Kenneth Rogoff’s War on Cash

Sovereign Man’s Simon Black warns of the suggestions for a cashless Society: (bold mine)

Rogoff begins asking the question: “Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes?”

He goes on to explain that getting rid of paper currency would provide two critical benefits:

1) It would reduce crime and tax evasion;

2) It would allow central banks to drop interest rates BELOW ZERO.

I was stunned. Though given the status quo thinking we have to put up with today, I really shouldn’t have been.

In fairness, Mr. Rogoff is an academic. It’s his job to dispassionately analyze data and render conclusions, whatever they may be. What’s scary is that some dim-witted politician will likely jump all over this.

People have been deluded into believing that only criminals and tax cheats hold cash in large denominations. And the conclusion is that if we ban cash, criminals will simply quit their craft because they’ll no longer have an officially-sanctioned medium of exchange.

This is total baloney, obviously. Banning cash doesn’t eliminate crime. It just creates a new cottage industry for cash alternatives.

Drug deals can just as easily go down swapping share certificate of Apple. Or title to a new car. Any number of things.

Perhaps the more important point, however, is the notion that eliminating cash frees up central bankers to force interest rates into negative territory.

The contention is that the official data tells us that inflation is tame. Consequently, central banks should be free to expand the money supply and ratchet down interest rates even more. 

There’s just one problem: interest rates are basically at zero already.

Technically a central banker could drop interest rates to below zero.

But if they did that, who in his/her right mind would hold their savings at a bank where they would have to PAY THE BANK to make wild bets with their money? 

People would just go to physical cash instead.

Solution? Eliminate cash! Then people would be forced to suffer NEGATIVE interest rates… and thus have a HUGE INCENTIVE to spend as much as they can as quickly as they can. Forget about putting something aside for a rainy day.

But hey, at least the stock market would probably rise.

Now, I highly doubt that physical cash is going to be sucked out of the system… tomorrow. But the War on Cash is very real indeed.

As I travel around the world, I’ve seen with my own eyes– CASH has become the #1 hot button item for customs agents everywhere. They even have highly trained cash sniffing dogs now.

It’s becoming more and more obvious that people should divorce themselves from this system and consider holding at least a portion of their savings in something other than fiat currency.

And of all the options out there, it’s hard to beat the convenience and tradition of precious metals.

Indeed governments have increasingly been waging war on cash. 

The latest: Israel’s government has recently declared limits on cash transactions.

From Reuters: Cash transactions between businesses will be limited to 5,000 shekels ($1,400) under an Israeli government plan to fight money laundering and tax evasion.

I have previously shown that various governments have waged war on cash like Mexico, Italy, Russia, Nigeria and Ghana or even in the US.

In the Philippines I had my share of nightmare with the domestic authorities at the domestic airport whom harassed me for bringing slightly excess cash (based on the mandated limits) for an outbound trip predicated on a regulation that I wasn’t even aware of then. As a side note, the slightly excess cash was meant as gift for my Mom who resides overseas!!

Money laundering or tax evasion has served as the stereotyped alibi or scapegoat for the war on cash. But such is a sign of desperation. Remember cash as currency or medium of exchange, are issued to the citizenry by the respective governments who wield the monopoly seignorage. So by waging war on cash, governments have not only assailed on their basic function, they reveal signs of dissatisfaction with current revenues from such seignorage privilege.

War on cash serves as an extension of financial repression policies. 

The fundamental reason is that governments intend to capture even more of the public’s resources (directly and indirectly) to fund the interest of political agents and their private sector allies. It's is a sign of unmitigated greed imposed on society by force.

The real targets are really not money laundering or tax evasion but the cash holding society, particularly the informal economy. Again this is a sign of desperation.

Statist always conjure up reasons for state control over everything.They always point to so-called benefits without looking at the costs. But costs are not benefits. 

For instance, the importance of cash came into the limelight when the western banking system nearly collapsed in 2008. In Europe, many took shelter by hoarding € 500 cash. So the assumption to migrate to a cashless society extrapolates that the banking sector and the governments are risk free.

But this is something untrue. In fact both the government and banks are the major sources of risks. Just look at the massive build up of debt levels of major economies. What happens when all these unravels? 

