The man who used to sign hundred-dollar bills says it’s time to eradicate them…
Lawrence Summers is a former secretary of the United States Treasury. He was also chief economist at the World Bank. On Tuesday, he launched the latest attack in the War on Cash…
Here’s what he wrote in a piece titled “It’s Time to Kill the $100 Bill” for The Washington Post:
Even better… would be a global agreement to stop issuing notes worth more than say $50 or $100.
(Yesterday, we noted European Central Bank Chair Mario Draghi wants to kill the 500-euro note later this year.)
An all-out assault on cash has begun…
Central banks have entered a dangerous new era. They’ve taken extraordinary steps—like pushing interest rates negative—to try to stimulate economic growth. But cash banknotes thwart this (as you’ll see below).
So it’s no coincidence the move to limit—even ban—cash transactions is happening as central banks push interest rates deeper into negative territory…
I asked PBRG Founder Tom Dyson to delve into the bizarre world of negative interest rates for all Daily readers.
Below, he explains what negative interest rates mean for the economy and your investment portfolio… and the best way to protect yourself.
From Tom Dyson, founder, Palm Beach Research Group: Japan recently announced it was implementing a negative interest rate.
The central banks of Denmark, Norway, and the European Union are already using negative interest rates.
And last week, Janet Yellen, head of the Federal Reserve, said the Fed is considering it, too.
There are lots of stories in the newspapers and on blogs about this. Your friends may even be talking about it soon.
Here’s the story…
A pack of gum has a price. A gallon of gas has a price. But you may never have thought money has a price.
It does. The interest rate is the price of money.
Money is useful. Money is powerful. And the right to control money is valuable.
Think of money like a car.
You can use a car for a million different things… including using it to make money (by operating a taxi, delivering pizzas, etc.).
Having access to the car (or money) is valuable, whether you own it or not. And if it’s valuable, you should have to pay for it.
To control a car, you have to pay rent. To control money, you have to pay interest. He who pays interest earns the right to control the money. It’s as simple as that.
So let’s talk about negative interest rates…
A negative interest rate means the price of money is below zero. You get control of the money… and the owner pays you for it.
It’s nonsensical. Negative interest rates shouldn’t exist… ever.
Let’s go back to our car example…
A negative interest rate is like me paying you to take my car out and deliver pizzas—for your own profit, not mine.
Why would I do that? I’d be better off just leaving my car in the driveway.
I’d never pay to have you use my money. I’d just leave my money in my wallet… or under the mattress.
So do you see why interest rates should never go below zero? It’s because you’d never pay someone to take your money when you could just let it sit idle in the bank at no cost.
So why are central banks setting negative interest rates?
They’re experimenting. They hope negative interest rates will lead people to spend more… and borrow more… and invest more.
They hope negative interest rates will lead to economic growth. Why? Because if it costs you to keep your money in the bank, you’ll have more incentive to take your money out and spend it.
But they’re idiots. Negative interest rates only encourage people to remove their money from the banking system.
If your bank set interest rates at -5%—i.e., you had to pay your bank 5% to hold your money—would keep your money in the bank?
Of course not. You’d withdraw it. And you’d put it under your mattress. It doesn’t encourage spending.
The last thing governments want is people withdrawing money from the banking system.
I won’t go into the details here, but here’s how the modern banking system works: For every dollar deposited in the banking system, the Fed allows the banks to make $10 in loans. In other words… they create $9 of new money supply out of thin air.
This new money causes the economy to balloon.
The reverse of this is also true. Every dollar pulled from the banking system results in $9 of money supply vanishing. The economy shrivels.
So central banks want you to spend money… they don’t want anyone removing their money from the banking system.
But that’s exactly what negative interest rates lead people to do. So central banks will never set a significantly negative interest rate.
They can get away with modest negative rates—less than 1%—just because it’s inconvenient to withdraw money from the system… especially if you have large amounts of it.
That’s what we’re seeing now. But anything more negative than about -1%, and depositors will start pulling money from the system and storing it in cash.
Now, what if the government outlaws cash withdrawals? Couldn’t they then make interest rates more negative?
Or what if they make it illegal to withdraw amounts greater than $500 at a time… or something like that?
Yes, it’s possible. But I don’t see it.
There’d be a panic. And it wouldn’t work anyway. The money would find its way out. I assure you. People would figure out how to transfer it overseas. Or buy gold. It would be totally counterproductive. And it’d be very deflationary.
That said, who knows how stupid the central bankers are…
That’s why everyone should have some cash at home… maybe $10,000 or so. And you should keep your bank balances to a minimum.
I predict it’ll never come to this… and we’ll never see meaningful negative interest rates (more negative than half a percent to 1%). They’re just not practical.
But we don’t have a crystal ball. No one does. And we live in unprecedented times. Take steps to protect yourself. Part of that includes withdrawing cash now.