Wednesday, January 4, 2017

“Are You Prepared for ‘Unencumbered’ Interest Rate Policy?”

“Are You Prepared for ‘Unencumbered’ Interest Rate Policy?”, Introduction
by Brian Maher

“It’s a new year. And the war on cash opens on a new front… India launched a major offensive in November when it banned the most widely used bank notes. Chaos was the result. And now. Greece is launching its latest offensive against cash. This offensive amounts to a “soft” ban on cash. Greece may not seem important. But beware, this “soft” cash ban could be a model for the advanced economies.

The Greek news site, Keep Talking Greece, reports that as of Jan. 1, Greek taxpayers will be required to make a minimum amount of purchases with credit or debit cards. Here’s the deal: If you’re Greek and make less than 10,000 euros, you’ve got to make 10% of your payments with plastic. Make up to 30,000 and that number rises to 15%. Over 30,000 and it rises to 20%. And if you don’t play by the rules? Enjoy that 22% penalty. Say you make 50,000 and you’re required to spend 10,000 digital. But you only spend 5,000 digital. Your penalty would be 22% of that 5,000 you didn’t spend- 1,100 euros.

Here’s another bug the elites consider a feature: rent, utilities, loan repayments, transportation expenses and many other expenses don’t count. No. You’ve got to spend on groceries, restaurants, hairdressers, dance schools and the like. What, you don’t want to learn the waltz? Go tell it to the judge. Keep Talking Greece explains it: "Households will be obliged to spend money even if they do not want to. As the large part of monthly need coverage (utilities. etc.) is not accepted by the tax office, households who do not manage to reach the necessary percentage through supermarket percentages will have to go and spend like crazy in retail, dance schools and gyms and other goods and service providers.

“See, look, we’re not banning cash,” these cats will purr. “We would never do such a thing. Spend your cash till you’re blue in the face. But if you want to avoid that 22% penalty, well…” And who’s to say they’ll cap the spending requirement at 20%? Maybe the economy’s in doldrums next year and they raise it to 50% so your additional spending can “stimulate” the economy. Then 75% maybe. Next thing you know, there’s so little use for cash no one accepts it anymore, not even the local mom and pop. It’s just too much trouble to keep on hand and store and all that when hardly anyone uses it. And here’s the thing:

Once the level of cash in society falls to a certain point, it’s only a small step before it vanishes entirely. And that’s how cash will die. They don’t have to ban it outright. It’ll just die of neglect. They just have to make it impractical to the point that no one accepts it anymore. Make using it the equivalent of buying a Ferrari with a stack of singles. It’s legal- but go ahead and try it.

That’s how the elites will realize their dream of truly negative interest rates. You’d rather spend your money on tango lessons or opera tickets than pay the bank for the privilege of holding it for you. (Opera? Let’s think about this…)

This sort of “soft” cash ban is more a flanking attack than a direct go at the trenches like India pulled in November. The resistance is too heavy in the center. Pull off a good flanking attack and you make a lot less noise and you’ve soon got the enemy surrounded. That’s the elite’s purpose in the war on cash- to quietly outflank and surround you, to cut off all escape routes. Then comes the order: Lay down your cash and come out with your hands up. And off to the digital POW camp you go.

Today, it’s Greece. It’ll be someone else tomorrow. And don’t be surprised one whit if it’s America next week or next month or next year. Below, Jim Rickards shows you how inconceivable policies like negative interest first become possible, then inevitable. What in blazes are “unencumbered” interest rates? And how do you fight back? Read on."

"Are You Prepared for “Unencumbered” Interest Rate Policy?"
By Jim Rickards

"In September Janet Yellen gave a speech in Jackson Hole, Wyoming titled “Designing Resilient Monetary Policy Frameworks for the Future.” That title at least suggested that some new thinking and new policies might be on display. They weren’t. 

Yellen basically said that interest rate cuts, quantitative easing, interest on excess reserves and forward guidance were sufficient to pull the U.S. economy out of a future recession if needed. In short, Yellen said the Fed’s existing toolkit is adequate, and is unwilling to consider more radical tools or remedies. The real lesson was that if you like weak growth, money printing and market manipulation, get ready for more of the same. She dismissed the idea of negative rates. She also agreed that “helicopter money” (really fiscal policy supported by Fed bond purchases to finance deficits) could be useful, but made it clear that it was up to Congress to implement that and the Fed would not lead the charge.

