The ‘War on Cash’ Gains Momentum

  • Backed by what, exactly?
  • High price, but not expensive

Cash, as in physical, in your pocket cash, will soon be no more.

Central banks and governments have begun a ‘War on Cash’, and mainstream commentators have taken up the cause.

The argument was first seriously proposed by Bank of England chief economist, Andy Haldane, last year.

He made the point that it was difficult for central banks to impose negative interest rates if people could just hoard physical bank notes and coins.

But if the only form of money in existence was central bank-issued digital money, it would be easy for banks to impose negative interest rates.

The rationale would be that the longer you kept money in the bank, the more it would cost you. Therefore, there would be an incentive to spend…which would boost the economy.

It would also help to avoid the perilous slip into deflation.

That was and is the argument, anyway.

However, while that’s the incentive for the central bank, the stooges in the mainstream have identified other reasons to abolish cash.

The Eurozone will no longer print the 500 euro note. Why? Because of claims that it’s the note denomination of choice for crooks.

In a Financial Times op-ed earlier this year, former Treasury Secretary, Larry Summers, argued that the US should follow suit, and abolish the $100 bill.

The only people who use cash, it seems, are crooks. Therefore, abolish cash, and you’ll abolish crime…perhaps…or not.

But now the mainstream has taken another step in the ‘War on Cash’. The Financial Times, which you would think would have a free market view, appears to become more statist by the day.

The latest article suggests that a complete shake-up of the world’s money system is in order, with central banks gaining even more control — as if they haven’t done enough damage already.

More on this in a moment. First…


Overnight, the Dow Jones Industrial Average fell 19.31 points, or 0.1%.

The S&P 500 index gained 0.7 points, or 0.03%.

In Europe, the Euro Stoxx 50 index added 5.68 points, for a 0.19% gain. Meanwhile, the FTSE 100 gained 0.21%, and Germany’s DAX index closed higher by 0.15%.

In Asian markets, Japan’s Nikkei 225 index is up 349.1 points, or 2.13%. China’s CSI 300 index is down 1.57%.

In Australia, the S&P/ASX 200 is down 3.17 points, or 0.06%.

On the commodities market, West Texas Intermediate crude oil is trading for US$42.70 per barrel. Brent crude is US$44.87 per barrel.

Gold is US$1,319 (AU$1,755) per troy ounce. Silver is US$19.64 (AU$26.13) per troy ounce.

The Aussie dollar is worth 75.18 US cents.

Backed by what, exactly?

Let’s get back to that article in the Financial Times:

Regular Free Lunch readers will know our sympathy with proposals for central banks to take over the role of money creation (a public good if anything is) from the private sector. They would do so by giving individuals and companies a convenient way to hold official digital money (as they already offer banknotes and coins) instead of deposits with private banks. The interest in e-cash is now resolutely in the mainstream: as Marilyne Tolle reports on the Bank Underground blog, the Bank of England is running a research programme on how and whether to provide it.

Tolle usefully surveys the principal possible effects of e-cash. It would probably replace private transaction settlement systems; it would threaten the current business models of private banks; and it would enhance the ability of central banks to carry out monetary policy.

Such interest by a leading central bank is exciting. Even more exciting is the fairly positive view emerging from Threadneedle Street. In a new staff working paper, John Barrdear and Michael Kumhof estimate that a modest scheme of central bank emoney, which does not replace the private banking system’s role in money creation, could boost the size of the economy by 3 per cent and help stabilise swings in economic activity.

That noise you just heard was you editor’s jaw dropping to the floor.

Aside from the general nonsense of the article and the idea, the last part of the last sentence really stands out the most.

It’s the idea that simply putting the creation of money fully in the hands of the central bank, it will somehow grow the economy by 3%.

Who’d have thunk it?

There we were thinking that economic growth was the result of meaningful action, the employment of labour, innovation, and perhaps most of all, the investment of capital.

Nope. Got it wrong. Get a central bank to issue digital money, and hey presto, there’s your 3% economic growth.

So, exactly how will the 3% economic growth come about?

As the article notes, Messrs Barrdear and Kumhoff have written a paper on the subject. It’s 92 pages long, and we’ll concede to only skimming the first few pages.

But frankly, that’s all we need to see in order to conclude that the premise is hogwash.

The paper explains how they see the magical appearance of 3% economic growth happening. (Ed note: CBDC in the article refers to central bank digital currency):

As a baseline, we consider a setting in which an initial stock of CBDC equal to 30% of GDP is issued against an equal amount of government debt, and is then, subject to countercyclical variations over the business cycle, maintained at that level. We choose 30% because this is an amount loosely similar to the magnitudes of QE conducted by various central banks over the last decade…

Our simulations suggest that this policy has a number of beneficial effects. First, it leads to an increase in the steady-state level of GDP of almost 3%, due to reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs that are analogous to distortionary tax rates. Second, a CBDC regime can contribute to the stabilisation of the business cycle, by giving policymakers access to a second policy instrument that controls either the quantity or the price of CBDC in a countercyclical fashion.

