Monetary Repression Cannot Create a Recovery
It is no coincidence that the $100 bill has become a target, just as the €500 note fell under Mario Draghi's ire just this week. Cash is suddenly now being cast as if all it can be is an aid to criminality. As if to mark how far down the rabbit hole we have traversed, that is the same argument used not long ago against bitcoins. The fact that "we" are even contemplating the possibility only demonstrates further failure of monetary policy and orthodox theories. First, it was zero interest rates; then negative real rates; now negative nominal rates and no cash with which to vote with your feet, as should be your right.
What is equally dubious about the whole attempt is that it betrays the very nature of the policies now supposedly in support. The entire idea of "flexible" central banks endowed with full discretion was to overcome the free objections of citizens as if the enlightened few were far better to judge potential outcomes to actions. In other words, economists blame the people for the Great Depression so that the people should never be allowed to act against their own self-interests now collectively defined from above.
Not all that long ago, in the 1970's and early 1980's, there was serious debate on the monetary regimes responsible for all this nastiness. Through first the work of Milton Friedman and Anna Schwartz, the Federal Reserve's actions in the early 1930's were not just criticized but faced the full brunt of accountability so that they, or the perception of the inactivity, would define all future policy for all future conditions. As this version tells it, the magnitude of monetary destruction was the responsibility of the Fed in not undoing what the public was doing. From this perspective, it was the solemn duty of the central bank to mitigate the harm the people of this nation, or any nation, were supposedly doing to themselves and each other.
With the ends collectivized and socialized, the means could be attacked. In this case, as in all others, the dastardly acts of individual expression were "hoarding" currency and gold, as if individuals have no right of individual action upon their own view of circumstances. Monetarists believe that the Fed failed to act enough to counter the self-destructive nature of freedom, and so that their socialist tendencies for collective goals must in all cases override any so contra-action.
On the occasion of Milton Friedman's 90th birthday in 2002, Ben Bernanke spoke to a distinguished audience and concluded along these very same lines. He said,
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
The fact that it was Bernanke making such a commitment was significant not just because of his status within the Fed, or that he would go on to become its leader during the next great crisis, but perhaps more so due to the path by which he came to those career heights. It was in the early 1980's that Bernanke made his name as a scholar of the Great Depression and especially this view, derived from Friedman, of monetaristic causes and what he thought their proper antidotes.
Speaking in March 2004, Bernanke would return to this theme as he so often did. The topic of his speech was "Money, Gold and the Great Depression" which continued that any action contrary to the proposed "soundness" of the banking system was almost illicit, therefore there must be those enlightened few who are given the authority to define both "soundness" and what might be "contrary" to it.
"The banking crisis had highly detrimental effects on the broader economy. Friedman and Schwartz emphasized the effects of bank failures on the money supply. Because bank deposits are a form of money, the closing of many banks greatly exacerbated the decline in the money supply. Moreover, afraid to leave their funds in banks, people hoarded cash, for example by burying their savings in coffee cans in the back yard. Hoarding effectively removed money from circulation, adding further to the deflationary pressures. Moreover, as I emphasized in early research of my own (Bernanke, 1983), the virtual shutting down of the U.S. banking system also deprived the economy of an important source of credit and other services normally provided by banks."
From that statement there is derived no ambiguity whatsoever; anything that proposes "hoarding" of cash is against the stated purpose of monetary enlightenment as self-determined. In the case of our current debate, which, of course, there will be no debate only judged resistance to further and increasing trial balloons along these lines, the move toward banning high denomination bills first appears perfectly consistent. Without those physical notes available, anyone suggesting removal from the authoritative system will be relatively more burdened by the peculiar nature of cash as money - namely that because the number stamped upon the face of each note will now be less, the intended monetary miscreant will be forced to accept more pieces of paper for the "same value."
For small "hoarders", this is not really an impediment, which suggests the true target. Left unstated, however, is that any degree of change in hoarding potential now is nothing like the Great Depression. If global monetary authorities are acting in anticipation of perhaps a significant move to cash out of deposits, then it is they that would be the cause.
