One week ago, a day after the FOMC shocked most traders and economists by not hiking rates, keeping a very dovish outlook and in fact hinted negative rates may be coming (something Yellen noted further in her speech yesterday), a surprising speech by one of the Bank of England's more cool-headed economists, Andy Haldane, led to even more headscratching when the central banker urged not only the implementation of negative rates but also called for a ban on cash.
Subsequently in a post analyzing what the Fed's NIRP hint really meant, we suggested that while the market is focused on a Fed hike, the real story is the possibility of negative rates (which already are the norm in continental Europe) coming not only to the US but globally, which however may necessitate the partial or full elimination of cash as a monetary medium.
Fast forward to today, when we get yet another "very serious policy maker" confirm that cash as we know it may be on the endangered species list - again, a necessary precondition to make global NIRP effective - when overnight former Bank of England central banker, Charles Goodhart, told a London audience that bills such as the Swiss National Bank’s 1,000-franc note and the European Central Bank’s 500-euro note should be abolished, adding this "move that might also prove beneficial by trimming interest rates."
So one week after a BOE-er calls for elimination of cash and NIRP, another former BOE-er float a more moderate trial balloon, demanding the abolition of high-denomination cash and a further "trim" in interest rates.
This constant NIRP/cash ban chatter simply confirms that discussions of NIRP boldly going where it has never gone before (yet) such as the UK and the US, are at a very advanced level during those secret central bank dinner meetings on the 18th floor at the BIS tower in Basel every other month, as is the discussion of abolition cash as a monetary medium.
What was particularly amusing, however, is the justification for Goodhart's "modest proposal": it is to prevent the facilitation of drug deals! Bloomberg reports:
"There is no value whatsoever, except in seigniorage receipts to a number of small Swiss cantons, in the Swiss National Bank and the ECB issuing these vastly high-denomination notes which are there to finance the drug deals,” Goodhart told the inaugural Money Macro and Finance Group annual conference.
Truly, this is nobility personified: the institution which is the monetary equivalent of a liquidity drug dealer to BTFD-starved addicts around the globe is generously suggesting eliminating high denominated cental bank notes to impair another drug-related industry.
Such concerns have festered for years. In 2010, U.K. banks and money-exchange services stopped distributing 500-euro notes after a report showed that 90 percent of demand for them came from criminals. An internal Bank of Italy study the previous year described how such bills were accumulated by mafia money launderers, terrorists and tax dodgers because they’re easy to hide and transport.
Having trotted out his humanitarian strawman, the ex-central banker quickly goes back to the topic at hand: the future of monetary policy through cash (mis)management:
“Let’s get rid of all high-denomination notes as a starter,” Goodhart said. “If we were limited to low-denomination notes, at any rate because of the costs of stockpiling and all the rest we can drive interest rates a little bit further down.”
While at it, Chuck decided to add some emotion to his spiel: "Goodhart poured scorn on the institutions responsible for the issuance of such bills. “Central bankers are sometimes absolutely shameless, and the Bundesbank and the ECB and the Swiss National Bank are absolutely shameless in this regard,” he said."
So supposedly central banks are "absolutely shameless" not for generating the biggest wealth divide between the rich and the middle class in the history of mankind, but for giving the population the ability to preserve their modest savings in a convenient physical form away from the same banking institutions who would be delighted to follow in the "shameless" ECB and SNB's footsteps, and demand depositors pay for the privilege of funding bank liabilities. Much better to have investors purchase €500 worth of stocks or CHF1000 worth of bonds kept as digital 1s and 0s on some hard disk (where said 1s and 0s can be erased in a millisecond) and whose rate of interest can be cranked down to -? at the push of a button.
Because remember that simple balance sheet identity: the functional equivalent of boosting the rate of interest on a bank's assets, is reducing the rate of interest on its liabilities.
At this point even Bloomberg gets it: "Goodhart’s comments coincide with reflections this month by Bank of England Chief Economist Andy Haldane, who explored the potential interest-rate advantages of abolishing paper currency."
- Yesterday, Janet Yellen explicitly said that "the federal funds rate and other nominal interest rates cannot go much below zero", which clearly means going negative a little at first, "just the tip" if you will, and then figuring out just how much lower rates can go.
- Today, another central banker echoes comments from a week ago, and says that all high denomination notes should be abolished, which means starting with €500, CHF1000, perhaps the $100 bill, and also going lower. It is unclear what to Mr. Goodhart is not a sufficiently "high-denomination" note that deserves to be abolished. Surely some central banker, somewhere, "knows best."
What comes next is clear by now to all but the most tenured economists.