That sound you just heard, that was our other jaw hitting the ground.

This is a perfect example of what Jim Grant calls the ‘PhD Standard’ of monetary policy.

Its economics for those who spend too much of their time reading textbooks and playing with spreadsheets.

But aside from that, what would it mean for Australia’s money supply? According to the most recent numbers from the Reserve Bank of Australia, there are $70.2 billion of bank notes on issue.

Obviously, that doesn’t include coins. So let’s say that all up, the total amount of currency currently issued by the RBA is $80 billion-worth.

At last count, Australia’s gross domestic product (GDP) was around $1.8 trillion. So, right now, the RBA has issued physical currency equivalent to 4.4% of GDP.

If the RBA took control of money creation back from the retail banks, and if it adopted this proposal, the RBA would issue $540 billion of digital money.

This, supposedly, would be ‘backed’ in full by government bonds. As far as we’ve gotten with the paper, it’s unclear how this would work. When a government issues a bond, it’s because it wants to spend the money it receives.

It’s hard for your pea-brained editor to see how the central bank money is ‘backed’ by anything. Would possession of a digital currency unit give you a claim over the government bond?

We wouldn’t have thought so, because an investor would own the bond. Unless of course, the ‘investor’ is the central bank. In which case, we assume the possessor of the digital money could ask to redeem their money for a unit of a government bond.

They could then take the bond, sell it, and in exchange receive…erm…the central bank’s digital money! Hmmm. We smell a rat here.

Perhaps that’s not how it will work. If it isn’t how it will work, we’re blowed if we can figure out another way in which the digital money has the ‘backing’ of an asset.

If the central bank doesn’t hold the government bonds, then third party investors would hold them. In which case, the digital money would only have the ‘backing’ of the government’s balance sheet.

It’s all rather complicated, don’t you think?

But aside from that, surely the irony is lost on no-one that if central banks and governments really were interested in a ‘hard currency’, that had the backing of a real asset, a solution already exists.

That’s right, it’s a Gold Standard.

That’s the scenario in which a bank can only issue money that corresponds with a one-for-one claim on gold held at the bank or held by a government.

Amazingly, the mainstream, central bankers, and governments, have claimed that a Gold Standard is a terrible idea because it would inhibit growth.

Yet, according to the report by Barrdear and Kumhoff, a ‘central bank standard’ would encourage economic growth.

Of course, the claim is nonsense. It will do no such thing. The reason why central bankers favour a ‘central bank standard’ rather than a gold standard, is the ability to create money at will.

The baseline may very well be to issue digital money with the 100% backing of government debt, but it’s a baseline on wheels.

The 100% backing could always be in play. The central bank and government could simply move the baseline. Instead of the maximum 30% of GDP, why not 40%, 50%, or 100%?

It would be easy for them to do so. The central bank could just change the rules, based on the need or want to stimulate the economy.

Given everything you’ve seen over the past eight years, does anything lead you to believe that the central bank and government could resist the temptation to print and spend?

We shall leave that question unanswered, and let you decide.

All we know is this: the concept of a central banked digital money is a sham. It’s not an effort to create a better, more stable, more reliable, or stronger money system.

If that were the real goal, they would simply advocate for a Gold Standard.

The real reason for the ‘War on Cash’, or the abolition of cash and its replacement with central bank digital money, is because it gives governments and central banks the flexibility to keep doing what they’ve done for the past eight years.

In which case, we’re glad we own gold. The era of low interest rates and rampant money printing is nowhere near an end.

The last time we checked, gold was trading above the US$1,300 level. It’s up 24% this year. Our bet is that the closer central banks move towards abolishing cash, the greater the reason for owning gold.

Five years from now, we’ll wager that US$1,300 will look darn cheap compared to how much it will be worth then.

High price, but not expensive

We note that Apple Inc [NASDAQ:AAPL] released its latest quarterly financial report.

It doesn’t make for good reading. Although, as you’d expect, the Apple fans are happy to see the positive side.

What strikes us the most is that based on current revenue projections, Apple is on track to see its first fall in revenue since 2001.

Back then, revenue fell from US$7.9 billion in 2000 to US$5.3 billion in 2001. In 2015, revenue was a staggering US$233.7 billion.

Revenue for the 2016 financial year looks set to come it at ‘just’ US$214.6 billion.

Bad news. Or is it?

The stock price is down 27% from its early 2015 peak. That was when some folks predicted Apple could become the US market’s first ever trillion-dollar company.

Today, its market cap is US$529.5 billion.

But while it’s a big company, in valuation terms, it’s looking pretty good. As you can see from the charts below, on a price to earnings (top chart) and price to sales (lower chart), there’s nothing overly expensive about the stock:

chart image

Source: Bloomberg
Click to enlarge

Of course, it depends how much of the bad news the market has already priced into the stock, and whether you want to invest in a company with potentially declining earnings.

Apple isn’t a stock we’d rush to buy…but it’s not a stock we’d run away from either. One to watch.