Why governments want your cash

column-John Mangun-OUTSIDE THE BOXIN response to this column on Tuesday, “They Are Coming For Your Money,” one person asked tersely, “What’s the point?”

I thought, as usual, that I had outlined a clear and somewhat brilliant analysis of how and why governments were coming after cash-money to pay government debt and to control the population in the event of any social unrest due to bad economic conditions.

But of course, readers are always more sensible and reasoned than are writers. So please allow me once again to attempt to make my point on the potential of government taking away physical cash.

In 2009 the US and European central banks lowered interest rates to 1 percent or less. Borrowing was supposed to be so inexpensive, that everyone would run to the bank, borrow huge amounts of cheap money, and boom the economy. But banks were very cautious about lending to ordinary consumers and business and the borrowers were even more cautious. So we have had six years of almost no borrowing for economic expansion and, therefore, almost no economic growth.

What borrowing that has been done has been to buy stocks, houses for speculation, an occasional new car, and to refinance previous debt.

People invest based on confidence. By the time Quantitative Easing 2 had come around, they knew that the government did not have things under control because government policy was not creating economic growth. You will not borrow money at 1 percent if you do not expect to make a return of more than 1 percent.

No matter what the central banks have done or are doing, people refuse to borrow and spend. It has become so bad that in the Wall Street Journal newspaper, columnist Jon Hilsenrath (an unofficial mouthpiece for the US Federal Reserve) wrote this on Tuesday in a column titled “A Letter to Stingy American Consumers.”

“The sun shined in April and you didn’t spend much money. Do you know the American economy is counting on you? We can’t count on the rest of the world to spend money on our stuff. You should feel lucky you’re not a Greek consumer. The Federal Reserve is counting on you too. Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates.”

Here is the key part, “You have been saving more too. You socked away 5.6 percent of your income in April after taxes, even more than in March. This saving is not like you. What’s up?”

Every personal finance guru is going to talk first about saving money as you must. A buffer equal to six-months of your income is sensible. Yet, a savings rate of 5.6 percent is equal to only three-month buffer. And the US Fed thinks Americans are saving too much.

As confidence in the government continues to deteriorate, people will want their cash, as I said before, and a run on the banks can quickly bring the fragile banking system in the West to collapse. If people cannot use cash, then there cannot be a bank run. It has happened before during the Great Depression when the US confiscated what was then the ultimate cash instrument: gold. Overnight, it was illegal to own gold. Remember, back then US dollars were convertible into gold.

In Europe, negative interest rates are designed to get consumers to spend as saving money costs money. But it is not working. The next step is the “Use it or lose it” policy.

Governments can and will confiscate bank deposits if people do not spend the money. But this can only be done if all “money” is electronic and not stored in cash under your bed. Why do you think governments are going crazy about Bitcoin and other digital money that they cannot get their hands on or even know about?

From the governments’ point of view public holding of cash must be eliminated or at least curtailed. That policy will prevent bank runs. Governments can forcefully make people spend their wealth where and when the government desires. When money is only available in electronic form, there is no way to hide from government confiscation.

How do we know this is a possibility? Because the mainstream press and the media in the West has suddenly been presenting a constant stream of stories about how much better the global economy would be if it were not for all that physical cash sleeping in the banks.

E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.


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I HAVE always enjoyed reading Dean West’s blogs, which are insightful and laced with a bit of humor. Dean is founder and president of Association Laboratory Inc., a US firm that provides quality information and strategic insights to association leaders.