MacroBusiness Persists with War on Cash in Australia

I'm a regular reader, subscriber and intermittent commenter at MacroBusiness (less frequently since my comments started getting trapped in their spam filter or outright deleted when disagreed with). They often produce well thought out arguments on finance and economic topics, which aren't being covered adequately by the mainstream media.

However, these quality pieces containing mostly original content are interwoven with myopic 'filler' articles which often appear rushed, copy and pasting swathes of text from other sources, adding a few lines of comment and then posted to the site, acting as an aggregator of news. One such example recently had blogger Leith van Onselen writing about the elimination of large denomination bank notes, it ended on this note:

"Personally I believe Australia should phase-out both $50 and $100 notes. We are turning into a cashless society anyway, so phrasing-out these bills wouldn’t create much of a burden to the ordinary law-abiding person."

The article included a quote from UBS analyst Jonathan Mott, "Removing large denomination notes in Australia would be good for the economy and good for the banks" and this corker from Peter Martin, "Phasing out high denomination notes would be painless, for those of us with nothing to hide" (eerily similar to a quote often attributed to Nazi propagandist, Joseph Goebbels).

The post on MacroBusiness generated hundreds of comments from readers who disagreed with the blogger. Many of them putting forward solid arguments against his conclusions, which included the following:

“..legalising all drugs would do much more to stamp out organised crime than removing large bills.”

“I don’t see why a digital record of every transaction I make should be kept and intercepted and stored by an all seeing government. There are some cases where cash makes sense and where you don’t necessarily want certain individuals to know what you’re buying, when and why. Not all of it is illegal.”

“How are banks held accountable in your cashless society? If banks (let’s say all of them), take undue risks, how is a depositor to “opt out”?”

“Let’s make it so no small market can exist. We can’t have farmers growing good food and selling it straight to people who want it. We MUST force everyone into the big supermarkets. Let’s make it so when all these mad elitist bastards want negative nominal IR’s there is no way to avoid their lunatic scheme for the world.”

“Moving to a cashless economy presently means that you must use a bank as an intermediate. The banks are private corporations that are so powerful they can’t be investigated.”

“..removing 50’s and 100’s has no impact on the black economy. It just becomes an inconvenience for everyone else.”

“We can’t trust the banks to give us financial advice, and we need a Royal Commission into them just to try and get them honest (unlikely to happen), but it’s okay to eliminate high-denomination notes and keep that money in banks instead?”

“..If we real see yields on bank deposits head to/below zero and stay there…….why would you keep your money in a bank in that environment”

“The problem with non cash transactions is the simply ridiculous amount of information (data) that’s being collected (and permanently stored) about individuals and what they buy, when and where. Big data is the corporate gold mine that industry is just starting to really use, most governments are still in the clueless category but they’re learning quick AND they are being sold different service packets by big-database owners. So it’s not simply about the government storing purchase information information about you tomorrows big data is a global corporation and provides a 100% clear picture of each and every individuals life, who they associate with and when and where this happens. Transactions are the glue that ties it all together, the purchase that links you personally with all the available data.”

“China only has 100 RMB notes (about $20 AUD). It didn’t stop tax evasion. It didn’t stop money laundering. It didn’t stop drug dealing’. Of course, having high denominations will make it easier, but to say all of this will magically disappear when the $100 is phased out is wrong.”“Eliminating cash eliminates the option of using cash to protect oneself in various difficult circumstances – some legal, some quasi-legal and some no doubt illegal…. but all *ethical*. The most obvious one is trying to survive when your government falsely believes you are a criminal. This happens all too often now and is probably only more likely in future. Removing cash without providing an alternative for people who might face these challenges is a VERY F*CKING BIG DEAL.”

Leith's response in the comments included praising India for their recent demonetisation of "large" denomination notes (value of which are in the vicinity of A$10-20), calling those who disagreed with him tin foil hatters, suggesting that removal of the $100 note would "certainly interrupt the black economy" and finally bowing out of the comments without addressing many of the valid arguments raised by his readers.

I had considered writing this post after this first article, but thought I would give Leith the benefit of the doubt, perhaps his brain fart would not be repeated and he would not broach the subject again. I was wrong. In the last week Leith published a follow up article supporting comments from Kelly O’Dwyer (oft referred to as Kelly O'Liar in MacroBusiness headlines when she says something they don't agree with), vilifying the $100 note. Leith failed to address any of the reasoned comments which followed his last article.

