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What A Cashless Society Would Look Like

Tyler Durden's picture




 

Submitted by Erico Matias Tavares via Sinclair & Co.,

Calls by various mainstream economists to ban cash transactions seem to be getting ever more louder.

Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

Pros and Cons

To be most effective, banning cash would most likely need to be coordinated between the US and the EU. Otherwise if only one of the two Western economic blocks were to do it, the citizens of that block might start using the paper currency of the other, thereby circumventing the restrictions of this policy. Can’t settle your purchase in paper euros? No problem, we’ll take US dollar bills.

This is just one aspect that can give us a glimpse of the wide ranging consequences this policy would have. Let’s quickly consider some pros and cons, as we see them:

Pros:

  • Enhance the tax base, as most / all transactions in the economy could now be traced by the government;
  • Substantially constrain the parallel economy, particularly in illicit activities;
  • Force people to convert their savings into consumption and/or investment, thereby providing a boost to GDP and employment;
  • Foster the adoption of new wireless / cashless technologies.

Cons:

  • The government loses an important alternative to pay for its debts, namely by printing true-to-the-letter paper money. This is why Greece may have to leave the euro, since its inability or unwillingness to adopt more austerity measures, a precondition to secure more euro loans, will force it to print drachma bills to pay for its debts;
  • Paper money costs you nothing to hold and carries no incremental risk (other than physical theft); converting it into bank deposits will cost you fees (and likely earn a negative interest) and expose you to a substantial loss if the bank goes under. After all, you are giving up currency directly backed by the central bank for currency backed by your local bank;
  • This could have grave consequences for retirees, many of whom are incapable of transacting using plastic. Not to mention that they will disproportionately bear the costs of having to hold their liquid savings entirely in a (costly) bank account;
  • Ditto for very poor people, many of whom don’t have access to the banking system; this will only make them more dependent, in fact exclusively dependent, on government handouts;
  • We wonder if the banks would actually like to deal with the administrative hassle of handling millions of very small cash transactions and related customer queries;
  • Illegal immigrants would be out of a job very quickly – a figure that can reach millions in the US, creating the risk for substantial social unrest;
  • If there is an event that disrupts electronic transactions (e.g. extensive power outage, cyberattack, cascading bank failures) people in that economy will not be able to transact and everything will grind to a halt;
  • Of course enforcing a government mandate to ban cash transactions must carry penalties. This in turns means more regulations, disclosure requirements and compliance costs, potentially exorbitant fees and even jail time;
  • Banning cash transactions might even propel the demise of the US dollar as the world’s reserve currency. The share of US dollar bills held abroad has been estimated to be as high as 70% (according to a 1996 report by the US Federal Reserve). One thing is to limit the choices of your own citizens; another is trying to force this policy onto others, which is much harder. Foreigners would probably dump US dollar bills in a hurry and flock to whichever paper currency that can offer comparable liquidity.

In light of the foregoing does banning cash transactions make sense to you? Aren’t the risks at all levels of society just too large to be disregarded?

Unintended Consequences

Paper money can be thought of as a form of interest-free government borrowing and therefore as a saving to the taxpayer. Given the dire situation of Western government finances, probably the very last thing we should do right now is to ban cash transactions.

Think about it. If the government prints bills and coins to settle its debts, rather than issuing bonds, it does not add to its snowballing debt obligations. Of course the counterargument is that this might result in significant inflation once politicians put their hands directly on the printing press. But isn’t this what the mainstream economists are so desperately trying to do to avoid deflation?

And it’s not like people in the West have tons of cash under the mattress. Let’s do the math. If only 30% of US paper money is held by residents, this is only about 2% of GDP, and probably unevenly distributed. It is therefore very dubious that any boost to economic activity will be that significant. In fact there is no empirical evidence that demonstrates this policy will work as intended (not that this has ever stopped a mainstream economist)

Moreover, an economy’s ability to create money would be even more impaired if its banking system were to crash – exactly at the time when it would need it the most. In reality it could be hugely deflationary because there would be no other currency alternatives. Talk about unintended consequences.

As to who could replace the US in providing paper liquidity to the world, we don’t need to think too hard. China will surely not ban cash transactions given that almost a billion of its citizens are still quite poor and most have no access to banking services (plus it seems that their own economic advisors are much more sensible). Replacing the US in offshore cash transactions would create substantial demand for the Chinese yuan, at that stage without any real competition from other major economies as presumably none would be using paper.

It is therefore doubtful that US political leaders would ever endorse such a policy; they would be effectively giving up on an incredible advantage – the US dollar ATM, to the benefit of their main geopolitical competitors. However, given the considerable influence of mainstream economists in financial and political circles this cannot be ruled out, especially during a crisis.

And it would be just the latest in a set of unprecedented economic policies:

“A depression is coming? Let’s put interest rates at zero. The economy is still in trouble? Let’s have the central bank print trillions in new securities. The banks are not lending? Let’s change the accounting rules and offer government guarantees and funds. People are still not spending? Let’s have negative interest rates. The economy is still in the tank? LET’S BAN CASH TRANSACTIONS!”

