Apr222015
Should we pay the federal reserve to store wealth in currency?
Would you allow the federal reserve to ban currency so banks could charge you to store your savings?
Money is both a medium of exchange and a store of wealth. Money represents the stored value of labor not immediately converted to consumption. Historically, people used scarce items like gold that were durable, difficult to replicate, easy to store, and easy to transport both to acquire goods and services and as a store of wealth when no goods and services were required.
Gold served as money for millennia, mostly because nobody figured out how to transmute other elements into gold. However, once rulers started coining gold, they began to substitute other metals, shave the coins, and reduce the size of the coins in a process known as seigniorage. Ever since then, governments sought ever more ingenious ways to confiscate the stored wealth of citizens without direct taxation.
Paper Money
After several failed experiments with paper money and an ongoing problem with seigniorage, governments finally resorted to forcing people to accept their paper currency under threat of legal prosecution. US dollars have a note declaring they are good for all debts both public and private, a decree that forbids citizens from rejecting US dollars as payment for goods and services.
Perhaps as a recognition that rulers and legislatures lacked the discipline not to degrade the value of currency, most governments around the world established central banks and turned over authority to manage the currency to the central bank, and for the last 100 years or more, central banks tinkered with the money supply through interest-rate policy.
Central banks around the world gave up on a gold standard and allowed the value of their currencies to float based on supply and demand. Since then no central bank faced any restrictions on how much money they could print — how much stored wealth value they could confiscate from citizens — except the restriction imposed by the world market price for their currency by people who use other currencies. If central banks print too much, the value of the currency declines, and inflation generally ensues.
Deflation and Negative Interest Rates
Our current regime of central bank management of currency has some limitations besides inflation. The financial crisis of 2008 was precipitated by excessive debt creation, often in the form of unstable real estate loans. The widespread destruction of debt caused by defaults and the subsequent collapse of asset prices lead to deflationary conditions.
The federal reserve would have lowered rates below zero to stimulate the economy if it were possible, but negative interest rates were considered impossible, so policymakers didn’t attempt it. But why are negative interest rates impossible?
First, for ordinary people, if banks start charging depositors to hold their money — the result of negative interest rates — people would withdrawal their deposits in cash and stuff their mattresses or safe deposit boxes. When interest rates are negative, it pays to store money in cash rather than pay the bank to hold your savings. Policymakers feared massive bank runs if interest rates went negative, so they felt limited by a zero bound.
Experience in Europe over the last year or so shows that interest rates can go negative. Investors expect widespread deflation of the Euro, probably due to the impending Greek default and the likely later defaults of Spain and Italy. Investors have purchased bonds with negative yields just to store wealth in what they believe will be a deflation ravaged currency. It turns out that the storage costs of holding billions of Euros made it more attractive to store that wealth electronically rather than convert it to paper currency.
This experience has emboldened some to float the idea that currency should be abolished entirely. Emotionally, I am repelled by such an idea. I don’t want to be forced to pay a bank for the privilege of storing my money electronically. By eliminating alternative means of storing wealth, over time bankers will undoubtedly reap the benefits of lower interest rates on deposits, and it times of deflation — which are generally caused by bank excess — banks will be able to make money directly from depositors by confiscating the value of their stored wealth. It’s the kind of idea revolts are made of.
Citi Economist Says It Might Be Time to Abolish Cash
Would this save the world economy?
by Lorcan Roche Kelly, April 10, 2015
The world’s central banks have a problem.
When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut — they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy.
It takes a remarkably twisted logic to conclude cash in an economy is a problem.
In a new piece, Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates.
Fundamentally, the ELB problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction?
The better question to ask is why would you surrender your right to hold your wealth in cash so banks could take it from you?
Cash therefore gives people an easy and effective way of avoiding negative nominal rates.
Buiter’s note suggests three ways to address this problem:
- Abolish currency.
- Tax currency.
- Remove the fixed exchange rate between currency and central bank reserves/deposits.
Tax currency? Does that idea sound as crazy to everyone else as it does to me?
Yes, Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether. (Note that he’s far from being the first to float this idea. Ken Rogoff has given his endorsement to the idea as well, as have others.)
Just because others have also floated this dumb idea doesn’t make it any better.
Before looking at the practicalities of abolishing currency, we should first look at whether it could ever be necessary. Due to the costs of holding large amounts of cash, Buiter puts the actual nominal rate at which the move to cash makes sense as closer to -100bp. So, in order for a cash abolition to become necessary, central banks would need to be in a position where they wished to set nominal rates much lower than that.
