Jim’s Mailbox

Posted at 1:55 PM (CST) by & filed under Jim's Mailbox.

Jim,

Just a thought.

If cash were banned to allow the Fed to have negative interest rates below minus 100 bp, wouldn’t that create a massive flight out of bonds and into gold?

Also note that reference that such a scenario would prevent people from “opting out of the system!” Exactly what you’ve been saying for years with “GOTS”.

CIGA Wolfgang Rech

Citigroup’s Gold "Expert" Demands A Cash Ban
Submitted by Tyler Durden on 04/16/2015 13:09 -0400

Late last year, Grexit "expert" Willem Buiter decided that he was a greater expert on the topic of monetary metals than on geopolitics by stating that "Gold Is A 6,000 Year Old Bubble." Now, he has decided that after gold, it is best to just do away with any physical currency altogether and the time to ban cash has arrived.

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? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. Buiter’s note suggests three ways to address this problem:

1.Abolish currency.

2.Tax currency.

3.Remove the fixed exchange rate between currency and central bank reserves/deposits.

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.)

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.

If cash were to be banned, people could no longer opt out from this system. Bank runs would no longer be possible at all. While a bank run these days only gives one government scrip that is itself an irredeemable liability of a central bank, it is at least slightly more “real” than the accounting entry known as deposit money. Most importantly, cash can insure one against a bank going under, or the breakdown of the entire banking system, which is always a potential danger. Banks would obviously love a cash ban – quite possibly they are the only ones who would love it even more than governments.

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