More Central Planning

The problem is that central planners never know how and where to stop. If a policy doesn’t work, they just find a way to tinker somewhere else – and with more vigor. Devolving the initiative back to the private sector is never an option.

Micromanagement of every single detail of our economic lives thus seems to be inevitable. And at that point there will be no more free markets. As pointed out by Friedrich von Hayek, “the more the state plans the more difficult planning becomes for the individual.”

Banning cash transactions seems like yet another excuse to postpone implementing real solutions to our financial problems. How can we have sustainable growth in the economy if:

  • The banks are not solid enough to lend?
  • Consumers are not solid enough to borrow?
  • Overindebted municipalities, states and governments seek ever more tax revenues?
  • An already overburdened private sector is underwriting the cost of every policy error?

The guys and gals who generate real wealth and employment need encouragement and support, not more penalties on how they choose to go about their business.

A cash ban does not address any substantive issues. What is needed is a sensible economic proposal and above all political courage to implement it, which so far seems to be lacking.

There are no free lunches in economics. A cashless society is promising to have very tangible costs to our liberties and future prosperity.

 

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Wed, 05/20/2015 - 10:23 | 6113344 DutchBoy2015
DutchBoy2015's picture

Ohhh, Okay, you are right, I am wrong.  Yes, they will put you in chains. NO cash allowed. all businesses will fold. and we all will go back to feudal times.

You are the man,

Wed, 05/20/2015 - 10:42 | 6113427 gcjohns1971
gcjohns1971's picture

Yes.

I know I am awesome.

I often wonder why everyone else is so confused.

Thank you for the validation!

 

But seriously... a lifetime of labor can be arbitrarily confiscated using this method...and in fact is THE INTENT of the method.  This is in fact chattel slavery akin to the Plantation System.

Wed, 05/20/2015 - 11:58 | 6113710 DutchBoy2015
DutchBoy2015's picture

Correct,  everyone will soon be living in tents.,  I predict end of next year.  

Wed, 05/20/2015 - 12:22 | 6113802 gcjohns1971
gcjohns1971's picture

Why not?

The word 'Mansion' once meant, "Mansion A dwelling place, -- whether a part or whole of a house or other shelter. "

Why shouldn't 'tent' conform to the same trend.  Once day it may mean not a humble scrap of fabric to keep out the rain, but a grand estate.

Wed, 05/20/2015 - 08:45 | 6113027 Last of the Mid...
Last of the Middle Class's picture

You will by God buy more shit from Wallyworld, we'll just debit you account and if you're lucky send it to you in the mail. Unintended consequences will be a massive and I mean off line barter system that will leave bankers everywhere washing the shit of their peckers while telling you how wrong they've been all along.

Wed, 05/20/2015 - 08:56 | 6113057 DutchBoy2015
DutchBoy2015's picture

SMDH , more gibberish.  No one is forcing you to shop at Walmart .  WTF are you on about?

 

Wed, 05/20/2015 - 10:46 | 6113384 gcjohns1971
gcjohns1971's picture

Economists object to people's option to hold physical cash such that it cannot be easily located, spent, or loaned out against their will.

If you do not understand this, then you should research the term 're-hypothecation' and 'Fractional Reserve Banking'.

I promise you.  When you save your money in a bank, the money is not there.  It is loaned out to others on a fractional reserve basis.  Hence both you and the recipient for the loan have 100% claim on the same money at the same time.  This is the nature of banking, as it currently exists.  And this is the source of the business cycle, as it currently exists.

You see, fractional reserve banking creates an inverted pyramid of credit based upon sparse real assets.  Worse, it is not clear to the bankers themselves which particular 'asset' is a real one, vice a portion of another bank's credit pyramid.  

When people understand this really is how banking works, that their money is gone... or more precisely that others can exercise 100% claim on what they believed was 'their' money, then they try to withdraw it.  This is called a 'bank run'.

Bank runs are periodically inevitable as a consequence of Fractional Reserve Banking itself because the pyramid of credit is interest-bearing, while the assets upon which it is based are not interest bearing.  This creates a deficit of cash in the system to satisfy all claims.  Someone will not be paid.

To ensure that the interest can be paid, central banks intentionally create monetary inflation (the cause) and price inflation (the result of more funds bidding upon a fixed basket of goods).   The mechanism of this monetary inflation is debt issuance by the authorizing government - running a deficit and increasing debt.  Again, this process continuously injects new money into the system so that the interest on the debt pyramid can be paid.

However, this method of creating money allows the recipients of the new money to spend it before it bids up prices...and those recipients are a consistent group. 

This consistent group, then, is continuously gaining a larger and larger share of the economy's total wealth...for no reason other than the design of the system.  This is the source of wealth-inequality.  No one cares if someone makes a load because he created something that saves us all time, money and effort.  But when they get money-for-nothing it creates a host of problems.

