The “war on cash” story is getting a good run on the usual websites (try here, here and here for a sample) and no surprise to see some hype
involved like this from Martin Armstrong (debunked by Bullion Baron here). Generally commentators are seeing this as positive
for gold, but I’m not so sure it is good for gold in the long run.
The idea is that to get around the “zero bound problem” – where central
banks cannot reduce interests rates too far below zero because people
will withdraw cash to avoid negative interest rates (see JP Koning for more on this issue) – central banks will ban or
punitively tax cash. To avoid this, people will buy gold instead of holding
bank deposits, and/or use gold transactionally, which will increase
demand for gold and its price.
I think that is a viable scenario with potential to go mass market
depending on how aggressive the government gets. However, consider this
selection of quotes on the “cash problem”, which are fairly representative of
mainstream economic thinking:
- Frances Coppola: “it is only those who seek to evade
monetary policy who find convertibility suspended”
- Jim Leaviss: “the authorities will be able to
encourage us to spend more when the economy slows or spend less when it
is overheating”
- Peter Bofinger: “it would make it easier for the
central bank to enforce its monetary policy”
- Kenneth Rogoff: “given the persistent and perhaps
recurring problem of the zero bound”
Note the use of “evade” and “enforce” (lets ignore for the moment that
they are talking about policy, not law) – the attitude is that a central bank
cannot be restricted in its need to “fight a large deflationary shock”,
it must be able to reduce interest rates as far as possible until people do
what it wants. There is no consideration of whether the existing policy
is working or is counterproductive, more of the same medicine must be allowed
to be administered.
This attitude means that if people find another way of evading the
“policy” to force spending over savings, we can be sure that the thinkers
will call for that method to be banned as well. They are already there, as
Rogoff notes in his paper:
“It is unclear how easily these activities [use of anonymous
cash] could substitute into other transactions media, but presumably this
could be made difficult by restricting other potential anonymous transactions
vehicles.”
It doesn’t get any clearer than that. I like the euphemistic “anonymous
transaction vehicles” – gold and silver surely are the only globally
recognised and easily used substitutes for physical cash (sorry, bitcoin is
not easily used or understood by the mass market).
In the past I haven’t see gold confiscation as a likely scenario, but that was pre
negative interest rates. If central banks continue down this path and can get
governments to agree that they must be allowed to force people to spend, then
it does change the risk assessment of confiscation.
However, I do not want to get all hype-ish myself. Policy and politics
wise it is not a universally held view that cash should be banned, and we are
speculating that people will just take a cash ban without any resistance. To
be fair, Kenneth Rogoff did raise a number of costs to banning cash, which
would cause policy makers to move cautiously. Also consider these thoughts from Carl-Ludwig Thiele from the German
Bundesbank:
“we believe that there should be a mix of different payment
instruments and government agencies do not have the right to tell the
citizens how they should pay”
Then again, Germany is repatriating a fair bit of gold from the US, even
if slowly.
