Ready for the “Digital Slaughterhouse”?
Let’s pause to catch our breath.
Over the last week-and-a-bit, I’ve been sharing the evidence with you that shows the radical plans policymakers have for your money.
These are plans to:
- Limit the amount that can be used in cash transactions;
- Pave the way for negative interest rates, for example by making it cost to hold money outside the banking system;
- Create a situation that speeds up the transition to cashlessness – or herd everyone’s savings into “digital slaughterhouses”, to borrow a phrase from my colleague Jim Rickards.
There’s been a lot to get though. And that’s despite me only scratching the surface (believe me, policymakers and their allies in the economics establishment have done a lot of groundwork).
I worry there’s a danger of missing the wood for the trees. And failing to see just how big this really is.
So today, I thought I’d summarise the last couple of weeks so you can see everything in one place.
Because when you do, you start to see how it all fits together…
Don’t assume you’ll always be able to pay for things with cash
For the most part we seldom notice them because we don’t butt up against them very often.
But they’re there. Banks, for example, are already suspicious of any large deposit or withdrawal in cash (and by large, I’m talking as little as a few thousand pounds).
The mechanism is in place, and it’s very easy to direct banks to extend those suspicions, or even tell them to start refusing cash deposits above a given amount.
Likewise cash payments.
There are already some quite severe restrictions in place in some individual EU countries (Spanish residents, for example, are limited to €2,500).
Britain may be leaving the EU, but some of Britain’s most senior economic policymakers are very much on board with the idea of reducing the role of cash.
This might not seem like too big a deal on its own.
But it’s not on its own.
Imagine a scenario where you felt you’d be better off taking all your money out of the bank.
Why might you be considering that? Well, imagine if by leaving it there you were guaranteed to lose 5% of it.
Not after inflation – that’s 5% nominal. £2,500 for every £50,000 you have in the bank.
Sounds far-fetched? As you’ll see below, this is precisely the scenario economists are planning for.
That’s why these cash transaction limits matter.
A pile of cash worth £100,000 is a lot less useful if you can only spend, say, £2,000 at a time.
And there’s no reason to think things will stop at the current proposals.
Once a cash transaction limit exists, it can be lowered. What if you were limited to just £500 a time for cash payments?
What about £50?
Radical policies don’t just come from nowhere. There are years of behind-the-scenes preparations
Last Thursday, we looked at how quantitative easing – a phrase and a policy we’ve all become familiar with – began life as a short, obscure paper written by a German economist working out in Japan.
Within a few years, future Nobel economist Paul Krugman was pushing QE as possible solution to low inflation.
On Friday we saw how Ben Bernanke picked up the baton and took it all the way.
Bernanke made QE a standard tool of central bank policy. He was able to do so thanks to all the groundwork he and other economists had done in earlier years.
That’s how these ideas come into being.
They start as oddities mused over by chin-stroking economists. Then, via working papers and discussions at conferences and symposia, the ones that make it bubble up towards the surface.
More serious economists take them up, then serving policymakers.
And when the moment’s right, they reach for them and put them into practice.
Anti-cash policies are already well advanced
On Monday just gone we looked at an IMF working paper about what policymakers should do to “break through the zero lower bound” (i.e. push interest rates below zero).
Then yesterday I showed you how, in August last year, an economist called Marvin Goodfriend presented the same idea from that working paper to the biggest central bankers’ policy meeting on the calendar.
You also saw how, back in the year 2000, Goodfriend suggested putting a magnetic strip into banknotes to track how long they’ve been in circulation.
That way, they’d be able to impose a charge on the older ones – in effect, a negative interest rate on physical cash.
As I noted yesterday, with today’s technology you could go much further than a simple magnetic strip.
When you look at this in the round, you can see how there is active planning going on.
Note, this is not some evil, top-down conspiracy theory.
It doesn’t have to be.
What you’re seeing is a bottom-up response to an irresistible logic.
What do central banks do when faced with recession?
They cut interest rates.
Where are interest rates now?
Barely above zero.
What could they do if there was a crisis tomorrow, given rates are so low AND they’ve hammered “unconventional” policies like QE for all they’re worth?
Policymakers don’t have a cogent answer. So they’re frantically working to put one in place.
Their answer involves:
- Discouraging hoarding of savings as cash, by finding ways to apply negative interest rates to physical currency;
- Then cutting interest rates even if they’re already at zero.
This is just arithmetic at work. Any number below zero is negative, after all.
Of course, that doesn’t mean these policies will be benign if you’re the one whose savings are being chipped away at year after year after year.
Far from it.
So, the big question… what the heck do you do?
That’s what my colleagues and I have been working on behind the scenes. And we’ve identified three things we reckon every investor should do to prepare.