To save the economy now spiraling toward another wreck, after having never recovered from the last one, central bankers have left themselves with only increasing degrees of negative as stated at the outset. Having struck out with negative "real" interest rates, negative nominal rates are proposed and already enacted across large sections of the global financial system (including yields on "risk free" securities). At some unknown and really unknowable point, people and really more so banks will interview and become more open to alternatives which escape this authoritative repression.
This is wholly different than the "hoarding" vilified of the 1930's in both cash and gold. It represents the contradictory tensions that serve to illuminate the inconsistency of the dominant economic and monetary theory. To save the global economy, and the US with it, the central bank "must" tax short-term "money" rates so that banks will instead lend rather than hold to their own liquidity preferences (to reuse a Keynesian term more at home wholesale interbank than in the economy), and if they don't they will pass along those negative nominals to deposit holders so that they will spend rather than save.
It's reprehensible on so many levels, including the assignment from above about when and how people are supposed to engage in commerce. And if one might be so inclined as to exercise free authority to deny the command, then they are instead to be denied increasingly the means by which to escape the authority; the monetary noose can only tighten.
Take heart, however, we are told by the authoritarians as they know best what is best and that such repression shall be for our own good. This message somehow survives all the failures of the past decade (and more in the case of Japanese repression), and there have been only failures. Monetary policy does not work at any point, save perhaps the briefest of distortions that at best might resemble prosperity in only passing glimpses. It is thus quite difficult to simply accept demanded pain in the name of future reward where the probability of future reward is nil.
In that respect, the impulse to withdraw is not even an economic commentary but simply the quite logical and reasonable counter-response to past policy; leaving again the idea of hoarding as a matter owing to monetary officials. They create themselves the very dangers they have sworn to battle by any means necessary. Banning cash, then, even in large denominations at first, is nothing more than a contradiction - to defy those that realize the policy mistakes given that there are only mistakes. Monetary policy alone creates these potential conditions for what monetary policy assigns as the worst of the worst.
From that position there can only be further tension and thus further repression, and under those conditions any economic advance is simply not possible - as if coercion in increasing intensity can ever be the basis for sustained economic growth. If that were ever true, Venezuela, Cuba, the Soviet Union, etc., would be shining current examples of how to conduct affairs. The capitalist system, a true capitalist system, is predicated upon honest trade and private property. Both of those need to be extended into the realm of money at least as factors (and private property reinforces honest trade).
Without monetary property rights, central banks can act as they desire - or so they think. If hoarding of gold in the early 1930's was a major act of restraint on the Fed's ability to combat the parallel hoarding of currency (under Bernanke/ Friedman, the loss of gold in the 1930's forced the Fed to only further drain "liquidity" as it was obliged to stop the outflow of gold), removal of all restraints should have produced the panacea. Obviously, that did not happen in 2008 as the system experienced a panic despite following all the Friedman prescriptions. In fact, reading A Monetary History, particularly the lengthy dedication to the Great Contraction, one would find every precursor idea to what Bernanke's Fed would eventually carry out.
And the reason for that was quite simple, namely that monetary policy and authority was so focused on the people as agents of financial and economic destruction it never considered the same possibility of the banks. Monetary policy was so attentive to the withdrawal of liquidity as it had been in the 1930's that it could not even conceive of the withdrawal of liquidity in only interbank format. In other words, the panic in 2008 was in general entirely reversed. Hoarding was an act of "banking" not of the public; in fact, other than participation through asset markets and the shriveled economy revealed by them, the public sat out the whole affair. The only hoarding of liquidity was interbank; a panic of and by banks alone.
In thinking it was creating a flexible system removed from the people's vote of property, the financial system had instead become one where the only vote was collectively banks'. And it remains that way, which is why the Fed's (and ECB's, BoJ's, PBOC's, etc.) commands go nowhere no matter what. Thus, if there is to be hoarding of cash in response to NIRP, the little guy is not even a consideration.
