Welcome to Finance and Fury

Last Monday’s ep – Cash Restrictions Bill – Went through black economy and outline of regulations

Today – Go further into implications of this – along with other considerations such as bail-ins and negative rates

why bill needed – not for the black market

  1. Case for black market is a guesstimate – 3% of GDP — roughly $50 billion – recommendations given by KPMG, along with the guesstimate showing the 65% increase in black market economy over past 3 years
    1. This figure, it said, was a qualitative estimate (guess), based on a wide definition of what activities make up the black economy – activities including underpaying wages or paying for work cash-in-hand, under-reporting income, sham contracting, ABN and GST fraud, illicit tobacco, money laundering, unregulated gambling, criminal acts, counterfeit goods and illegal drugs –
    2. Proper modeling on the economic and social costs is work has not yet been done – Yet the Government is moving ahead with proposed laws that could make people criminals — with the threat of two years in jail — for spending more than $10,000 in cash.
    3. Opposition assistant treasury spokesman Stephen Jones has also indicated that he wants to see the ban apply to Bitcoin — a move that would send the Bitcoin industry into disarray given its repeated public campaigns to invest in the digital currency to avoid the proposed cash ban.
  2. Treasury is looking into giving the ATO even more powers to hunt down whomever it deems to be a ‘black economy’ criminal – changing the law to reverse the onus of proof for “serious black economy offences” –
    1. Rather than them proving crimes – you have to prove a negative (that no crime has been committed) – much harder

What is the real long-term purpose of this?

  1. Reason Given – Black market – underpaying wages, illegal cigarettes, money laundering, illegal gambling, etc –
    1. How will banning cash payments above $10k stop these? One way is to arrest criminals – enforcing existing laws –banning cash completely would limit this – crypto may be used instead, why Govs likely next target
    2. Instead – legislation which can be updated by the minister ($10k becomes $1k, or transfers no longer excluded)
      1. other countries have already imposed limits — France above 1,000 euros; Spain above 2,500 euros; Italy above 3,000 euros
      2. Along with large denominations being banned – India, EU – with inflation, should increase, not be banned – issued in 1984 – inflation of 2.6% over 35 years – worth about $40 today in real terms
      3. Think the $100 AUD is safe for a few years – economists recommending for few years to ban to starve black market –
    3. Plus new powers for ATO – Guilty until proven innocent – power economically ruin lives – even if not guilty – cost/time spent on meeting claims/regulation
  1. What I think – to give authorities greater control over your choices and economy –
    1. Control of your choices and therefore behaviours during economic recessions or panics – Ties back into the Bail-ins, IMF, SDR and interest rate episodes I have been doing over the past few months
      1. In panics the Gov/Central banks take two likely actions to stop contagion of fear spreading – props up banks and provides stimulus spending and lower cost of cash – monetarist theory
  2. Issue – a financial crisis is mostly behavioural in response to one starting event
  3. The policy response aims to effect human behaviours – better to be seen to do something
    1. central banks reduced interest rates – for Severe recessions – required 3 to 6% points cut in policy rates – if a crisis happens – few countries have left in rate cuts – or low Gov Debts to GDP to run up a budget
      1. to get around this problem – recent IMF staff study looked at how it could bring in a system that would make deeply negative interest rates an options – Still drop rates by 4%, but down from 1% = -3%
      2. Likely not get that low -just example –
    2. The success of the system relies on confidence – the limitation on the ability to withdraw cash shores up bank balance sheets – no bank runs and no liquidity issues due to no reserves
      1. But if deposits will lose money – people don’t want to hold cash at a loss – so would withdraw
      2. Create a form of a bank run – which is unacceptable in a complexly fragile economy –
      3. But people buy investments/spend the money instead – which is part of the aim to control behaviour and get economic growth going
    3. Past the point of return for this working – most of the money being lent through stimulus goes to Wall Street and not Main street (you and I) – But the same policy response is still repeated – low rates
      1. This started out as a short-term emergency experiment – but now this short-term emergency experiment is the normal = more and more then needs to be done for an effect
    4. Bail-In laws – talked about them about while back in the where to invest and not invest in a crash episode
      1. Under the provisions – cash deposits remaining in banks is essential
      2. To avoid bank runs of mass withdrawals = bank collapse – capital reserves now coming from capital notes – not depositors fund solely – having the liability in debt instruments and not deposits
        1. To have funds to help ‘restructure capital’ through turning these notes into shares in the bank or writing them off for liquidity
        2. Other potential – your deposited cash as the legislation is so loosely worded
      3. The cycle of legislation – more and more – has to become more extreme – diminishing marginal returns of effects – one input leaves to a less than one and eventually negative output
        1. Similar to an addict – drug tolerance grows so need more and more for the same effect – takes a toll on the body over time
    5. Here – Money is the drug – and the body is the economy (which is us in financial transactions)
      1. Think people forget – without us – no economy – without Gov, still economy – people adapt and restructure – even currency – confidence is all that is needed – empires fall and people restore
    6. Modern Economy – money is created through central banks and lent out to Governments/Banks at the cash rates –
      1. As cash rates get lower – Interest payments on Gov debt gets lower – if you haven’t noticed, Gov’s globally are in debt
      2. But so are the populations – Aus is number 2 in the world for Household debt to GDP – 120% (Swiss 128%, EU 57%, US 76%) – So we have a lot of debt – but what do we have to show for it? More expensive property
    7. The effects of interest rate drops have been reduced (diminishing returns) – population adapted – similar to an addict – we aren’t as impressed the second time, let along 10th
      1. In the 90s – interest rate drops lead to people running off to the bank to borrow more to spend – property, renovations
      2. Today – people are more likely to pay back their mortgage more quickly instead of increasing loan size
        1. Most money isn’t spent in the economy so no aggregate demand boost to create growth
        2. If no GDP growth = higher Debt to GDP – if GDP went up 10% p.a. and debt does, no problem
        3. Plus – Estimates of QE – 90% stays within financial system – not going to the main street but wall street
    8. Negative interest rates – as time goes on – this looks to be a bit of an inevitability
      1. Bank runs avoidance due to cash restrictions – Forces people into holding cash in Banks
      2. Or Forces cash to be invested to avoid negative rates – push up hard prices and fuel GDP growth