Investors should ignore Fed noise. But that doesn’t stop markets from overreacting to every syllable of Fedspeak. Gold investors just have to live with day-to-day volatility until the world finally realizes that central banks are impotent and can safely be ignored in favor of global macroeconomic fundamentals.

Yellen was not the only one speaking at Jackson Hole, though. Another major speech was by an economist named Marvin Goodfriend, from Carnegie Mellon University. His speech was called "The Case for Unencumbering Interest Rate Policy at the Zero Bound."

On its face, the Goodfriend speech was about negative interest rates- and just because Yellen doesn’t like them now doesn’t mean they’re not coming in the future. That negative rate idea has been around for a few years. But Goodfriend’s focus was to promote “unencumbered” negative interest rate policy, which means getting rid of things standing in your way.

Specifically, the No. 1 thing standing in the way of negative rates is cash. If citizens can go to cash, that makes it difficult to impose negative rates on digital bank accounts. That’s also not a new insight. The war on cash has been going on for a while, and prominent economists from Larry Summers to Ken Rogoff have called for an end to cash. Rogoff did so in a front-page article in the “Review” section of The Wall Street Journal. He’s also written a recent book called "The Curse of Cash". The title removes any doubt about his position.

What is new in all of this are ideas that Goodfriend presented to the Fed to neutralize the role of cash. His preferred way is just to “abolish paper currency,” as his paper outlines in Section 5A. But then Goodfriend laments that “the public is likely to resist the abolition of paper currency.” He’s right about that.

So Goodfriend comes up with a new concept called the “flexible market-determined deposit price of paper currency.” (Seriously, I’m not making this up; you can find it in Section 5B of his paper.) In plain English, this means the “money” in your bank account and the “money” in your purse or wallet would be like two different kinds of currency. There would be an exchange rate between the two, just as there is an exchange rate between dollars and euros. The Fed could set this exchange rate at whatever level it wanted and would not be obligated to “defend” that rate at any particular level.

What this means is if you go to the bank and withdraw $1,000, the bank might only give you $980 in cash because of the “exchange rate” between your bank account and cash. Or if you deposit $1,000 in cash, the bank might only credit your bank account $980 because of the same “exchange rate” between your cash and the bank account balance. In short, it’s a way to impose negative interest rates on physical cash.

It’s true that Goodfriend is an academic, not a policymaker. But Yellen and other Fed bigwigs like William Dudley and Stanley Fischer were sitting in the audience. In my experience, this is how things start. Some ivory-tower academic writes about a policy proposal. A few other ivory-tower academics and beltway think tanks take the idea and run with it. Then one of those academics gets appointed to a policy position. The next thing you know, the policy is in effect.

That’s how I saw special drawing rights (SDRs) coming years in advance, and that’s how I see the war on cash now. That’s why I also see a war on gold. Curiously, academic policymakers have spent so many years disparaging gold they seem to have forgotten that gold is money. Once the war on cash heats up — and certainly when that war is in full swing, out in the open- people everywhere will turn to gold as an alternative form of money. And then, once policymakers see the massive shift to gold, they will launch a war on gold also.

So my advice to people interested in gold is- get it now while you still can. What are you waiting for?But it’s not just the government and the banks that are doing everything they can to make it impossible for you to get your own money in the form of cash. Now they have a new partner- big business! It seems that businesses have their own war on cash. They hate handling it and it’s expensive to transport, store and insure. More and more, businesses are refusing to take your cash.

This is just another form of discrimination against the poor who may not have banking accounts or who rely on check cashing services and live paycheck to paycheck. It’s also aimed at you because it forces you into a digital system where your money can be hit with negative interest rates, service fees, account freezes, bail-in charges and other forms of theft.

When pigs are going to be slaughtered, they are first herded into pens for the convenience of the slaughterhouse. When savers are going to be slaughtered, they are herded into digital accounts from which there is no escape. The war on cash may be a losing battle for you and me, but there is still shelter in physical gold, silver, land and other hard assets. These scenarios are more disturbing, and the tempo more rapid, than I imagined just a short time ago."

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