The article generated more comments worthy of consideration, which included the below:

"What on earth is wrong with people holding cash if they choose to? As many have noted – criminals will readily find some other way of settling their transactions. Opposition to cash usually boils down to the latest efforts by the private banks and their minion neoliberal cheerleaders wishing to extend the already virtual private monopoly over money creation to a complete monopoly."

"I’m still in Vietnam at present and took cash with me to exchange while here for spending money. Every money exchanger I have come across has $100 notes, I only brought $50 notes as I withdrew them from the ATM. How many other money exchangers and foreign banks have pools of Aussie $100 for exchange purposes across the world? Maybe instead of blaming criminals they should be considering this?"

The second comment in particular makes a lot of sense and explains one reason we may be seeing an increase in demand for high denomination notes, for tourists traveling to our country (in the 12 months to October 2016, the annual number of arrivals increased by 11.1% relative to the corresponding period of the prior year):

A recent RBA Bulletin (The Future of Cash) points to similar reasoning:

..liaison with major cash industry participants indicates that increases in overseas demand are a fairly usual occurrence when the Australian dollar depreciates. Part of this demand is likely to stem from the increased attractiveness of Australia as a destination for tourism and education, with both of these groups of visitors tending to be large users of cash.

The bulletin highlights that due to the anonymous and untraceable form of cash, it is impossible to calculate how frequently cash is used in facilitating illegal activities:

A potential source of currency demand that has attracted international attention recently is the use of cash, particularly high-denomination banknotes, to avoid reporting income to the authorities, or to finance illicit activities. Cash may be valued by those engaged in such activities because it is anonymous and untraceable. By definition, however, this also means that it is not possible to assess the demand for cash for these purposes accurately.

However, it does highlight that phasing out the $100 note is unlikely to be disruptive to criminal elements:

As noted, it is not possible to estimate the extent to which cash, or any particular banknote denomination, is used in illegal activities. However, liaison with AUSTRAC (Australian Transaction Reports and Analysis Centre) and the Australian Crime Commission suggests that it is the $50 denomination – rather than the $100 – that tends to be preferred by criminal elements because of its ubiquitous use in legitimate transactions. This suggests that to the extent that the $100 banknote is being used for nefarious purposes, any phase-out may not be particularly disruptive to those engaged in such activities.

This directly contradicts Leith's claim that getting rid of $100 notes would "certainly interrupt the black economy".

And if you thought about it rationally, a lot of the transactions occurring to avoid tax (e.g. tradies performing 'cashies') or buy illegal goods would continue unimpeded using smaller notes as the transaction would typically be only a small handful of notes regardless of whether using $50s or $100s.

The RBA highlights there are many legitimate uses for cash:

Demand for cash in the economy stems from its roles as a means of payment and a store of value.

As a means of payment, cash has a number of attributes that may be valued by end users.

It has near-universal acceptance, facilitates simultaneous exchange and instantaneous settlement, is convenient for person-to-person payments and can still be used at times when electronic payment methods are unavailable due to internet or electricity outages.

Cash transactions are also anonymous and, with low rates of counterfeiting in Australia, fraud may be less of a concern than when using alternative payments.

Cash can also be used as a store of value and, for this purpose, its attributes come to the fore in times of economic/financial uncertainty. In particular, in circumstances in which the viability of banks is under question – as was the case in many countries during the 2008–09 financial crisis – cash may be considered a superior store of value to money held in the form of bank deposits. That is, claims on the central bank are preferred to claims on a commercial bank.

And let's face it, a move to reduce large denominations is really a nudge toward a cashless society, which would have it's own problems as recently highlighted by the BIS:

There are academics and politicians advocating the abolition of cash. What do you think of that?

Negative nominal interest rates, especially if persistent, are already problematic. Quite apart from the problems they generate for the financial system, they can be perceived as a desperate measure, paradoxically undermining confidence. Getting rid of cash would take all this one big step further, as it would signal that there is no limit to how far into negative territory nominal interest rates could be pushed. That would risk undermining the very essence of our monetary economy. It would be playing with fire. Also, it would be quite a challenge for communication, even in simply economic terms. It would be like saying: "We want to abolish cash in order to tax you with lower negative rates in order to - tax you even more in the future."

