Tag Archives: Financial repression

Moving Towards a Cashless Society – Should Christians Be Alarmed?

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Cashless transactions are nothing new; they are part of the fabric of modern society.  Online bill paying, credit cards and our phones allow us to make transactions without touching paper money.  But, is a totally cashless society something we should embrace or should the idea alarm us?

The move toward a cashless society has been promoted on the basis of convenience and credit. Besides, bad guys such as tax cheats, drug dealers and terrorists use cash to hide their “business” from the government.

To motivate consumers to use them, credit card transaction fees are not charged to the customer but to the merchant. Of course, this is only an illusion since these costs get reflected in the price a merchant charges a consumer, even if that consumer uses cash. Banks offer online services for free because it is cheaper than processing paper checks.

It is important to note that in a paper money transaction between two individuals that involves a single currency there is no possibility for a “middle man” to take a cut. Similarly, the government cannot apply negative interest rates to cash that you stuff in your mattress. They also cannot track it, tax it or control it.1

Cash is a thorn in the side of central banks that want to employ negative interest rates. The mere existence of paper money means there is a limit to how low negative interest rates can go because it always provides an option to take money out of the banking system.2 When the cost to use banks becomes too onerous people will simply choose to use cash and stop using banks despite the inconvenience.

Is there evidence that banning cash is even a remote possibility? Consider this:

  • Nearly 40% of Danish use a Danske Bank app for payment via smart phone. A cashless society is “no longer an illusion but a vision that can be fulfilled in a reasonable time frame.” – Michael Busk-Jepsen, executive director of the Danish Bankers Association 3
  • Only 30% of Nigerians have a bank account. To remedy this situation, Nigeria (with the help of MasterCard) launched a biometric national ID card that will be used as a payment card.4
  • Banks are pushing for a ban on cash (to ostensibly inhibit tax evaders and money launderers) in Norway where purportedly only 6 percent of the people use cash on a daily basis.5
  • France’s finance minister has declared cash and anonymity to be the enemy in the fight against terrorism.6

However, bringing about a cashless society won’t be easy. There are still significant numbers of people who would oppose it, both in and out of government. Ninety percent of Americans still use cash on a daily basis.7 Even in Scandinavian countries, government officials are concerned about privacy. In countries like India the move to a cashless society would not be easily accomplished because electronic transactions represent a very low percentage of all financial dealings and silver and gold ownership is commonplace. Nevertheless, there are people in positions of power and influence around the world who continue to press forward with the agenda.

Other convenient forms of storing wealth outside of the banking system will also be targeted. Gold, illegal to own in the U.S. between 1933 and 1974, will likely be made illegal once again. The government can also cause the inflation it covets by setting the price of gold it confiscates arbitrarily high. This has happened before.  In 1934, the U.S. government adjusted the price of gold from $20.67/ounce to $35/ounce.8

Christians know from reading the book of Revelation that one day authoritarian control of the ability to buy and sell will be used against them. Whether financial repression as practiced today will play a role in shaping a world in which such control would be possible remains to be seen.

In the near term, financial repression is here to stay. That’s because despite how they have bungled the economy, those in power truly believe they can manage our lives better than we can.

Evil Disguised as Benevolence

In an effort to address the abuses that occurred in the financial industry leading up to the 2008 crisis (and there were many), the Consumer Financial Protection Bureau (CFPB) was formed. This agency now seeks to protect confused seniors and their IRAs from unscrupulous financial advisors who lead them into risky and fraudulent investments.9 In order to protect us, the CFPB is amassing a huge data base of our financial habits.10 It seems to me that they want to go beyond the God-given mandate for government to restrain evil11 in the marketplace. They want to direct it. So, instead of acting like a police officer who pulls you over to give you a ticket for running a red light, they act like a police officer who wants you to move over and let him drive.

Some people fear that this will all eventually lead to Americans being forced to buy low return government bonds with their retirement savings thus turning the nation’s IRA accounts “into a $20 trillion ATM for the government.” 12   Rather than simply performing its role to catch and punish the bad actors in our economy, it seems as if the government, when it comes to wicked wealth transfers, only wants to get rid of its competition.