Negative rates – they may become a thing in Australia – already exist Japan and Europe

  1. There is now about $17 trillion – trillion with a T – in negative-yielding debt in the world, government and corporate debt combined –
    1. European CB rumour mill – hyped possibility of a stimulus package – namely negative interest rates, liquidity facilities, and QE – on top of already demand-side driven policies of free easy money
    2. The entire German government bond market, even 30-year bonds have negative yields
      1. Germany booming? economy shrank in the last quarter – negative interest rates from the ECB, negative yields on corporate and government bonds – didn’t help growth – why do it?
    3. Pretty easy to see where this is coming from – the IMF is promoting implementing negative rates – public papers and statements with this all in it
      1. IMF blog – “Cashing In: How to Make Negative Interest Rates Work” explains its motive in wanting negative interest rates — a situation where instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank.


Just another move in the plan to phase out cash

  1. Printing cash can be expensive when you start ‘printing money’ – but through QE and double entry accounting – no need – So the powers that be have no need for cash anymore – actually a liability for them
  2. When cash is available – cutting interest rates into negative territory becomes a risk – uncertainty on withdrawals
    1. Cash acts as “an interest rate floor” as people hold cash when bank deposit interest rates are at zero.
    2. The thought of paying the major banks to hold your money isn’t one that most consumers would jump at
    3. The alternative — as risky as it may be — is hoarding cash, or making investments in tangible commodities like gold.
  3. The end game outlined in the IMF’s post – their ideal world — one without cash and to change human behaviours financially to act as ‘homoeconomicus’ – the rational individual that the models require to work – by rational – what they think is the best decision to maximise utility – how most economics works – what would an economist do – most people aren’t economics and don’t do this – nor should they – hard to measure utility across individuals – different values
  4. What behaviours are they trying to promote with negative rates and cash bans
    1. if depositors have to pay the negative interest rate to keep their money with the bank = consumption and investments are more attractive – economic theory says that GDP should go up – jolt lending, demand, etc.
    2. But if rates go lower = people borrow more, and have less cashflow due to paying debts = no consumption occurs
    3. Negative rates then free up cashflow – as your principal repayments start to reduce – spend in economy
    4. Banks don’t need depositors funds as much – savings rates are about 2.8% anyway – due to notes issued as replacements – ones that can be controlled through legislation – easier than stopping people doing a bank run
      1. Just in case – still want to make sure that this reduces in the chance of occurring – cash restriction bill
  5. The central banks get greater control to influence your behaviour and economic outcomes.
    1. For those who have faith in monetary policy and central banks, this is no problem – one year on from the banking royal commission, faith in our financial institutions — and the regulators who failed to police the banks’ bad behaviour — isn’t exactly at an all-time high
    2. Creating a weird world where savers are penalised — and borrowers get paid — upside down


Next Monday – look at negative rates and how an economy and financial system operates under negative rates – How to allocate investments based around this

Few examples to go through along with what are some potential long term outcomes

Thanks for listening, if you want to get in contact you can do so over at www.financeandfury.com.au at the contact page

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