Cash Is Not the Enemy; Central Banks Are
Ostensibly to foil terrorists, the European Central Bank intends to stop producing €500 banknotes. Getting rid of the bill, referred to by the sinister name ‘Bin Laden’, “will make life harder for criminals, raising their costs and increasing their detection risks,” Peter Sands, a former chief executive of the British bank Standard Chartered and enemy of big bills, told the New York Times.
Rogoff views the world as a giant chess game, and we are mere pawns in the all-knowing monetary mandarins’ game.However, all of the public safety blather is mere eyewash. Kenneth Rogoff writes in The Curse of Cash that central bankers know getting rid of cash “would make it easier for central banks to invoke negative interest rates either when inflation is stuck at very low levels or, far more significantly, when the economy is in deep recession and requires substantially negative real interest rates to help stimulate demand.”
Rogoff quit high school to play chess and achieved Grandmaster status, but decided to pursue economics and now teaches at Harvard after working at the IMF and the Fed. Readers of “Curse” will get the feeling Rogoff views the world as a giant chessboard, and we humans are mere pawns in the all-knowing monetary mandarins’ chess game.
Money in Rogoff’s world is the government’s tool. There is no sense in Bitcoin or anything else competing with government money, for “it can use laws, regulations, and outright coercion to come out on top: a determined government is always going to win the battle of currency supremacy, at least in the long run.”
Ironically, it is the government’s cash that the professor sees as the enemy. The majority of currency (80 percent to 90 percent) is made up of large denomination bills, and he believes there is no use for $100s, $50s, or $20s other than criminal activity and tax evasion.
Cash Is King
I would urge the ex-Fed economist to come down from his Ivory Tower and visit Las Vegas where C-notes are the coin of the realm, or go to a trailer park and collect rent, where most occupants pay in the bills he wants to abolish.
Rogoff’s plan to handle such pedestrian concerns is to hand out debit cards to the poor and let one, five, and 10 dollar bills circulate until converted to coins.
Rogoff and other cash haters wish to turn time-preference on its head. Savers should pay borrowers for delaying consumption, instead of the other way around. However, as Murray Rothbard explained,
What we need, in short, is savings: this is the factor limiting investment. And saving, in turn, is limited by time-preference: the preference for present over future consumption. Investment always takes place by a lengthening of the processes of production, since the shorter productive processes are first to be developed. The longer processes remaining untapped are more productive, but they are not exploited because of the limitations of time-preference. There is, for example, no investment in better and new machines because not enough saving is available.
While the author explains that cash is the enemy of central bank policy, he does not admit it is the enemy of fractionalized banking. A hundred dollars on deposit can be lent out and multiplied by the banking system. A hundred dollars in cash can not. “The ‘bank run,’ which shivers the timbers of every banker,” wrote Murray Rothbard in The Case Against the Fed, “is essentially a ‘populist’ uprising by which the duped public, the depositors, demand the right to their own money. This process can and will break any bank subject to its power.”
In Europe and Japan, where Rogoff’s negative interest rate policy panacea is ineffectively underway, the run is on safes. Savers seeking the high yield of zero are hoarding money at home. “To be sure, the Germans are merely catching up to where the Japanese were over half a year ago,” reports Zero Hedge.
Super Negative Rates
Rogoff writes that incentives to hoard cash must be taken away so negative rates can work their magic. He claims Europe and Japan have just tiptoed into negative rates and if they haven’t worked, and they haven’t, it “cannot be viewed as a decisive test of how they might work after necessary preparations have been made, because many issues have yet to be dealt with, especially finding a way to deal with a run into cash.”
Pushing rates to say -5% if necessary “will be transformative” claims the Harvard economist. He asserts that it’s no big deal, comparing it to dropping the gold standard, moving away from fixed exchange rates, and central banks becoming independent.
Are interest rates not prices? And if so, should they not be discovered instead of imposed?The idea is that instead of letting their money do nothing, negative rates would push people to spend the economy into prosperity. Keynesians view savings (or hoarding) as bad. The hoarder is depriving the economy of consumption that creates employment. In no time, Keynesians fret, everyone becomes a hoarder and the economy spirals down the recessionary rabbit hole never to return.
However, Keynesians forget about production and the capital needed to fund it. On this Ludwig von Mises explained, “Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material condition of man; they are the foundation of human civilization.”
Rogoff believes the government must have monetary policy, to stabilize the economy, respond to financial crises, create price inflation and ”engage in partial default on government debt.” Government money is a “natural monopoly” he claims, writing, “the modern-day system of having independent central banks run by technocratic central bankers has worked far better than any other system so far, certainly better than a gold standard would.”
That is an amazing assertion coming from a guy who co-authored, with Carmen Reinhart, This Time Is Different: Eight Centuries of Financial Folly. The world has gyrated between boom and bust since the last thread to the gold standard was cut in 1971, and Rogoff himself lists the numerous inflations and hyperinflations that have occurred in recent decades.
James Grant, in an acceptance speech before the Money Marketeers, wondered aloud what he would have done should Ron Paul have won the presidency in 2012 and appointed him Fed Chair. “Are interest rates not prices?” He would have asked members of the Federal Reserve Board. “And if so, should they not be discovered instead of imposed?”
The Pretense of Knowledge
As for the 700 economics PhDs employed by the Fed that Rogoff is so impressed with, Grant channelled Nobelist F.A. Hayek, saying he would ship “these aspirational physicists” to NASA or the National Science Foundation, and hire a few financial historians in their place.
Hayek,in his Nobel Prize