All things considered phasing out $100 (or large denomination) notes would be a pretty awful policy direction for Australia to take. It would:

• Make it more difficult to keep spending private (from government / corporations / banks)
• Limit options when trying to protect oneself from risky banks (ironically something MacroBusiness highlights often)
• Inconvenience those needing to use cash regularly in transactions, a majority of which would be conducted legally.

And all despite lack of evidence or reasoned argument that doing so would reduce the so called "black economy".

The team at MacroBusiness need to think this one through a little better.

----------------------------------------------------

Subscribe to New Posts By Email / Follow Bullion Baron on Twitter

 

Cash Is A Store of Value If Interest Rates Are Negative

Here is what happens when you take a quote out of context... Rick Santelli (CNBC), Zero Hedge and no doubt many others by now have honed in a line from Federal Reserve Chairwoman Janet Yellen. Zero Hedge has shortened the quote for their headline which reads: Santelli Stunned As Janet Yellen Admits "Cash Is Not A Store Of Value", this would suggest Yellen had been critical of holding cash for that purpose (as a store of value), however watching the clip reveals a very different message.

Yellen does say "cash is not a very convenient store of value", but she says so immediately following a comment that she's surprised there hasn't been a larger pickup in demand for cash (in the Eurozone areas where interest rates are negative).

What Yellen is actually implying in her response is that holding (physical) cash IS a good store of value when interest rates are negative, the reference to it being an inconvenience is presumably about having to deal with it physically. Like precious metals, holding assets physically comes with a different set of risks to owning them digitally in an account.

In fact I recently commented on the blog of JP Koning about holding cash as a store of value, pointing out there may be an opportunity for new services in the secure storage of cash (not unlike an allocated bullion account):

Physical cash acts as a store of value (or potentially even rises in value if the area is experiencing deflation) when interest rates are negative because the nominal amount you own doesn't change, where as if you hold a deposit in a bank account you may be charged a negative rate.

Of course over the long term, assuming a successful return to inflation and positive rates, cash is not a good store of value, but there are periods such as now, in countries where interest rates are negative, that holding cash as a store of value makes sense.

The deceptive way in which Zero Hedge and others have framed this quote by Yellen is why you need to be careful about the narrative and agendas that others drive as I have pointed out several times in the past.

---

Every post delivered to your inbox (free), enter your email address:

I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.

 

Attention Traders: The Value Of Cash Is Not Absolute

Over the last few years, as the price of Gold declined, several professional traders and financial commentators have taken it upon themselves to unleash their wisdom about the metal being "just a trade". They've decided that everyone should see the financial world through their narrow lens and have used it's declining price as "proof" you should always have a stop and be prepared to exit your position.

The way I've framed the above might suggest I have a problem with their view. In fact I don't, it's one way of looking at the assets in your investment portfolio. However, to take their view you also have to give thought to ALL positions and that includes cash, which should also be considered a trade as it's value can change.

Earlier this year I wrote about Ritholtz's position on gold bugs ('Barry Ritholtz Mischaracterizes Gold Bugs'), one of the rules in his article was:

The Danger of One-Way Trades: What would make you reverse your biggest present holding? What facts or situations would force you to change your views and sell? If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.

I hear traders talking day in and out about 'going back to cash' or 'sitting in cash' after exiting all positions, but if a trader was to think about what they are doing logically, as they would any other position, they are simply moving from one asset which fluctuates in value to another.

What facts or situations would force a trader to consider a position in cash being unsafe? Answer that and you might be on the path to understanding the reasons that some investors choose to hold physical Gold.

A reader of my Ritholtz article commented: "Ritholtz essentially supports his analysis by treating fiat currencies as a bedrock, i.e. asset changes are all relative to this unchanging fiat value." I agreed: "Ritholtz claims to be ‘asset class agnostic’, but then measures the performance of other assets back to fiat which doesn’t have static value."

Newsflash: Cash / fiat currency is not a neutral position.

There is no asset which remains absolute in it's price or value relative to everything else (and yes that includes cash or Gold).

I tried to explain this briefly to one trader (Mark Dow) who regularly has a crack at gold bugs on Twitter, to my amusement he suggested that you don't have to hedge against fiat currency because it's "legal tender".

Click Image to Enlarge

How could anyone think that a currency being legal tender protects the holder from changes in it's value?

Sure it's a unit of account and may remain a constant relative to some assets, for example a $10,000 loan will always require $10,000 in cash (+ interest) in order to repay it, but the value of currencies can be affected in various ways, sometimes to devastating effect.

