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Negative Interest Rates and the War on Cash
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raspberry-blower



Joined: 14 Mar 2009
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PostPosted: Thu Sep 15, 2016 1:01 pm    Post subject: Negative Interest Rates and the War on Cash Reply with quote

Interesting - if lengthy - essay by Nicole Foss over at The Automatic Earth about the on going policy of Negative Interest Rates which are becoming increasingly prevalent (particularly in Japan)

Nicole Foss wrote:
Mechanisms for spreading risk to the point of dilution to nothingness, such as securitization, seen as effective and reliable during monetary expansions, cease to be seen as such as expansion morphs into contraction. The securitized instruments previously created then cease to be perceived as holding value, leading to them being repriced at pennies on the dollar once price discovery occurs, and the destruction of that value is highly deflationary. The continued existence of risk becomes increasingly evident, and the realisation that that risk could be catastrophic begins to dawn.

Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road. Negative interest rates and the war on cash are symptoms of such a limit being reached. As confidence evaporates, so does liquidity. This is where we find ourselves at the moment on the cusp of phase two of the credit crunch, sliding into the same unavoidable constellation of conditions we saw in 2008, but on a much larger scale
.


So that's where we are at currently.

Also discussed is the problem of physical cash in a Negative Interest Rate environment:

Nicole Foss wrote:

The experience of the global financial crisis taught us that the type of shocks which can drive policy interest rates to the lower bound are also shocks which produce severe impairments to the monetary policy transmission mechanism. Suppose, for example, that the interbank market freezes and prevents a smooth transmission of the policy interest rate throughout the banking sector and financial markets at large. In this case, any cut in the policy rate may be almost completely ineffective in terms of influencing the macroeconomy and prices.

This is exactly what we saw in 2008, when interbank lending seized up due to the collapse of confidence in the banking sector. We have not seen this happen again yet, but it inevitably will as crisis conditions resume, and when it does it will illustrate vividly the limits of central bank power to control financial parameters. At that point, interest rates are very likely to spike in practice, with banks not trusting each other to repay even very short term loans, since they know what toxic debt is on their own books and rationally assume their potential counterparties are no better. Widening credit spreads would also lead to much higher rates on any debt perceived to be risky, which, increasingly, would be all debt with the exception of government bonds in the jurisdictions perceived to be safest. Low rates on high grade debt would not translate into low rates economy-wide. Given the extent of private debt, and the consequent vulnerability to higher interest rates across the developed world, an interest rate spike following the NIRP period would be financially devastating.


There's plenty to chew over in this in which Nicole starts her conclusions thus:

Nicole Foss wrote:
The advent of negative interest rates indicates that the endgame for the global economy is underway. In places at the peak of the bubble, negative rates drive further asset bubbles and create ever greater vulnerability to the inevitable interest rate spike and asset price collapse to come. In Japan, at the other end of the debt deflation cycle, negative rates force people into ever more cash hoarding. Neither one of these outcomes is going to lead to recovery. Both indicate economies at breaking point. We cannot assume that current financial, economic and social structures will continue in their present form, and we need to prepare for a period of acute upheaval.

Using cash wherever possible, rather than succumbing to the convenience of electronic payments, becomes an almost revolutionary act. So other forms of radical decentralisation, which amount to opting out as much as possible from the path the powers-that-be would have us follow. It is likely to become increasingly difficult to defend our freedom and independence, but if enough people stand their ground, establishing full totalitarian control should not be possible.

To some extent, the way the war on cash plays out will depend on the timing of the coming financial implosion. The elimination of cash would take time, and only in some countries has there been enough progress away from cash that eliminating it would be at all realistic. If only a few countries tried to do so, people in those countries would be likely to use foreign currency that was still legal tender.


TAE: Negative Interest Rates and the War on Cash
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johnhemming2



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PostPosted: Thu Sep 15, 2016 1:27 pm    Post subject: Reply with quote

It is a valid point that cash payments are less visible to the authorities. Although electronic payments are not automatically reported to the authorities they can get hold of the transaction details (how much paid, by whom to whom) very easily.
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emordnilap



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PostPosted: Thu Sep 15, 2016 2:46 pm    Post subject: Reply with quote

Quote:
We can therefore expect cash to be increasingly disparaged in order to justify its intended elimination


I and several others on this forum and elsewhere have been saying for years that this will happen.

Some people are already signed up for it - I see them every day. In a way that displays unthinkingness on steroids, they would not object to elimination of cash, claiming they 'hardly use it anyway'. Of course they don't.

In practice, it means you have no money. Someone else has it, doing with it whatever they want.
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Snail



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PostPosted: Thu Sep 15, 2016 4:47 pm    Post subject: Reply with quote

I was trying to get a replacement mobile top-up swipe card for my mum yesterday with no joy. Apparently, hardly anyone uses them now-a-days (despite being hugely convenient this way). Topped up her phone using a cash machine and will try the phone shop in another town tomorrow.

But there will always be some sort of cash type money. Else what about people without bank accounts or drug dealers etc.
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PS_RalphW



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PostPosted: Thu Sep 15, 2016 5:09 pm    Post subject: Reply with quote

Snail wrote:
I was trying to get a replacement mobile top-up swipe card for my mum yesterday with no joy. Apparently, hardly anyone uses them now-a-days (despite being hugely convenient this way). Topped up her phone using a cash machine and will try the phone shop in another town tomorrow.

