»Vivek Kaul's Diary

Germans Fight Back in the 'War on Cash'


Yesterday I said I'd show you how Germans are turning their backs on banks. The Germans know a thing or two about paper money disasters and banking collapses. Also, I said I'd show you how the Italian government's plan to give vouchers to students is a trial plan to replace cash with "cash like" substitutes.

And I will get to both those stories. But let's not ignore markets. It's still pretty boring out there. But did you know that this has been the best August for the FTSE 100 since 2009? You remember what happened then.


Mind you it hasn't been a huge month. The UK's benchmark index is up about 1.2% for the month. By comparison, it was up 6.5% in August of 2009. It shows you how range-bound the market has been. From the 4 August intra-day low to the 15 August intra-day high, the market was up about 5%.

But with all eyes on the US jobs report Friday, and all ears on the possibility the US Federal Reserve could raise American interest rates this autumn, it's not been a great day for energy and mining stocks in the UK. Commodities like easy money and inflation. Not tighter money and deflation.

It's almost as if the market, or investors, are waiting for something to react to. Real investors, like Tim Price and Charlie Morris, are focused on value and momentum. But everyone else seems to be waiting for data to react to. There isn't much of it about.

You did learn today that UK house prices grew by 5.6% year-over-year in August, according the to Nationwide Building Society. That was the fastest growth in five months. And it's another piece of macroeconomic idea that puts paid to the idea that the Brexit vote would cause an immediate catastrophe.

What's more, sterling deposits in UK banks increased by £6.6 billion in July, according to the inimitable Mike Bird from The Wall Street Journal. Citing Bank of England data released Tuesday, Bird shows that foreign investors haven't packed their suitcases with cash and headed for Calais just yet. This was precisely the pre-Brexit fear.

But all is quiet on the Brexit front. Too quiet, in fact. It's beginning to worry me that bad things haven't happened. Maybe they will when we least expect it. I'm not hoping for bad things. But later today, I'm publishing some figures to MoneyWeek Unlimited readers that show some disturbing trends in the futures markets regarding sterling. I'm tentatively calling it... the Breckoning!

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When banking dies

Quickly then, about the Germans and Italians. "German savers are leaving the security of savings banks for what many now consider an even safer place to park their cash: home safes." That's from Ulrike Dauer, also at The Wall Street Journal (which has gotten on with the business of reporting and analysing the news while the Financial Times wallows in Brexit grief).

Negative rates haven't caused Germans to spend money or lose faith in cash. They've lost faith in banks. My prediction is they'll next lose faith in central bankers. And when that happens, faith in paper money.

Let's focus on what German savers are doing and saying:

"It doesn't pay to keep money in the bank, and on top of that you're being taxed on it," says Uwe Wiese. He's an 82-year-old pensioner who took a payout on his company pension and promptly parked it all (€53,000) in a safe. That is a bold move driven by a lot of fear and practicality.

He's not alone. "The moment the bank tells me I have to pay interest on my deposit I'll take my €50,000 or whatever it is and put it under my pillow, or buy a safe and stick the money inside," said Dagmar Metzger in Munich.

That's a bank's worst nightmare. A run on cash by savers who no longer trust the system. It may be one of the reason's Bank of England governor Mark Carney is reluctant to employ negative rates in the UK. He doesn't want to cause a bank run.

Metzger, by the way, wants the existence of cash guaranteed by the German constitutions. If it's a sentiment you share, don't forget to sign Tim Price's petition here. It needs 10,000 signatures to trigger a government response. We're halfway there.

As to the abolition of cash by any means necessary, Metzger says: "I don't want to become completely transparent. I don't want everyone to know whether I buy chocolate, strawberries or mangoes at the store," she says. A fair point.

Advocates for the killing of cash like Ken Rogoff will say it's not mangoes and chocolate they're worried about. It'd be drug lords and terrorists and tax cheats. Surely a little chocolate anonymity can be sacrificed for the greater good and public safety. Privacy is old fashioned. Cash is a clumsy social technology. The world has moved on, or can, if the luddites and privacy freaks would just let it go.

Being one of them, I know that privacy freaks are notoriously hard-headed. That's why the abolition of cash will have to be done incrementally. The Italians know this. Starting next month, the Italian government will give every 18-year-old school leaver the chance to claim up to €500, but only for the purposes of spending it on something culturally enriching.

The authorities call it a "culture bonus", because nothing shows you how much a people value their culture like free government money to teenagers. But seriously, this has all the required elements to advance the abolition of cash. It looks like for a good purpose: promoting culture. It also seems to solve a problem: unemployed youth with no money to spend.

And the really important bit is that it's money that has to be used in a certain way. It's not money really. It's a credit which can only be used for a certain purpose.

The imposition of limits on how and when money can be used is precisely the way you go about redefining what money is. It's money with commercial borders. Paper currency travels easily between businesses and transactions. It's common to all of them, which is what makes it practical and convenient.

But in a world where money isn't travelling fast enough - the velocity of money is down - you have to move it along by other means. One way to do so is to redefine what money is. There's money you use for food (electronic debit cards probably). There's money you use for consumer goods (coupon money that must be used by a certain date). There's money you save (cash which will be taxed or on which you'll pay interest).

I could go on. But by now I hope you get the point. Cash will be quarantined. It will be divided. It will be conquered. And it will be killed. If you have it in a safe, you'll have a safe full of pretty but worthless bank notes.

Please note: This article was first published in Capital & Conflict on August 31, 2016.

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