zero
Interest Rate Policy), but several Fed officials have also begun calling for
NIRP (negative rates).
The stated justification for this move is to stimulate demand by forcing
consumers to withdraw their money and go shopping with it. When an economy
is struggling, it is standard practice for a central bank to cut interest
rates, making saving less attractive. This is supposed to boost spending and
kick-start an economic recovery.
That is the theory, but central banks have already pushed the prime rate to
zero, and still their economies are languishing. To the uninitiated
observer, that means the theory is wrong and needs to be scrapped. But not
to our intrepid central bankers, who are now experimenting with pushing
rates below zero.
Locking the Door to Bank Runs: The Cashless Society
The problem with imposing negative interest on savers, as explained in the
UK Telegraph, is that theres a limit, what economists called the zero
lower bound. Cut rates too deeply, and savers would end up facing negative
returns. In that case, this could encourage people to take their savings out
of the bank and hoard them in cash. This could slow, rather than boost, the
economy.
Again, to the ordinary observer, this would seem to signal that negative
interest rates wont work and the approach needs to be abandoned. But not to
our undaunted central bankers, who have chosen instead to plug this hole in
their leaky theory by moving to eliminate cash as an option. If your only
choice is to keep your money in a digital account in a bank and spend it
with a bank card or credit card or checks, negative interest can be imposed
with impunity. This is already happening in Sweden, and other countries are
close behind. As reported on Wolfstreet.com:
The War on Cash is advancing on all fronts. One region that has hogged the
headlines with its war against physical currency is Scandinavia. Sweden
became the first country to enlist its own citizens as largely willing
guinea pigs in a dystopian economic experiment: negative interest rates in a
cashless society. As Credit Suisse reports, no matter where you go or what
you want to purchase, you will find a small ubiquitous sign saying Vi
hanterar ej kontanter (We dont accept cash) . . . .
The Lesson of Gesells Decaying Currency
Whether negative interests will actually stimulate an economic recovery,
however, remains in doubt. Proponents of the theory cite Silvio Gesell and
the Wörgl experiment of the 1930s. As explained by Charles Eisenstein in
Sacred Economics:
The pioneering theoretician of negative-interest money was the
German-Argentinean businessman Silvio Gesell, who called it free-money
(Freigeld) . . . . The system he proposed in his 1906 masterwork, The
Natural Economic Order, was to use paper currency to which a stamp costing a
small fraction of the notes value had to be affixed periodically. This
effectively attached a maintenance cost to monetary wealth.
. . . [In 1932], the depressed town of Wörgl, Austria, issued its own stamp
scrip inspired by Gesell . . . . The Wörgl currency was by all accounts a
huge success. Roads were paved, bridges built, and back taxes were paid. The
unemployment rate plummeted and the economy thrived, attracting the
attention of nearby towns. Mayors and officials from all over the world
began to visit Wörgl until, as in Germany, the central government abolished
the Wörgl currency and the town slipped back into depression.
. . . [T]he Wörgl currency bore a demurrage rate [a maintenance charge for
carrying money] of 1 percent per month. Contemporary accounts attributed to
this the very rapid velocity of the currencies circulation. Instead of
generating interest and growing, accumulation of wealth became a burden,
much like possessions are a burden to the nomadic hunter-gatherer. As
theorized by Gesell, money afflicted with loss-inducing properties ceased to
be preferred over any other commodity as a store of value.
There is a critical difference, however, between the Wörgl currency and the
modern-day central bankers negative interest scheme. The Wörgl government
first issued its new free money, getting it into the local economy and
increasing purchasing power, before taxing a portion of it back. And the
proceeds of the stamp tax went to the city, to be used for the benefit of
the taxpayers. As Eisenstein observes:
It is impossible to prove . . . that the rejuvenating effects of these
currencies came from demurrage and not from the increase in the money supply
. . . .
Todays central bankers are proposing to tax existing money, diminishing
spending power without first building it up. And the interest will go to
private bankers, not to the local government.
Consumers today already have very little discretionary money. Imposing
negative interest without first adding new money into the economy means they
will have even less money to spend. This would be more likely to prompt them
to save their scarce funds than to go on a shopping spree.
People are not keeping their money in the bank today for the interest (which
is already nearly non-existent). It is for the convenience of writing
checks, issuing bank cards, and storing their money in a safe place. They
would no doubt be willing to pay a modest negative interest for that
convenience; but if the fee got too high, they might pull their money out
and save it elsewhere. The fee itself, however, would not drive them to buy
things they did not otherwise need.
Is There a Bigger Threat than a Sluggish Economy?
The scheme to impose negative interest and eliminate cash seems so unlikely
to stimulate the economy that one wonders if that is the real motive.
Stopping tax evaders and terrorists (real or presumed) are other proposed
justifications for going cashless. Economist Martin Armstrong goes further
and suggests that the goal is to gain totalitarian control over our money.
In a cashless society, our savings can be taxed away by the banks; the
threat of bank runs by worried savers can be eliminated; and the
too-big-to-fail banks can be assured that ample deposits will be there when
they need to confiscate them through bail-ins to stay afloat.
