Today: war on cash. Tomorrow: war on gold?

Bron Suchecki (Perth Mint) | 20 May 2015 15:17

The “war on cash” story is getting a good run on the usual websites (try here, here and here for a sample) and no surprise to see some hype involved like this from Martin Armstrong (debunked by Bullion Baron here). Generally commentators are seeing this as positive for gold, but I’m not so sure it is good for gold in the long run.

The idea is that to get around the “zero bound problem” – where central banks cannot reduce interests rates too far below zero because people will withdraw cash to avoid negative interest rates (see JP Koning for more on this issue) – central banks will ban or punitively tax cash. To avoid this, people will buy gold instead of holding bank deposits, and/or use gold transactionally, which will increase demand for gold and its price.

I think that is a viable scenario with potential to go mass market depending on how aggressive the government gets. However, consider this selection of quotes on the “cash problem”, which are fairly representative of mainstream economic thinking:

Frances Coppola: “it is only those who seek to evade monetary policy who find convertibility suspended”
Jim Leaviss: “the authorities will be able to encourage us to spend more when the economy slows or spend less when it is overheating”
Peter Bofinger: “it would make it easier for the central bank to enforce its monetary policy”
Kenneth Rogoff: “given the persistent and perhaps recurring problem of the zero bound”
Note the use of “evade” and “enforce” (lets ignore for the moment that they are talking about policy, not law) – the attitude is that a central bank cannot be restricted in its need to “fight a large deflationary shock”, it must be able to reduce interest rates as far as possible until people do what it wants. There is no consideration of whether the existing policy is working or is counterproductive, more of the same medicine must be allowed to be administered.

This attitude means that if people find another way of evading the “policy” to force spending over savings, we can be sure that the thinkers will call for that method to be banned as well. They are already there, as Rogoff notes in his paper:

“It is unclear how easily these activities [use of anonymous cash] could substitute into other transactions media, but presumably this could be made difficult by restricting other potential anonymous transactions vehicles.”

It doesn’t get any clearer than that. I like the euphemistic “anonymous transaction vehicles” – gold and silver surely are the only globally recognised and easily used substitutes for physical cash (sorry, bitcoin is not easily used or understood by the mass market).

In the past I haven’t see gold confiscation as a likely scenario, but that was pre negative interest rates. If central banks continue down this path and can get governments to agree that they must be allowed to force people to spend, then it does change the risk assessment of confiscation.

However, I do not want to get all hype-ish myself. Policy and politics wise it is not a universally held view that cash should be banned, and we are speculating that people will just take a cash ban without any resistance. To be fair, Kenneth Rogoff did raise a number of costs to banning cash, which would cause policy makers to move cautiously. Also consider these thoughts from Carl-Ludwig Thiele from the German Bundesbank:

“we believe that there should be a mix of different payment instruments and government agencies do not have the right to tell the citizens how they should pay”

Then again, Germany is repatriating a fair bit of gold from the US, even if slowly.

Bron Suchecki is the Perth Mint’s manager of analysis and strategy. Article republished with permission. Click here for the original.