Convenience always has a price tag associated with it.  In our world, not only do the modern-day money changers charge fees for the convenience we enjoy, but we pay an even higher price as measured in the loss of privacy and loss of personal control of our finances.  Even without considering more sinister outcomes, Christians viewing this from a stewardship standpoint should conclude that the move to a cashless society is not something to embrace and that financial repression is not something we should allow to stay hidden.  At least not as long as we live in a free society.

 

References:

1) “The Death of Cash”, Peter Coy, Bloomberg Businessweek, April 23, 2015

2) Ibid.

3) “This could be the first country to go cashless” by Virginia Harrison, June 2, 2015 CNN Money

4) “MasterCard targets Africa governments in new growth strategy”, October 12, 2015 Lilian Ochieng, Daily Nation

5) “Norway’s Biggest Bank Calls for Country to Stop Using Cash”, Abigail Abrams, January 22, 2016, International Business Times 

6) Fighting the “War on Terror ” by Banning Cash, Joseph T. Salerno, June 22, 2015

7) “One in 10 Americans don’t carry paper money anymore” CNBC, May 12, 2014, CNBC.com staff

8) “The Gold Standard and Price Inflation”

9) “Senior Designations for Financial Advisors” Consumer Financial Protection Bureau

10) “Richard Cordray and the CFCB Are Monitoring Your Banking Habits”, Carter Dougherty, April 25, 2013, Bloomberg Business

11) Romans 13:4

12) Economist George Gilder quoted in the article “Financial Repression From the Obama Administration: How Savers May Be Forced To Buy Federal Debt” by William Tucker, Forbes, Dec. 23, 2013

 

Negative Interest Rates – Ingenious, Absurd, or Diabolical?

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downtown financial district

On January 29, 2016 the Bank of Japan announced it would join the European Central Bank (ECB) and three national banks in the negative interest club. Members in this exclusive club pay their own nation’s banks negative interest to keep excess reserves at the central bank in hopes that losing money will overcome the risk aversion banks have during uncertain economic times. Coercing the member banks to buy assets in this manner increases asset prices and decreases borrowing costs. By loosening credit the central banks believe they will spur economic growth and win the fight against their dreaded enemy – deflation.1

Negative interest rates are not just for banks; they find their way to the average person. The interest paid on short-term sovereign bonds has gone negative in Austria, Denmark, Germany, the Netherlands and Switzerland.2 This can happen very quickly as evidenced by Japan’s 10-year bonds dropping into negative interest rates today, February 9, just eleven days after the Bank of Japan announced the policy rate change.

Before going further, let’s just make this point and get it out-of-the-way – to be paid to borrow and charged to save is absurd. There, I said it. Let’s continue.

So, why would anyone buy government bonds that have a negative interest rate? One reason is for safety, fearing other types of investment might lose even more in a financial crisis. Another reason to buy bonds is to sell them at a profit anticipating that interest rates will go even lower.

What Enemy Are the Deflation Fighters Really Fighting?

We are told, erroneously in my opinion, by most economists and by those in power that deflation is the worst of all scenarios. They claim it leads to an economic death spiral like we experienced in the Great Depression. The argument goes like this: Once people realize prices are falling they delay spending until prices fall even further. This decreased spending lowers business sales and profits which, in turn, increases unemployment which decreases spending and so on.3

I believe the real reason indebted governments consider deflation disastrous is because deflation forces them to pay back debt in currency that is worth more than when they borrowed it. Financial repression, on the other hand, seeks to devalue the currency to pay off debt more easily.

Negative Interest Rates Have Some Disturbing Repercussions

I think many people, at a gut level, will suspect there is something sinister about negative interest rates. Hopefully this uneasiness will lead to more awareness of the widespread use of financial repression by governments around the world.

Maybe negative interest rates (combined with a zero or positive inflation rate) will end up serving a good purpose in a way that near zero interest rates never could. It is obvious that something is amiss when your bank savings statement shows an interest deduction. It is less obvious when the rate of inflation is higher than the low but positive interest rate you receive from the bank. In the latter case, your account has more money in it but you can purchase less with it. Maybe negative interest rates will expose central banks’ financial repression policies for what they truly are – wealth transfers.

