The Growing Threat of Negative Interest Rates
It might sound like a conspiracy theory. But judging by the increasing desperation of governments to reboot the world economy, it just might happen.
“It” is the recall or confiscation of cash, i.e., dollars, euros, pounds, etc., in physical form. And a key justification that those calling for this radical measure cite is that it reinforces the ability of central banks to impose negative interest rates.
Negative rates mean that lenders literally pay businesses and consumers to borrow money. They also penalize savers for hoarding it.
- The Danish and Swiss national banks have gone the farthest into negative territory, with interest rates of -0.75%. That means €100,000 in a euro-denominated account in Switzerland would be worth only €99,250 after one year. While these rates apply only to “excess reserves” banks maintain at the central bank, nothing stops banks from requiring depositors to share the pain.
But that’s not enough, according to some economists.
Advocating for Cash Abolishment
Citicorp’s chief economist, a technocrat named Willem Buiter, thinks the US needs much lower interest rates to push the economy out of the doldrums. He thinks negative interest rates around -6% would do the job. But there’s one condition: For his plan to work, he says, the government must abolish cash.
It’s easy to understand why Buiter might not have warm and fuzzy thoughts about cash. After all, if your bank is taking 6% from your savings, $100 in your account would be worth only $94 at the end of one year, $88.36 after two years, and $83.06 after three years.
On the other hand, a $100 bill with Ben Franklin’s picture on it would still be worth… well, $100.
Buiter understands that as long as cash exists, no one will voluntarily keep their savings in accounts with negative interest rates.
And Buiter isn’t the only one pointing out that outlawing cash could stimulate the economy, especially in a crisis. In a recent article, Michael Pento, president and founder of Pento Portfolio Strategies, observed:
“Strategies such as pushing interest rates into negative territory, outlawing cash, and sending electronic credits directly into private bank accounts may appear more palatable in the midst of market distress.”
And the Fed seems to be catching on to the prospect of negative interest rates.
At the latest meeting of the Fed’s Open Market Committee, at least one member suggested that negative interest rates might be worth considering.
Current Financial Practices and Potential Legal Implications
As for abolishing cash altogether, proposals to do so are much further advanced outside the US.
- Italy and France have banned all cash transactions over €1,000.
- Spain has banned cash transactions exceeding €2,500.
- Similar restrictions are in place in Belgium, Bulgaria, Greece, Mexico, Russia, Uruguay, and other countries.
In the US, cash transaction limits don’t yet exist, but de facto limits already are enforced.
I’ve received reports from several clients of interrogations by banks if they withdraw more than a few thousand dollars in cash from their accounts. And depositing or withdrawing more than $10,000 in cash from an account requires that banks (as well as other “financial institutions”) file a Currency Transaction Report with the IRS.
“Structuring” a single cash transaction into multiple transactions to avoid this requirement is a crime. And if the circumstances surrounding a transaction above $5,000 are “suspicious,” financial institutions must file a Suspicious Activity Report.
Federal, state, and local law enforcement agencies consider cash holdings inherently suspicious. Under the legal process of civil forfeiture, they can seize your cash if they believe that it’s somehow connected to a crime.
That’s easy, since nearly 100% of cash circulating today contains tiny concentrations of narcotics residues – primarily cocaine. All police need to do is bring in a drug-sniffing dog to inspect the cash. If the dog alerts, police seize the cash.
And under civil forfeiture rules, it’s up to you to prove that the cash has a legitimate origin.
Implementation Challenges and Proposals
If the government decides to restrict cash transactions or outlaw cash altogether, how would they do it?
Actually, efforts along this line are already well under way.
- Many airlines accept only credit or debit cards for inflight purchases.
- Louisiana forbids cash for some secondhand sales of scrap metal.
- A proposal in Wisconsin would ban cash payments for treatment at pain clinics.
But for negative interest rates to really take hold, the Fed will need to step in.
One proposal is for cash to be recalled in a very short period – as little as 10 days. Anyone turning in more than a relatively low threshold – perhaps as little as $1,000 – would be required to prove that the cash was generated legally and that all taxes on the income had been paid. Otherwise, 30% or more of the cash would be confiscated.
Adapting to an Evolving Financial Landscape
It’s easy to be frightened by these proposals. But if governments think they can force us to accept negative interest rates on our savings by abolishing cash, they need to think again. It’s preposterous to assume that savers will passively accept outright confiscation of their assets via negative interest rates or a ban on cash.
Instead, people will simply revert to other stores of value. The Yapese people who inhabit some of the Caroline Islands in the Pacific Ocean, for instance, once used giant stone disks as money. Some of the disks were as large as 13 feet in diameter.
Other forms of “currency” are more convenient. For instance, at the end of World War II, a cigarette economy developed in occupied Germany. Cash was scarce, so ordinary Germans adapted by exchanging cigarettes for food and other necessities.
Indeed, barter of all kinds flourishes when money is scarce. It will flourish even more if governments make a serious effort to abolish cash. And of course, ending cash will only encourage the growth of digital currencies such as Bitcoin.
Finally, I believe that there will be significant movements of cash into precious metals – especially gold.
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