The gold bugs would love that. The main criticism of gold as a medium for storing wealth is that gold pays no interest. If interest rates went negative, any asset that did not decline in value or have excessive carrying costs becomes superior to cash. Gold would actually become a cashflow asset because it avoids a negative cashflow.
Buiter does not have to go far to find an example of where a central bank may have wanted to set interest rates much lower to -100bp. He uses (a fairly aggressive) Taylor Rule to show that Federal Reserve rates should have been as low as -6 percent during the financial crisis.
It seems Buiter is correct: Sometimes strongly negative nominal rates are called for.
It seems Buiter is correct? What a presumptuous and ignorant statement! A few squiggly lines on a graph proves nothing, other than perhaps people can use economic theory to support foolish ideas and justify immoral theft.
Buiter is aware that his idea may be somewhat controversial,
Somewhat controvercial? There’s an understatement!
so he goes to the effort of listing the disadvantages of abolishing cash.
1. Abolishing currency will constitute a noticeable change in many people’s lives and change often tends to be resisted.
It would be resisted at gunpoint by many. It would probably be easier to take away people’s guns than take away their cash.
2. Currency use remains high among the poor and some older people. (Buiter suggests that keeping low-denomination cash in circulation — nothing larger than $5 — might solve this.)
Screw the old and the poor in order to help the banks? I don’t see the federal reserve having any problem with that, do you?
3. Central banks and governments would lose seigniorage revenue.
WTF? Directly confiscating the wealth of citizens through negative interest rates would not cause the loss of seigniorage revenue, it would magnify the effect of this evil significantly.
4. Abolishing currency would inevitably be associated with a loss of privacy and create risks of excessive intrusion by the government.
No kidding. For as much as I find this idea offensive, it would do much to bring illegal activities out into the open. Crack cocaine dealers would need card readers on their iPhones to complete drug transactions. And how would people tip strippers? Would strippers have card readers in their G-strings?
5. Switching exclusively to electronic payments may create new security and operational risks.
Buiter dismisses each of these concerns in turn,
I imagine he does dismiss each concern with some completely rational and well-reasoned nonsense.
finishing with:
In summary, we therefore conclude that the arguments against abolishing currency seem rather weak.
In summary, I therefore conclude that the arguments in favor of abolishing currency seem like the ravings of a lunatic.
Whatever the strength of the arguments, the chances of an administration taking the decision to abolish cash seem vanishingly small.
Thank goodness.
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Why the Federal Reserve May (Almost) Never Raise Interest Rates
Investors in securities markets are now strongly betting the Federal Reserve won’t raise interest rates in June, but the million dollar question is will the Fed ever be able to raise interest rates again?
Fed officials are debating whether recent economic weakness—flagging industrial production, housing starts and jobs gains—are temporary or will the economy continue to disappoint.
The harsh winter and falling oil prices took a big bite out of first quarter growth, but consumers have not rushed to make up for lost time by spending the recent bonanza in purchasing power from lower gas prices. Labor market slack—for example, the contingent labor force of 7 million men ages 25 to 54 not holding a job or looking for work, nor counted in the official unemployment rate—limits wage gains and breeds uncertainty.
Stagnation in southern Europe and Japan and slowing growth in China has prompted foreign central bankers to print lots of money and depress the dollar values of the euro, yen, and yuan. That makes foreign products even cheaper on store shelves and U.S. exports too expensive to sustain both market shares and profits abroad.
Economists and Fed officials can argue whether these forces are temporary or permanent, but capital for use in the private sector is in great abundance around the world—witness cash-rich corporations buying back stock and their robust pace of business acquisitions.
Already, inflation is near zero, negative interest rates have emerged on government bonds, and large company bank deposits are emerging in more stable and stronger European jurisdictions—Germany, Denmark, and Sweden—and those may well stay negative for a long time.
Economists fret that zero inflation and deflation will discourage spending as cautious consumers hold out for lower prices—but not if banks start charging interest to hold their money.
In a modern economy, cash is terribly inconvenient. Credit card bills, mortgages, and most family expenses can’t be paid with greenbacks, and corporations can’t pay suppliers, workers, or just about anything else with currency either.
If prices start heading south, banks will be in a strong position to charge a nuisance fee—read negative interest rates—to ordinary consumers for holding their cash, because like corporations they need bank deposits to pay bills in an era when only electronic transfers and checks are practical for settling with most vendors and workers.
The Fed may find that it might like higher interest rates and encourage moderate inflation, but such impulses are outdated and outmoded.
Even after first rate increase, policy will remain easy: Fed’s Dudley
Economic performance will determine when the Federal Reserve finally raises U.S. interest rates from near zero, an influential Fed official said on Monday, adding he hopes to tighten policy later this year.
