How Negative Interest Rates Will Be Implemented - Vivek Kaul's Diary
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How Negative Interest Rates Will Be Implemented

Jun 1, 2016

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A strange story from Greece. You'll be required to use credit or debit cards for transactions larger than €500 in order to qualify for certain tax exemptions, according to a new Greek law scheduled to take effect on 1 July. I told you it was strange.

You can read the story here. The linking of mandatory electronic payments with a tax allowance is what makes the story confusing. But if you just think about it in terms of being able to track and measure all the money you spend, then it makes more sense. How?

The Greeks, no doubt at the prodding of the European Union, are cracking down on tax evasion. It appears that if you make less than a certain income, you receive certain tax allowances - as long as you can provide receipts for your activity. You can see what's going on.

The government wants to make sure no one's using cash anonymously and then claiming a tax allowance anyway. If you're spending a bit of money and you still want to claim a tax allowance, you have to use an electronic form of payment. Those forms of payment can, presumably, be tallied up quite quickly to see if someone's claiming a tax allowance they're not eligible for (based on the amount spent).



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There are two important points here. Cash will be systematically eliminated for large purchases. If you're spending more than €500, the government wants to know. It's probably something that should be taxed. If you can track it, you can tax it.

The other important point is linking a benefit with a behaviour. You could probably use cash anyway for larger transactions. You just wouldn't be able to claim any allowance (if I understand the Greek law correctly). Some people might be perfectly happy with that.

To transition from a cash society to a cashless society, you have to introduce another kind of money - which operates in parallel to cash for a while but with an incentive to use the new money instead of the old money. It's part carrot and part stick. The carrot (in this case) is the tax allowance. The stick is the limitation on the size of the transactions.

The Bank of England floated the same type of idea with digital legal tender. It would operate side by side with paper pounds. But you'd pay a price to use cash, a penalty. The incentives would be aligned to go digital. And eventually cash would be driven from the field.

It's what happens after that - negative interest rates, deleting people's savings, and the risk of hacking - that worries me. But it's a beautiful Friday afternoon in London. So let's pretend like none of this is actually happening and get on with the weekend.

Please Note: This article was first published in Capital & Conflict on May 27, 2016.

Dan Denning studied literature and history, moving to Agora Financial in Baltimore fresh out of college. Working alongside Bill Bonner and Addison Wiggin, he became managing editor of Strategic Investments. He then moved via Paris and London to Australia, publishing a book - The Bull Hunter - along the way, and opened Agora's successful office Down Under. He returned to London in 2015 and became the publisher of Fleet Street Publications' financial newsletters.

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