But there will always be some sort of cash type money. Else what about people without bank accounts or drug dealers etc.


Most shops will now sell you a pin number. You dial your topup number on your phone and then dial in the pin. Not quite as easy but it works.

Once money becomes rare people will start issuing IOUs. Then someone will start selling nice notepads so that the IOUs can be in standard form. Then people will start acting as guarantors for other people's IOUs. Then the guarantors will issue their own IOUs. Then they will become banks by any other name.
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Snail



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PostPosted: Thu Sep 15, 2016 5:24 pm    Post subject: Reply with quote

Ah, had to look that up on the internet to see what you meant. An e-voucher. Thanks, I'll mention that to her as an alternative. Thanks.
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emordnilap



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PostPosted: Thu Sep 15, 2016 5:38 pm    Post subject: Reply with quote

Snail wrote:
But there will always be some sort of cash type money.


How do you know?

Snail wrote:
Else what about people without bank accounts or drug dealers etc.


'They' want everyone to have a bank account, pure and simple. This 'they' will force you to have one, by making not having one supremely inconvenient, even impossible to not have one. And they can use drug dealing as one of their prime motivations for doing away with cash.

It can occasionally be mildly inconvenient to not have a bank account, though it's perfectly possible: more people should go down that route because very few actually need one. I haven't had a bank account for years - a decade maybe - and it doesn't at the moment make any difference to me.

Already in the UK, there is no obligation to pay an employee her wages in cash. All 'they' have to do is make electronic wage payment compulsory.
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Snail



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PostPosted: Thu Sep 15, 2016 6:31 pm    Post subject: Reply with quote

Yes, you're correct of course.
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emordnilap



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PostPosted: Fri Sep 16, 2016 10:01 am    Post subject: Reply with quote

The transition is hidden in plain sight.
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AutomaticEarth



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PostPosted: Fri Sep 16, 2016 3:09 pm    Post subject: Reply with quote

Does anyone on here keep a substantial amount of cash to hand?

How much do you think it is wise to keep on hand? In the past I've kept about 3 months worth of emergency funds but have allowed this to dwindle somewhat.
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snow hope



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PostPosted: Fri Sep 16, 2016 9:17 pm    Post subject: Reply with quote

I think it is sensible to stash some cash. We got to within hours of the cash machines stopping in the UK (the West?) in 2008. Alistair Darling, Labour Chancellor of the Exchequer, admitted that in a TV interview.

In my opinion, the next crash will be bigger than the last one and much more disruptive. As usual I hope I am wrong. Sad
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boisdevie



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PostPosted: Fri Sep 16, 2016 9:25 pm    Post subject: Reply with quote

AutomaticEarth wrote:
Does anyone on here keep a substantial amount of cash to hand?

How much do you think it is wise to keep on hand? In the past I've kept about 3 months worth of emergency funds but have allowed this to dwindle somewhat.


I normally have a hundred quid around the place but should really keep more. Assuming that the cash machines will always be working is a dangerous assumption. Didn't they find that out in Cyprus last year?
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adam2
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PostPosted: Fri Sep 16, 2016 9:50 pm    Post subject: Reply with quote

AutomaticEarth wrote:
Does anyone on here keep a substantial amount of cash to hand?

How much do you think it is wise to keep on hand? In the past I've kept about 3 months worth of emergency funds but have allowed this to dwindle somewhat.


IMHO keeping a reserve of cash is sensible. In any serious long term emergency paper money might well become worthless.
However in the short term it could be very valuable, consider the consequences of another bank run, or a large power failure for example.

I suggest keeping up to about 50 in small notes instantly to hand, and several times that much well hidden.
Don't overdo it though, cash pays no dividend, interest or other income and carries the small but real risk of loss by fire or theft.

Stocks of food, fuel, water, warm clothing, footwear, blankets, tools, and other useful supplies are arguably more important.
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johnhemming2



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PostPosted: Fri Sep 16, 2016 10:35 pm    Post subject: Reply with quote

boisdevie wrote:
AutomaticEarth wrote:
Does anyone on here keep a substantial amount of cash to hand?

How much do you think it is wise to keep on hand? In the past I've kept about 3 months worth of emergency funds but have allowed this to dwindle somewhat.


I normally have a hundred quid around the place but should really keep more. Assuming that the cash machines will always be working is a dangerous assumption. Didn't they find that out in Cyprus last year?

It was Greece that closed the cashpoints to people with Greek bank accounts.

And Greeks travelling abroad with Greek Credit cards.
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fifthcolumn



Joined: 22 Nov 2007
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PostPosted: Sat Sep 17, 2016 5:05 am    Post subject: I find myself wondering Reply with quote

I find myself asking the question exactly what short term emergency would cash be useful for?

Having been in the power blackout in the northeast that lasted three to four days, I remember not being able to spend cash because of silly things like not being able to get into supermarkets because the doors were electric and wouldn't open. Tills likewise were electric and were unable to open to take the cash. There was no way to spend it.

I think in a disaster scenario you're better off to be stocked up with food and water for a few weeks. In the very long term, post collapse, if such a thing happens then maybe gold or silver might be useful but who knows.
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