“We have to see what unfolds,” New York Fed President William Dudley said in a speech that repeated cautious optimism that the U.S. economy will continue to expand and that inflation will begin to firm later this year.
Still, he said, the economy has further to go toward the central bank’s dual goals of full employment and 2-percent inflation.
The data will “hopefully” support a rate hike later this year, Dudley said at the Bloomberg Americas Monetary Summit. But “the timing of normalization remains uncertain because how the economy evolves is also uncertain,” he added.
Dudley, a permanent voter on U.S. monetary policy and a close ally of Fed Chair Janet Yellen, repeated that the pace of tightening will depend on how financial markets react.
The Fed is expected to raise rates by June at the earliest but more likely in the second half of the year, according to forecasts by economists and Fed officials.
The move is expected to reverberate through markets globally. Dudley said it could create “significant challenges” for emerging market economies, but that many of them are better prepared for it now than a couple of years ago.
Treasury Department: Fannie, Freddie Bailout Wasn’t A Loan
Acting Assistant Secretary for Legislative Affairs Randall DeValk wrote that the government “did not make an ordinary loan” to Fannie and Freddie, but rather that it “took on an enormous risk when rescuing the enterprises in the middle of a financial crisis – a risk for which any private investor would have demanded substantial compensation.” He wrote that taxpayers continue to bear risks from Fannie and Freddie which in part explains why the companies’ profits continue to be swept.
In other words, the Treasury argues, the dividends paid so far should be treated as compensating for that risk rather than as a repayment of a loan.
In the letter, Mr. DeValk also said that the Treasury Department changed the terms of the bailout agreement in order to avoid a situation in which Fannie or Freddie would need a bailout from the department in order to pay the set 10% dividend.
The change in terms “ended the vicious circle of taking funds from Treasury — meaning the taxpayers — to pay the Treasury the fixed dividends,” Mr. DeValk wrote.
March foreclosure starts skyrocket 18% from February
Foreclosure starts were up 18% from February. Approximately 94,100 foreclosures were started in March, a roughly 7% increase from last year.
March didn’t see quite as many foreclosure starts as there were in January when there were 94,400, but it was the second highest number of starts since the end of 2013, which was 105,000.
Existing home sales rise as spring homebuying season arrives
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, jumped 6.1% to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February.
This is positive news for the industry after existing-home sales collapsed 4.9% in January to the lowest rate in nine months, falling well below analyst expectations. And while they did pick up in February and edged up by 1.2%, there was still some stagnation in the market.
Lawrence Yun, NAR chief economist, spins the news with his usual nonsense.
“After a quiet start to the year, sales activity picked up greatly throughout the country in March,” he continued. “The combination of low interest rates and the ongoing stability in the job market is improving buyer confidence and finally releasing some of the sizable pent-up demand that accumulated in recent years.”
Pent-up demand is a fallacy offered as hope by realtors when little else goes well.
Total housing inventory at the end of March grew 5.3% to 2 million existing homes available for sale, and is now 2% above a year ago (1.96 million). Unsold inventory is at a 4.6-month supply at the current sales pace, down from 4.7 months in February.
“The modest rise in housing supply at the end of the month despite the strong growth in sales is a welcoming sign,” adds Yun. “For sales to build upon their current pace, homeowners will increasingly need to be confident in their ability to sell their home while having enough time and choices to upgrade or downsize. More listings and new home construction are still needed to tame price growth and provide more opportunity for first-time buyers to enter the market.”
The percent share of first-time buyers was 30% in March, well below the 40% average.
Steve Thomas nailed it, as usual.
Steve Thomas is the Oracle of Orange County.
Wait, maybe el O is …
I would have to agree..
el ORACLE is the Oracle of OC.
White House Threatens to Veto Bill That Cuts CFPB Funding
President Barack Obama has threatened to veto a proposed amendment to the Consumer Financial Protection Act of 2010 that the White House claims would reduce the amount of funding the CFPB director can request.
H.R. 1195, known as the Bureau of Consumer Financial Protection Advisory Boards Act, was introduced in the House by Robert Pittenger (R-North Carolina) and Denny Heck (D-Washington) on March 2. The bill calls for the establishment of advisory boards or councils within the CFPB of 15 to 20 members each for small businesses, credit unions, and community banks. The stated purpose of each advisory board or council is to “advise and consult” with the CFPB on issues that impact their respective groups. The bill was approved in the House Financial Services Committee earlier this year by a vote of 53 to 5.