So how does one hedge or insure themselves against fiat currency and the financial system?

This question reminds me of a discussion that took place in the comments on Cullen Roche's site (comments since disabled, but they were here) a couple of months back when he suggested that those wishing to hedge against the financial system should take a short position on the finance sector. 

Imagine taking out insurance against your house burning down and then leaving the only paper work you could use to make a claim inside the very same house.

That is basically what Cullen proposed. Some of the sensible responses below his suggestion included:

“Gold like cash is a unique hedge because unlike options, or bonds or financial hedges it has infinite duration.”

“I have an allocation to gold and silver because its the only way that I can be 100% sure that my “insurance” isn’t someone else’s liability.”

Precious metals are unique in the sense that they are one of few assets which can be held physically outside of the financial system & can't be diluted in the same way as fiat currencies.

Some traders might argue that significant changes in the value of cash occur so infrequently that it's not worth worrying about (tell that to someone living in Russia, Japan, Cyprus, North Korea, Venezuela), but that's exactly the mindset that some of these traders criticise others for, that is, having a baked on view that holding an asset poses no risk. 

Holding a 100% position in any asset is risky, whether that's cash, Gold, Silver, property or anything else. Diversify or be prepared to wear the consequences if the value of that position moves against you.

Every post delivered to your inbox (free), enter your email address:

I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.

 

You're a pension cheat, criminal or tax evader if...

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

I had a chuckle at a post on Zero Hedge this morning which listed some of the reasons you might be considered a conspiracy theorist:

You Know You Are A Conspiracy Theorist If...

• You are capable of critical thinking.
• You distrust mainstream media.
• You think that drones in America might not be for Al Qaeda.
• You think it’s a little strange that WTC building 7 came down at free fall speed on 9/11 yet it was never hit by a plane.
• You think you have the right to protest.
• You think the War on Terror is a scam.
• You think the War on Drugs is a scam.
• You think the anger directed at America from the Middle East could possibly be related to our foreign policy rather than hating how amazingly free we are.
• You don’t own a television, and if you do, all you watch is RT, especially the Keiser Report and Capital Account.
• You think rich, powerful and connected people should be subject to the rule of law and go to jail if they commit crimes. Even if they are bankers and work at JP Morgan or Goldman Sachs.
• You grow your own food.
• You buy raw milk.
• You think allowing a small group of unelected people (The Federal Reserve) to print unlimited amounts of money and distribute it as they please might not be a good idea.

More in the article here...

One of those things you read and laugh because there is truth to it (Government or regular people probably think you are a conspiracy nut for such thoughts or actions) at the same time that it is absurd that such thoughts or actions should be considered conspiratorial.

Then later in the day I was linked to an article where a former Reserve Bank Official is suggesting the removal of $50 & $100 notes from circulation in order to curb pensioners, criminals and tax evaders from hoarding the notes (article is trimmed, click here to read in entirety):

ELDERLY Australians committing welfare fraud on a massive scale are behind the extraordinarily high number of $100 notes in circulation, a former senior Reserve Bank official says.

Yesterday the Herald revealed there are now 10 $100 notes in circulation for each Australian, far more than the more commonly seen $20 notes.

One popular explanation is that they are used for illegal transactions as part of the cash economy, something the former Reserve official, Peter Mair, rejects as a "furphy".

In a letter to the Reserve Bank governor, Glenn Stevens, dated July 4, Mr Mair laid the blame squarely on elderly people wanting to get the pension and hiding their income in cash to ensure they qualified for the means-tested benefit.

"The bank is basically facilitating a tax avoidance scheme by issuing high denomination notes," he told the Herald. "They are not needed for day-to-day transaction purposes, or even as reasonable stores of value."

Mr Mair said the return for an Australian close to getting the pension who held $10,000 in cash, rather than declaring it, was "enormous".

"If putting it under the bed or in a cupboard means you qualify for the pensioner card, you get discounted council rates, discounted car registration, discounted phone rental - in percentage terms the return is enormous," he said.

His letter to the governor proposes phasing out the $100 and $50 denominations.

"Cards and the internet have delivered a body blow to high-denomination bank notes. They are redundant," he said. "There is no longer any point in issuing them except to facilitate tax dodging.

The authorities would announce that from, say, June 2015 every $100 and $50 note could be redeemed but no new notes would be issued. After June 2017 every note could only be redeemed at an annual discount of 10 per cent. It would mean that after two years, each $100 note could only be redeemed for $80, and so on."