Yet the war on cash is also based on the mirage that growth in debt and transfer of resources will have little or even NO limits or repercussions. This is utterly wrong. The war on cash only allows the establishment to buy time before their unsustainable system implodes.

Bank of Israel Buys Equities and Foreign Currencies

As I have been pointing out, inflationism has now become a central banking standard.

The Bank of Israel has reportedly bought $200 million of foreign currencies

From Ynet News.com

The Bank of Israel bought an estimated $200 million of foreign currency on Tuesday in a bid to weaken the shekel after it hit a 19-month high, although the move had little effect.

With exports comprising 40% of Israeli economic activity, the central bank has made it clear it will not allow a steep rise in the shekel.

So nearly every country have been attempting to “devalue” against another, which should provoke a competition or a race to the bottom. Some call this the currency wars.

This also shows how global central bankers will put to test the current paper money standard to the limits. Current developments have made them believe that they have attained a policymaking nirvana or where money printing bears no consequences to the real economy.

Also Bank of Israel is one example of countries supposedly diversifying into equities.

From Bloomberg:

The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time.

The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said.

Aside from the political motive, central bank operations seem to have transitioned into hedge fund operations but underpinned by the “guns and badges” institutions.

Bank of Israel’s equity exposure on the European and US equities could be interpreted as providing support on the equity markets of the US and Eurozone.

Ironically, this comes as the shekel is deliberately being devalued by them.

Bank of Israel’s actions thus appears to be tweaking profits via foreing currency-foreign equity arbitrages through policies. 

Are these not insider trading or manipulations? At whose expense? Market players and the economy?

I am not sure whether Bank of Israel’s equity purchases has been entirely foreign.

Nonetheless Israel’s TA-25 appears to be on mends following a downdraft in 2011. (chart from tradingeconomics.com)

Bank of Israel’s recent actions are examples of implicit guarantees on asset prices that only balloons the global pandemic of asset bubbles.

Natural-Shale Gas Revolution Spreads to Israel

The natural-shale gas boom spreads to Israel.

Reports the Financial Times (hat tip Carpe Diem’s Professor Mark Perry)

With reserves of almost 10 trillion cubic feet of natural gas, the Tamar field is a hugely valuable asset for the Israeli economy. Discovered in January 2009, it was the biggest gas find in the world that year, and by far the biggest ever made in Israeli waters. But the record held for barely two years. In December 2010, Tamar was dwarfed by the discovery of the Leviathan gasfield some 20 miles farther east – the largest deepwater gas reservoir found anywhere in the world over the past decade. The two fields, together with a string of smaller discoveries, will cover Israel’s domestic demand for gas for at least the next 25 years, and still leave hundreds of billions of cubic feet for sale abroad. The government take from the gasfields alone is forecast to reach at least $140bn over the next three decades – a staggering sum for a relatively small economy such as Israel’s.

It’s not just in Israel but as I previously pointed out the Natural-Shale gas revolution will become a world wide phenomenon.

And we are seeing some evidence of such progress. Again the FT,

Experts are convinced that Tamar and Leviathan will not be the last big Israeli discoveries. They point to the US Geological Survey, which estimates that the subsea area that runs from Egypt all the way north to Turkey, also known as the Levantine Basin, contains more than 120 trillion cubic feet of natural gas. Israeli waters account for some 40 per cent of the total. Should these estimates be confirmed through discoveries in the years ahead, Israel’s natural gas reserves would count among the 25 largest in the world, on a par with the proven reserves of Libya and ahead of those of India and The Netherlands.

Earlier Israel seems to have been devoid of energy resources.

For decades a barren energy island, forced to import every drop of fuel, Israel today stands on the cusp of an economic revolution, fuelled by the vast riches that lie below its waters.

left chart from Financial Times, right chart from Financial Post

But thanks to human ingenuity, massive advances in technology have transformed what was once resources of little economic value to become abundant highly economically valuable commodities.

Hopefully Israel’s newly discovered energy resources will serve as blessings than a (resource) curse. But this will depend on how the domestic and geopolitical trends in Israel and the Middle East will evolve.