Burning Banknotes !

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There are some out there in the economic world that believe that banknotes are detrimental to the health of the economy and that they are currently stifling the recovery of the markets. Their solution: burn the damn things and let them go up in smoke. Replace them with electronic money and then the central banks around the world will be able to do more than just providing alternatives that don’t work to revamping the financial markets and boosting economic growth.

What have central banks been doing these past few years? Nothing of much worth. They have tried Forward Guidance. They have thought up great ideas so they didn’t have to use negative interest rates to try to get the markets working such as Quantitative Easing, injecting billions every month into the economies around the world. It still didn’t get the banks lending and it still didn’t get them working and creating jobs. It just gave them the possibility of investing and gaining dividends and returns on that investment.

Burning Banknotes

Burning your banknotes could be the solution to that. Patrick Artus at Natixis believes that if we were to do that, then central banks would be able to act effectively. He says, taking the example of the situation in the European Union that the banks in the north that have their coffers filled are just not lending to those in the south that are in dire straits. The European Central Bank is now charging (since June 11th 2014) at a rate of -0.1% for banks to park their money at the ECB.

The ECB will not stimulate anything however. Simply because banknotes and tangible money exist. What do people do when interest rates are low? And when interest rates are negative? In theory, they withdraw their money and spend because it’s not gaining enough in value just sitting there.

Except, Artus argues that a 100 euro banknote, like all banknotes, has a 0%. Withdraw it and keep it and it won’t increase or decrease in value. It will still be worth 100 euros in a year. That’s worrying in countries like the USA where the percentage of cash in circulation at the same time stands at roughly 14% of the entire money stock of the country. Negative interest rates will just make people (and the banks) hold on to their money. If you are going to use negative interest rate, then they have to be used throughout the economy, for banks and for customers of those banks. Want people to spend? Apply negative interest rates everywhere, but, then you have to get rid of tangible money.

Of course, there’s the added bonus of getting rid of notes in as much as tangible money costs money (and a lot of it) to make it perfectly unique and impossible to copy (laugh!). The Europeans have banknotes that they use for transactions everyday (5, 10, 20 and 50 euro banknotes). They also have notes that they never or rarely use (100, 200 and 500 euro banknotes). Apparently, they had the 500 note just to placate the Germans and keep them quite since they were losing the 1000 mark banknote that they had. But also, the 500note has the nickname ‘the Bin Laden’ since they make fraud easy. These banknotes that are hoarded outside of banks are estimated in Europe to represent 50% of all banknotes in circulation (948 billion euros is the total stockpile of all euro banknotes in circulation in April 2014). The 500 euro banknote is 30% of all banknotes in circulation and never used in daily transactions by Europeans. Getting rid of banknotes is supposedly going to cut the Bin-Laden effect on money and its trafficiking. But, the fraudsters and the mafia will just go to Bitcoins or their like.

So do we burn or don’t we?

All of this won’t be worth the tantalizing attractiveness it seems to portray unless the whole world does the same thing. The likelihood of the entire world agreeing to get rid of banknotes at the same time and going electronic would be a trillion to one chance. We have just about as much chance of Vladimir Putin saving President Obama from drowning (if you remember his laughable newspeak just a few months ago now). Theories are nice, but they never seem to take into account the parameters of impossibility, do they? Still, it occupied a researcher somewhere in the world for a while, didn’t it?

Ready to burn your banknotes?

Originally posted: Burning Banknotes !