The letter acknowledges the proposal would be contentious and says it should not be done "in any way precipitously", but as payments become more electronic it will become inevitable.

"What would remain in circulation are coins and a modestly expanded issue of currency notes in the $10 and $20 denominations. There is every reason to expect that a national currency issue of this character would soon be adequate." SMH

The Australian $100 note was introduced in 1984. If we use the RBA Inflation Calculator (Link) we can measure that $100 in 1984 would buy a basket of goods valued at $270 in 2011 Dollars. By the time we were to phase out the $100 bill in 2017 it would purchase less than a third of the equivalent 1984 basket of goods (with an inflation rate of 3% between now and then).

Granted we use a lot more electronic transactions today than in 1984 (EFTPOS didn't become widely adopted until the early to mid 90s), however it shouldn't be assumed that those preferring to go about their business with cash are doing so unlawfully. Some just prefer the privacy or convenience that comes with using cash.

Another recent concern is the push for surveillance of citizens via having their internet & telecommunication services monitored:

AUSTRALIA'S security and law enforcement agencies are world leaders in telecommunications interception and data access and like most successful industries, they want more. Federal Attorney-General Nicola Roxon is canvassing a further expansion of surveillance powers, most controversially a requirement that telecommunications and internet service providers retain at least two years of data for access by government agencies. The Age

We are heading toward an Orwellian State on the current trajectory.

Based on the way Australia is heading with new legislation requesting ISPs keep 2 years internet history logs and the suggestion that we remove $50 & $100 bills from circulation I thought it would be worth coming up with a localised checklist... hence:

You know you are a pension cheat, criminal or tax evader if...

• You put some cash aside every week and keep it in your house to give out to the grand kids at Christmas time (my Nana did this).
• You are old enough to remember past bank collapses, understand not to take the system for granted and keep your savings in cash to protect yourself in the high risk environment that we face today.
• You prefer $100 notes over $50s as you can hold more $ in your wallet with fewer notes.
• You like keeping any note larger than $20 in your wallet because keeping the number of $20's required to get through your week in your wallet would put your back out every time you sat down.
• You prefer to draw out cash on an irregular basis to use for daily transactions in order to avoid bank transaction fees.
• You find it easier/more convenient to manage a budget when you can quickly check your remaining balance by opening your wallet or purse, rather than having to make a phone call or access the internet.
• You prefer to use cash in order to maintain a reasonable level of privacy when it comes to your personal spending.
• You hold onto some cash in the event of another global financial crisis where some types of accounts may be frozen in order to prevent a bank run.
• You hold some cash outside of the banking system given the increasing frequency of bank network outages which take down ATM and EFTPOS services.
• You use "non-conventional" methods of preserving your purchasing power (such as using cash to purchase and store bullion).
• You prefer to keep what little money you have in cash to avoid an increasing number of electronic fraud transactions which banks can take significant lengths of time to resolve (4-6 weeks).
• You prefer to save in a form of money (Gold/Silver) which has been in use for thousands of years rather than one which has been around for less than half a century.
• You have a joint savings account with your partner and want to buy them a large gift with cash to avoid them finding out about it.
• You ask to withdraw a large amount of cash in order to purchase a vehicle as the current owner doesn't want to take a cheque.
• You refuse to provide a private business with your ID in order to secure a purchase of bullion (who wants a business to have your address where they suspect you might store the purchase).
• You run a small business and need to keep a cash float on hand to operate smoothly.
• You don't do anything illegal, but would prefer to keep your transactional or internet browsing history private anyway, it's none of the Governments business.
• You aren't doing anything illegal online, but you might still be prejudiced against for your activities anyway (e.g. organising anti-Government rally).
• You are pretty sure that there is a greater chance of someone doing something illegal with your information in the department gathering the data than of doing something illegal yourself so would rather keep your data private.
• You would prefer not to have a Government whose representatives have been known to lie, cheat, steal, spend wastefully, look up inappropriate websites & act like clowns in general to have even greater control over your life than they already do.

I could probably come up with a trillion more (remember the good old days when it was enough to exaggerate with the word million?), but there are only so many hours in the day. If you can think of some good ones drop them below in the comments and I will add them to the post.

BB.

 

Support Bullion Baron - Buy your Gold and Silver through this link.