Lest we think negative interest rates couldn’t happen in the U.S., consider the Federal Reserve’s 2016 Supervisory Scenarios for Annual Stress Tests. Though they are quick to say that their Severely Adverse Scenario “does not represent a forecast of the Federal Reserve” it does, nonetheless, include the use of negative interest rates in the event of a catastrophic financial crisis.4

Employing negative interest rates is economic theory run amok. Yet, in some weird and perverse way, it is logical. If the government fears deflation so much that they want to ensure people will not hoard money waiting for prices to drop, then they must take away the money they save faster than deflation lowers prices so that consumers don’t delay spending. It is truly diabolical genius.

Wait. It gets worse.

Banks subjected to negative interest rates are faced with lower profits if they fail to pass the rates through to customers and risk losing depositors if they do. But this may not be a conundrum for long as there is talk of banning cash. Seriously, there is.

But that troubling topic will have to wait until my next post.

 

References:

  1. Global Economic Prospects, June 2015, Global Economic Prospects, Box 1.1
  2. Frank Hollenbeck does a nice job of refuting this argument in his article entitled “What’s So Scary About Deflation”
  3. Federal Reserve 2016 Supervisory Scenarios for Annual Stress Tests

 

 

Feeling Repressed?

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Do you feel repressed? No? Well, maybe you should.

Please let me explain. If you live in a nation that has a central bank (and who doesn’t?) then you are probably subjected to some form of financial repression.

Governments spend money on wars or the preparation for war and on social programs. Governments spend a lot of money. Trouble is, they don’t have any money. But you do. You have money because you worked and provided a tangible good or service for which someone else was willing to pay you.

Since the government has no money they get it from you through taxation or through borrowing. Governments issue bonds that people purchase and in return the government pays back the bondholders both principal and interest. So, where does the government get the money to pay back its creditors?

Tax increases are obvious and unpopular so governments usually pay back bondholders by selling yet more bonds. As long as the government can find buyers for its debt, then its leaders are lulled into thinking they need not raise taxes or cut spending.1  Instead, government debt is continuously increased. Eventually paying even the interest on all the debt becomes burdensome. 2

There are a few ways a government can reduce its debt. Economic growth and the increased taxes that accompany it is one way. A two-pronged approach of raising taxes and decreasing spending is the most obvious solution, but tax increases are opposed by one side as vehemently as spending decreases are by the other. Outright default or restructuring of debt is not an avenue that the U.S. is willing to go down at this point.

What if there was another way to pay off the debt? What if there was some sort of “hidden tax” that the government could levy to pay down its debt? There is. It’s called financial repression.

What Is Financial Repression?

Financial repression refers to methods used by governments and central banks to liquidate public and private debts and ease the burden of servicing those debts following periods of war or financial crisis.3  Governments promote monetary policies that favor debtors because they themselves are debtors.

Financial repression includes but is not limited to the following: capping interest rates banks can pay on savings deposits, interest rates for loans capped through the central bank’s target interest rate, and requiring pension funds to hold government debt.4  All of these actions direct funds to government that would normally flow elsewhere. It makes borrowing cheap for government.

But when the Federal Reserve talks about interest rates it doesn’t mention anything about trying to reduce government debt or financial repression. Instead, they base their monetary policy on “promoting maximum employment, stable prices, and moderate long-term interest rates.” They believe their mandate is best accomplished by monetary policy that has a 2% rate of inflation as its goal.5  Setting interest rates charged to banks near zero for the past seven years has been an attempt to stimulate the economy and increase employment.

So why do I believe that Fed policy is, in fact, financial repression and not economic stimulus?