And that may be the real threat on the horizon: a major derivatives default
that hits the largest banks, those that do the vast majority of derivatives
trading. On November 10, 2015, the Wall Street Journal reported the results
of a study requested by Senator Elizabeth Warren and Rep. Elijah Cummings,
involving the cost to taxpayers of the rollback of the Dodd-Frank Act in the
cromnibus spending bill last December. As Jessica Desvarieux put it on the
Real News Network, the rule reversal allows banks to keep $10 trillion in
swaps trades on their books, which taxpayers could be on the hook for if the
banks need another bailout.
The promise of Dodd-Frank, however, was that there would be no more
taxpayer bailouts. Instead, insolvent systemically-risky banks were
supposed to bail in (confiscate) the money of their creditors, including
their depositors (the largest class of creditor of any bank). That could
explain the push to go cashless. By quietly eliminating the possibility of
cash withdrawals, the central bank can make sure the deposits are there to
be grabbed when disaster strikes.
If central bankers are seriously trying to stimulate the economy with
negative interest rates, they need to repeat the Wörgl experiment in full.
They need to first get some new money into the economy, money that goes
directly to the consumers and local businessmen who will spend it. This
could be achieved in a number of ways: with a national dividend; or by using
quantitative easing for infrastructure or low-interest loans to states; or
by funding free tuition for higher education. Consumers will hit the malls
when they have some new discretionary income to spend.
Ellen Brown is an attorney, founder of the Public Banking Institute, and
author of twelve books including the best-selling Web of Debt. Her latest
book, The Public Bank Solution, explores successful public banking models
historically and globally. Her 300+ blog articles are at EllenBrown.com.
Listen to Its Our Money with Ellen Brown on PRN.FM.
http://www.truthdig.com/ http://www.truthdig.com/
Hang On to Your Wallet: Negative Interest, the War on Cash and the $10
Trillion Bail-In
http://www.truthdig.com/report/item/hang_onto_your_wallets_negative_interest
_the_war_on_cash_20151121/
Posted on Nov 21, 2015
By Ellen Brown / Web of Debt
youasamachine / CC BY-SA 2.0
This piece first appeared at Web of Debt.
In uncertain times, cash is king, but central bankers are systematically
moving to eliminate that fact. Is it really about stimulating the economy?
Or is some deeper, darker threat afoot?
Remember those old ads showing a senior couple lounging on a warm beach,
captioned Let your money work for you? Or the scene in Mary Poppins where
young Michael is being advised to put his tuppence in the bank, so that it
can compound into all manner of private enterprise, including bonds,
chattels, dividends, shares, shipyards, amalgamations . . . .?
That may still work if youre a Wall Street banker, but if youre an
ordinary saver with your money in the bank, you may soon be paying the bank
to hold your funds rather than the reverse.
Four European central banks the European Central Bank, the Swiss National
Bank, Swedens Riksbank, and Denmarks Nationalbank have now imposed
negative interest rates on the reserves they hold for commercial banks; and
discussion has turned to whether its time to pass those costs on to
consumers. The Bank of Japan and the Federal Reserve are still at ZIRP (Zero
Interest Rate Policy), but several Fed officials have also begun calling for
NIRP (negative rates).
The stated justification for this move is to stimulate demand by forcing
consumers to withdraw their money and go shopping with it. When an economy
is struggling, it is standard practice for a central bank to cut interest
rates, making saving less attractive. This is supposed to boost spending and
kick-start an economic recovery.
That is the theory, but central banks have already pushed the prime rate to
zero, and still their economies are languishing. To the uninitiated
observer, that means the theory is wrong and needs to be scrapped. But not
to our intrepid central bankers, who are now experimenting with pushing
rates below zero.
Locking the Door to Bank Runs: The Cashless Society
The problem with imposing negative interest on savers, as explained in the
UK Telegraph, is that theres a limit, what economists called the zero
lower bound. Cut rates too deeply, and savers would end up facing negative
returns. In that case, this could encourage people to take their savings out
of the bank and hoard them in cash. This could slow, rather than boost, the
economy.
Again, to the ordinary observer, this would seem to signal that negative
interest rates wont work and the approach needs to be abandoned. But not to
our undaunted central bankers, who have chosen instead to plug this hole in
their leaky theory by moving to eliminate cash as an option. If your only
choice is to keep your money in a digital account in a bank and spend it
with a bank card or credit card or checks, negative interest can be imposed
with impunity. This is already happening in Sweden, and other countries are
close behind. As reported on Wolfstreet.com:
The War on Cash is advancing on all fronts. One region that has hogged the
headlines with its war against physical currency is Scandinavia. Sweden
became the first country to enlist its own citizens as largely willing
guinea pigs in a dystopian economic experiment: negative interest rates in a
cashless society. As Credit Suisse reports, no matter where you go or what
you want to purchase, you will find a small ubiquitous sign saying Vi
hanterar ej kontanter (We dont accept cash) . . . .