A recently proposed amendment to the bill by House Financial Services Committee Jeb Hensarling (R-Texas), however, reduces the amount of funding the CFPB director can request by about $45 million and $100 million for the fiscal years of 2020 and 2025, respectively. The White House said in its statement that “These reductions to the caps could result in, among other things, undermining critical protections for families from abusive and predatory financial products.”
The bill’s co-sponsor, Heck, is urging his fellow Democrats to oppose the amendment to the bill, saying that Hensarling “put the torch” to his bill.
When All News Is Bad News
One of the defining traits of financial bubbles is the willingness of traders and investors to interpret pretty much everything as a buy signal. Rising corporate earnings mean growth, while falling profits mean easier money on the way. War means more revenues for defense contractors and easy money for everyone else. Blizzards means consumer spending will rebound in the Spring. Inflation means higher asset prices for speculators while deflation means, once again, easier money for everyone. When people are this optimistic they find the silver lining in every black cloud and happily to buy the dips with borrowed money.
A timely example is Greece’s threat to leave the Eurozone, default on its debt and go back to using drachmas. This could be seen as either the beginning of a chain reaction that destroys the eurozone and the rest of the world as we know it, or as an excuse for vastly easier money. So far — in a sign that the bubble is still expanding — each new twist (like last weekend’s announcement of de facto capital controls) has been accompanied by European Central Bank reassurances and market acceptance of those promises.
Another case in point is China’s twin weekend announcements that two major companies defaulted on their debt while the government eased bank reserve requirements. The pessimistic take on such things happening simultaneously would be that China’s financial sector is in crisis and the government is desperately and probably impotently trying to stop the bleeding. But the European and US markets saw only the liquidity side of the story and bid up risk assets pretty much across the board.
When we change our minds
But in the life cycle of every bubble there comes an emotional phase change. Dark clouds start to obscure their silver linings and new highs get harder and harder to achieve. Think home prices rising beyond middle-class affordability in 2007 or tech stocks hitting 50-times sales in 1999. Only unambiguously good news can keep the bubble going, and because few events are that pure, the crowd gets nervous and the spin gets negative. Faster growth means tighter money; a weak dollar means inflation while a strong one means falling corporate profits. War means instability, extreme weather means lower near-term growth. So sell the rallies and hide out in cash.
The world isn’t quite at this point — or maybe it is. The following chart (from Bloomberg) shows the impact of Greece’s impending loan deadline on a measure of risk in peripheral eurozone bond markets. Greece is the blue line; the black and red are Italy and Spain.
There’s no way to know until after the fact if the dark night of the market’s soul has begun. But when it comes, that’s how its first stage will look.
>> It would probably be easier to take away people’s guns than take away their cash
And thus we see the wisdom of the 2nd amendment. It is ultimately what restrains governments from running roughshod over the citizenry.
If you take away currency,people will barter and trade.If you try and take away guns in this country,at that point you would see a uprising and citizens will survive,but our corrupt elected leaders would not.Looking back through history,this story of TOO many laws and taxes always ends the same.Our leaders dont understand because they have never really worked,just milked the system for what they can get,but hide behind the bs on being for the people.
Currency would be taken away slowly and we would all watch in terror and feel powerless.
1. First they’d pass a law requiring serial number readers for every business to combat rampant forfeiting and money laundering that is ruining our economy.
As a result the black market and organized crime strengthens because they have created a demand for untraceable currency.
2. Then they’d require asking and recording state issued identification for all cash transaction greater than $100 because step 1. “did not work”
Black market and organized crime strengthens even more due to higher demand for their services legitimizing the governments actions even more.
3. Finally they’d disconnect the dollar from digital currency because forfeiting and money laundering costs the FED too much. They are not taxing you just “covering costs”
And in the end you do have paper currency, but it’s useless.
Feeling powerless ia always a choice.You always see things unfold,its just if you react or give in.The people have always been in power,they just dont realize it.You always get warnings,take heed.
MrBahn,
You outline exactly how they would make it happen. Each step seems innocuous, so the hordes won’t flood the streets, but the end result is the same: no currency.
Cryptocurrencies like Bitcoin will become more common and governments will seek to ban them because they can’t control them, tax them, or steal value from them.
Report: JPMorgan Chase Bans Storage of Cash in its Safety Deposit Boxes
Some JPMorgan Chase customers are receiving letters informing them that the bank will no longer allow cash to be stored in safety deposit boxes.
The content of a post over on the Collectors Universe message board suggests that we may be about to see a resurgence of the old fashioned method of stuffing bank notes under the mattress.