 

  • First, their policy is based on the erroneous belief that demand creates supply and the irrational fear that deflation is the worst thing that can happen to an economy. In short, I don’t believe their policies can accomplish their stated purpose.
  • Second, the fact is, paying interest on our nation’s debt has already reached the point of being burdensome. The only rate of interest we can really afford is 0%. Therefore it is imperative that interests rates be kept near zero.
  • Third, employing quantitative easing (QE) proves how desperate the government is to keep interest rates low. When the Fed buys government bonds from banks in large amounts, the interest rate on bonds naturally goes down. Therefore, the government doesn’t have to offer higher rates to attract buyers (creditors) so the interest burden on its debt is less than if interest rates were higher. The Fed creates the artificial demand for its own debt and keeps interest rates down by printing money! It is only incidental that the fed hopes the money will circulate causing the economy to grow yielding more taxes to reduce the debt.
Why Use the Term Financial Repression?

So, you may ask, why use the term financial repression? Who gets hurt when the government and central bank intervene in the marketplace in this manner?

  • If there is any inflation at all, anyone who saves will see the purchasing power of his savings erode. Retirees are especially vulnerable because they are usually not in a position to put their money into higher yield, higher risk investments such as stocks that have the potential for large losses.
  • People who live within their means are forced to subsidize spendthrifts. Not only do Fed policies reduce the debt of the government, they reduce the debt of private individuals and corporations as well which have reached record levels in the last decade. The Fed’s policies make it possible for borrowers to get their hands on money at a lower interest rate than they could in a free market. A lower interest rate is forced upon savers who, without such interference, would receive a higher rate of interest from banks competing for deposits. This is not wealth creation; this is yet another example of wealth transferred from one group to another.
  • The economy as a whole suffers when financial repression is employed. Inequality rises when capital flows into stocks, not solely based on value, but because other alternative places to park money yield no return thanks to the Federal Reserve. Then, of course, prices are bid up and a bubble forms.  The system is set up in favor of the rich who have access to the first use of capital.6 When the bubble pops, capital is wiped out having served little purpose in growing the economy.  Then, the Fed and the Treasury bail out the financial sector.
  • Unemployed workers are harmed when they can only find part-time work or work at a lower wage because capital has been funneled into non-productive asset bubbles instead of being used to build factories or start new businesses.
  • Proponents of current monetary policy would argue that low-interest rates allow more people to obtain a home mortgage. Aside from the fact that indebting yourself for most of your working life might not be a good idea, the Federal Reserve’s policies essentially remove an important option for many people – to wait until they have saved more money. People who want to buy a home are harmed as the government entices them to borrow by offering low interest rates and tax incentives, and by producing asset bubbles prompting people to buy before they would normally for fear of being priced out of the market. This is especially true during a period of stagnating wages that are also a direct result of the same Fed policies.
Summary

Financial repression punishes you for saving, rewards you for going into debt, increases inequality, provides a disincentive for elected officials to balance the national budget, is a deceptive way to fund government spending, and tends to replace unemployment with underemployment. It produces a boom-bust economic cycle and then is offered as additional medicine to cure the diseases it caused in the first place.

On second thought, if you are retired or you live within your means or you are a member of the future generation who will more than likely pay the highest price for the Fed’s misguided policies, then maybe you shouldn’t feel repressed. The term is too vague. Maybe you should feel like someone who has been forced to contribute to someone else’s prosperity and later forced to suffer the consequences of their financial folly when the economy crashes because borrowers’ short-term gains came at the expense of long-term investment in the economy.

 

 

Notes:
  1. In the case of the wars in Iraq and Afghanistan, taxes were decreased and spending increased. Evidently it was believed that the tax cuts would increase tax revenues from individuals and corporations due to economic growth enough to offset the cost of the wars.  It didn’t turn out that way.
  2. Anyone with substantial credit card debt knows this. The difference between the credit card holder and the government is that the government can lower to zero the percentage interest rate it pays on the balance owed.
  3. “Financial Repression Redux”, Finance & Development, June 2011, Vol. 48, Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia
  4. “The Liquidation of Government Debt” Carmen M. Reinhart, M. Belen Sbrancia, NBER Working Paper 16893
  5. “Statement on Longer-Run Goals and Monetary Policy Strategy”
  6. Read about the Cantillon Effect in my blog – Inequality, Part 3