In the last 12 months, the editorial boards at three of the biggest mainstream media outlets (Bloomberg, The Financial Times, and The New York Times) have all penned articles supporting the banning of physical cash.
In every circumstance, the argument has been that doing this would
A) Help stop crime such as money laundering or drug dealing.
B) Generate major economic growth.
Regarding #1, we know this claim is complete bunk. Consider the case in India where the Government recently banned ALL currency denominations above 500 Rupees.
The argument from the Government was that doing this would quickly reveal that most of the money would stay in circulation as part of the “Black Market”… thereby justifying the move (those using cash were criminals).
Instead, physical cash has poured into India banks. As we write this, 82% of ALL physical cash in the denominations that were banned has been deposited… and that was in less than THREE weeks.
I want to emphasize here that 500 rupees comes to roughly $7. And these denominations represent roughly 86% of ALL of India’s cash.
Put another way, India effectively banned ALL physical cash claiming that the money would remain in the economy because it was being used illegally. And instead, the money poured into banks.
So… we know that cash bans aren’t really about cracking down on crime. India has proved this to be total bunk.
But what about #2: the claim that banning cash would generate major economic growth?
This is the argument being proposed in the West, particularly amongst financial elites such as Ken Rogoff
The problem with this claim however is that a cash ban simply represent yet another attempt to go below the “zero bound” or ZIRP. The view here is that as long as Central Banks can force interest rates low enough, the economy will come roaring back.
The only problem is that there is ZERO evidence of this. The US maintained ZIRP for seven years, spent over $3.5 TRILLION in QE and generated the weakest recovery in the last 80 years.
In Europe, FOUR NIRP cuts (going well below the zero bound) and $1 TRILLION in QE failed to generate significant growth.
And in Japan 16 YEARS of ZIRP combined with QE programs equal to 50% of GDP failed to generate a sustained recovery.
So the idea that somehow getting rid of cash will prove to be the lucky charm at which point growth will come roaring back is misguided at best.
But will this stop the elite from banning cash in the US?
No way.
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Phoenix Capital Research
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