My mother has a SDB at a Chase branch with one of my siblings as co-signers. Last week they got a letter outlining a number of changes to the lease agreement, including this:
“Contents of the box: You agree not to store any cash or coins other than those found to have a collectible value.”
Another change is that signatures will no longer be accepted to access the box. The next time they go in they have to bring two forms of ID and they will be issued a four-digit pin number that will be used to access the box then and in the future.
The letter, entitled “Updated Safe Deposit Box Lease Agreement,” was sent out to customers at the beginning of the month.
“Hide your wallets, the banksters are on the move,” warns the Economic Policy Journal.
As of last month, Chase has also instituted a new policy which, “restricts borrowers from using cash to make payments on credit cards, mortgages, equity lines, and auto loans,” writes Professor Joseph Salerno of the Mises Institute.
The news arrives on the back of comments by Citi’s Willem Buiter, who recently advocated abolishing cash altogether in order to “solve the world’s central banks’ problem with negative interest rates”.
Last month we also reported on how the Justice Department is ordering bank employees to consider calling the cops on customers who withdraw $5,000 dollars or more.
Efforts to impose restrictions on the use of cash by banks are seen by many as an attack on anonymity and an example of how financial institutions are positioning themselves to handle the fallout of the next economic crash – at the expense of customers.
According to reports which emerged last year, HSBC is now interrogating its account holders in the UK on how they earn and spend their money as well as restricting large cash withdrawals for customers from £5000 upwards.
Banks in the U.S. are also making it harder for customers to withdraw and deposit cash, with Chase imposing new capital controls that mandate identification for cash deposits and ban cash being deposited into another person’s account.
In October 2013, we also covered policy changes instituted by Chase which banned international wire transfers while restricting cash activity for business customers (both deposits and withdrawals) to a $50,000 limit per statement cycle.
Last month, French Finance Minister Michel Sapin hailed the introduction of measures set to come into force in September which will restrict French citizens from making cash payments over €1,000 euros.
Where did you get this article?
When I searched the key phrases it brought up info wars and prison planet which are both both known as conspiracy theorist web pages. Info wars has credited the article as being written by Paul Joseph Watson. Watson works with Alex Jones of info wars and is NOT a reliable information or media source.
The source clearly isn’t the New York Times. I have no idea how accurate the report is, but it was interesting given the topic of today’s post.
I actually got this letter…
Is the source a crackpot, or is he ordinarily lucid and believable?
When cash is outlawed only outlaws will have cash!!!
Seriously…first they took away the gold, then reluctantly they allowed people to own it again…
This economist has spent too long in graduate school. Graduate school is where people go to finalize their divorce from reality and common sense.
Time to start designing those Pocket X-Ray Gold Amount Meters.
Gold bugs will win in the end.
People with the guns and food always win!
People with water win. You’ll die of thirst first.
Get a portable hiking water filter so you can drink your neighbor’s pool. I’m serious, I bought one.
Good point!
New plan for owning real estate: outlive everyone else, then take your pick.
Their idea works well in their ivory towers where decisions don’t have repercussions in the real world. Further, they will chide the ignorant masses for failing to grasp the genius of their ideas.
It’s funny that we had such a heated discussion about boomerang buyers last week and come to find out one of my relatives that strategically defaulted is coming up on the 3 year waiting period to qualify through FHA again. They can hardly wait to get into the housing market and just need that 3 year ownership “sabbatical” to end, so they can leverage up and do it again. They short sold their last place as a “business decision” after not making payments for something like 4 years.
This is completely anecdotal of course but I believe it reveals a short coming of the Fed study. They conducted the study prior to the housing bubble and the advent of strategic default as a widely accepted practice. I believe the “true” defaults concentrated mostly in low-income subprime borrowers will likely adhere to the study’s findings of only 10% returning to the market. However, the high income strategic defaulters will likely come back in a much bigger way, perhaps around 50%.
Many of them are just now getting past the 3 year rule and will be able to buy over the next few years. The demand from this cohort won’t be earth shattering but it should put some wind behind the sails of the housing market. Also, they will be counted as “first time buyers” by the government since they’ve been out of the market for over 3 years, which will play nicely into the Kool-Aid inducing headlines as the proportion of FTHB’s shows a dramatic increase driven by people who have owned before.
Your reasoning is exactly what housing analysts convinced themselves when they came out with their rosy projections. I think they will continue to prove wrong as the boomerang buyers simply won’t materialize in large numbers.
I’ll reach out to the few defaulters I know. I think they still have time to wait. The short sale process took so many months/years!
[…] glut, the remedy would be to lower interest rates below zero to disincentivize saving — which some kooks suggest. The evidence of the last several years shows this is clearly not the […]