The Lesson of Gesells Decaying Currency
Whether negative interests will actually stimulate an economic recovery,
however, remains in doubt. Proponents of the theory cite Silvio Gesell and
the Wörgl experiment of the 1930s. As explained by Charles Eisenstein in
Sacred Economics:
The pioneering theoretician of negative-interest money was the
German-Argentinean businessman Silvio Gesell, who called it free-money
(Freigeld) . . . . The system he proposed in his 1906 masterwork, The
Natural Economic Order, was to use paper currency to which a stamp costing a
small fraction of the notes value had to be affixed periodically. This
effectively attached a maintenance cost to monetary wealth.
. . . [In 1932], the depressed town of Wörgl, Austria, issued its own stamp
scrip inspired by Gesell . . . . The Wörgl currency was by all accounts a
huge success. Roads were paved, bridges built, and back taxes were paid. The
unemployment rate plummeted and the economy thrived, attracting the
attention of nearby towns. Mayors and officials from all over the world
began to visit Wörgl until, as in Germany, the central government abolished
the Wörgl currency and the town slipped back into depression.
. . . [T]he Wörgl currency bore a demurrage rate [a maintenance charge for
carrying money] of 1 percent per month. Contemporary accounts attributed to
this the very rapid velocity of the currencies circulation. Instead of
generating interest and growing, accumulation of wealth became a burden,
much like possessions are a burden to the nomadic hunter-gatherer. As
theorized by Gesell, money afflicted with loss-inducing properties ceased to
be preferred over any other commodity as a store of value.
There is a critical difference, however, between the Wörgl currency and the
modern-day central bankers negative interest scheme. The Wörgl government
first issued its new free money, getting it into the local economy and
increasing purchasing power, before taxing a portion of it back. And the
proceeds of the stamp tax went to the city, to be used for the benefit of
the taxpayers. As Eisenstein observes:
It is impossible to prove . . . that the rejuvenating effects of these
currencies came from demurrage and not from the increase in the money supply
. . . .
Todays central bankers are proposing to tax existing money, diminishing
spending power without first building it up. And the interest will go to
private bankers, not to the local government.
Consumers today already have very little discretionary money. Imposing
negative interest without first adding new money into the economy means they
will have even less money to spend. This would be more likely to prompt them
to save their scarce funds than to go on a shopping spree.
People are not keeping their money in the bank today for the interest (which
is already nearly non-existent). It is for the convenience of writing
checks, issuing bank cards, and storing their money in a safe place. They
would no doubt be willing to pay a modest negative interest for that
convenience; but if the fee got too high, they might pull their money out
and save it elsewhere. The fee itself, however, would not drive them to buy
things they did not otherwise need.
Is There a Bigger Threat than a Sluggish Economy?
The scheme to impose negative interest and eliminate cash seems so unlikely
to stimulate the economy that one wonders if that is the real motive.
Stopping tax evaders and terrorists (real or presumed) are other proposed
justifications for going cashless. Economist Martin Armstrong goes further
and suggests that the goal is to gain totalitarian control over our money.
In a cashless society, our savings can be taxed away by the banks; the
threat of bank runs by worried savers can be eliminated; and the
too-big-to-fail banks can be assured that ample deposits will be there when
they need to confiscate them through bail-ins to stay afloat.
And that may be the real threat on the horizon: a major derivatives default
that hits the largest banks, those that do the vast majority of derivatives
trading. On November 10, 2015, the Wall Street Journal reported the results
of a study requested by Senator Elizabeth Warren and Rep. Elijah Cummings,
involving the cost to taxpayers of the rollback of the Dodd-Frank Act in the
cromnibus spending bill last December. As Jessica Desvarieux put it on the
Real News Network, the rule reversal allows banks to keep $10 trillion in
swaps trades on their books, which taxpayers could be on the hook for if the
banks need another bailout.
The promise of Dodd-Frank, however, was that there would be no more
taxpayer bailouts. Instead, insolvent systemically-risky banks were
supposed to bail in (confiscate) the money of their creditors, including
their depositors (the largest class of creditor of any bank). That could
explain the push to go cashless. By quietly eliminating the possibility of
cash withdrawals, the central bank can make sure the deposits are there to
be grabbed when disaster strikes.
If central bankers are seriously trying to stimulate the economy with
negative interest rates, they need to repeat the Wörgl experiment in full.
They need to first get some new money into the economy, money that goes
directly to the consumers and local businessmen who will spend it. This
could be achieved in a number of ways: with a national dividend; or by using
quantitative easing for infrastructure or low-interest loans to states; or
by funding free tuition for higher education. Consumers will hit the malls
when they have some new discretionary income to spend.
Ellen Brown is an attorney, founder of the Public Banking Institute, and
author of twelve books including the best-selling Web of Debt. Her latest
book, The Public Bank Solution, explores successful public banking models
historically and globally. Her 300+ blog articles are at EllenBrown.com.
Listen to Its Our Money with Ellen Brown on PRN.FM.
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