This consistent group has different spending habits than the general population, and gained the wealth without productive behavior or productive trade. They bid up some prices but not others in a pattern different from that of the general economy.  This leads to price distortions, that prevent business people from knowing which productive behavior is most profitable. 

Moreover, the effect on businesses is even worse...because market bidding with wealth created without productivity also bids up the factors of production, in essence progressively starving businesses from cash with which to operate.  This makes businesses more likely to fail than otherwise.  And in failing, businesses will destroy a portion of the real assets underlying the credit pyramid.

However, this process does nothing to address genuine wealth destruction.  Unprofitable businesses cannot pay back loans given to them.   There the issue is not from where will come the money to pay interest.  Rather, the issue then is that the underlying asset upon which a credit pyramid was built has been destroyed.

When an economist says they want to ban cash, they are saying they want to interdict bank runs.  This would solve recessions, they reason, because it would interdict capital preservation by the first person who withdraws the cash. 

Except it wouldn't.  Because the threat is not from cash withdrawals, but from the understanding that multiple people cannot possibly have simultaneous 100% claim on the same asset.   The threat comes from the fraudulent nature of the system itself.  If you and I both get a claim check for the same car at the car park we cannot both separately drive the car home.  Issuing the duplicate claim check was fraud. 

The problem is not cash withdrawals, per se, because rather than take cash, a bank run could just as easily occur via spending. Whether the money is withdrawn from the bank's asset column via cash withdrawal or via spending will not make a difference to the bank's reserve ratio.  The only difference is that spending simply transfer's the note to another holder.  It does not extinguish it.  The reserve ratio is still broken.  Someone will still be left holding the bag.

The only difference between preserving capital through cash withdrawals and preserving capital through conversion to physical asset is the effect they have on the currency in use.

And this invokes Gresham's Law.  The assets they buy will become money - hence the Wally-World reference. A great number of people get their assets there.  The former money will become worthless.

Mass withdrawal of cash will result in the collapse of the credit pyramid through deflation.

Mass converstion of currency to physical assets will result in the collapse of the credity pyramid through hyperinflation.

Either way you will still have the crash...but electronic funds are easier to control.  By 'control' I mean 'steal accompanied with ceremony'.

Wed, 05/20/2015 - 09:00 | 6113069 F em all but 6
F em all but 6's picture

No cash. Strict bank deposits? I thought that bank deposits represent an unsecured loan to the bank. Where does that leave property rights and due process guaruntees thereof? In the toilet. Neat way to make those constitutional guaruntees obsolete from preempting. Ah the exception to the rule now creates the rule itself.

FUCK THESE PRICKS. I will NOT engage in a CONTRACT the fullfilment of which is automatically transfered to a THIRD PARTY that considerrs that transfer an unsecured loan.

 

Get ready for civil war.

Thu, 05/21/2015 - 11:02 | 6117310 begintowin
begintowin's picture

The sovereigns do not need to riot against the central government. That will only bring death and the destruction of property as happened during the American War of Secession.

What the people must do is not vote on November 8, 2016. If the nation stays home then a congressional quorum cannot be formed and no president will legally be able to hold office on January 20, 2017.  The legislature will not exist to make laws but the bureaucracy will continue as the fiscal budget would still be in effect through September 2017 (see: http://www.senate.gov/reference/glossary_term/fiscal_year.htm ) to run the government (e.g., pay social security, medicare claims, etc.)

The people will demand from the governor of their respective State to hold a congressional and presidential election in the next nine months with candidates who are not part of the existing plutocracy thereby creating a new federal government that serves the nation and not the fascists. That's how to do it without violence.

Wed, 05/20/2015 - 09:10 | 6113104 Wahooo
Wahooo's picture

What would it look like? It would look like a German concentration camp where everyone is assigned a number.

Wed, 05/20/2015 - 10:16 | 6113306 DutchBoy2015
DutchBoy2015's picture

It already is. whats your SSAN?

 

Wed, 05/20/2015 - 09:19 | 6113127 CHC
CHC's picture

I can see a huge underground in bartering popping up all over the place.  Those without anything will have no problem rioting, burning and pillaging until the cows come home.  There would be an insurrection the likes of which this country has never seen.  When you have nothing - you have nothing to lose - Gerald Celente

Wed, 05/20/2015 - 10:38 | 6113413 Polymarkos
Polymarkos's picture

Cashless society crap is about CONTROL. If all our money is digital, then the digital oligarchs can and will take all they want of it.

Wed, 05/20/2015 - 12:34 | 6113861 One Eyed Jack
One Eyed Jack's picture

Dose any more proof if anymore is needed to prove that this illegitimate government is attempting to over take you, your liberties, and your property?

Wed, 05/20/2015 - 17:30 | 6115039 Billy Bob101
Billy Bob101's picture

There are many pre 1965 silver US coins that might be useful if cash were banned.

Wed, 05/20/2015 - 22:14 | 6115838 honestann
honestann's picture

PRO:  Convince people to start saving real money, not paper currency.  In other words, buy and save gold and silver coins.  This is a HUGE pro... for the wise.

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