That was the entire point of the eurodollar system to begin with, as we can recognize the same tensions at work around its inceptions now re-emerge in its decay. When the eurodollar first registered, belatedly, on central banks including the Fed, it was at first a nuisance but increasingly a displacement. In the early 1960's, the FOMC went from actually hoping European inflation would kill it or that it might just wither away to nothing after sustaining defaults for the first time (the Ira Haupt affair, which is an inordinately interesting story with all the elements of great fiction: fraud, hints of the NJ mob, Warren Buffet making a killing off tangential effects, the NYSE bailing out rehypothecated stock shares on margin, the stock exchange closing due to the Kennedy assassination just in the nick of time at the most fortuitous possible moment, all with perhaps the first appearance of eurodollar funding on repo and financial collateral gone wrong) to intentionally altering monetary policy in the Quixotic quest to use interest rate differentials to "reverse it."
The combative nature of the banking system at that time was entirely due again to overly restrictive monetary rules, the eurodollar system offering banks the kind of freedom long since denied the people. While the Fed took a more hostile initial stance, over time that softened into acceptance once their interests more closely aligned (in the Great Inflation, no less, an important clue as to why the closer association; the Fed wanted to be totally free of fixed exchange, and the eurodollar system offered the means to do it). But that meant, fundamentally, the monetary authority implicitly accepting this bank-first construction of the purely financial - all the while monetary authorities denied this in practice and theory still focused on hoarding and money as strictly the public's problem.
The eurodollar system just continued to grow and build despite all the effort and hope bent on strangling it in the womb because it was never really about interest rate differentials, inflation or even monetary policy settings. It was the idea that there must be freedom somewhere and with monetary authorities so focused on denying it to individual people banks were freed to take it for themselves with attention diverted exclusively elsewhere.
Now having arrived at the other end, banks are again antagonistic in action if not openly in declaration; interests of the central bank and global banking system are no longer so closely aligned. Bank balance sheet factors permit now only resistance to the feudal interests of the supposed overlord of monetary policy; except in repeated failure we see who really holds authority.
The pendulum has swung fully from right to left; from where once hard money meant dispersed monetary authority and property rights that could only mean banks as complimentary and secondary. Now, banks are the sole arbiter of global money having absorbed all those powers through shifting property rights and laws into almost exclusively financial. So the Fed, once chastised for allowing too much power on the right now has to face the same problem only on the left (I don't mean these terms politically). If there is to be hoarding again, it will be banks first and I think monetary authorities finally (finally!) suspect the contours.
As I described last week, the only reason to hold a negative "yielding" money market balance, whether in the private money markets or on account at some central bank, is to remain in good standing of the virtual wholesale system. In other words, you accept -30 bps for now because at some point you expect to put that liability "to work" in some positive yielding opportunity in the near future. If you instead convert to cash, you will have both additional costs in doing so but then face the prospects of having to again convert back to virtual cash in money market accounts in order to carry out participation in any future opportunity; physical cash is illiquid. It might be too much hassle at -30 bps, but perhaps not at -50 bps? -100 bps?
That is the current danger facing global NIRP; there exists already quite negative nominal rates around the world and now the dimming prospects for those future opportunities. At some point, and it is impossible to determine the level that might trigger it all, banks will make the same determination that people were once free to make in the 1930's; getting the hell out because they can and because there is only increasingly more cost and risk and no upside to remaining under such repressive conditions. To the poor farmer in the Midwest in 1930 who stuck Federal Reserve Notes in a coffee can and buried it in the dry prairie as the more riskless substitute for banking, there might very well be some global bank that will convert virtual wholesale "money" to physical cash to be submerged in some bank vault as its more riskless substitute for central banking.
The consequences would be mostly the same for either scenario, as they would present the economy with a shortage of cash and a central bank yet again unprepared and unaware. And if they did happen to catch the process while it unfolded, they would be forced to respond with the literal printing press. In other words, there are no good outcomes down this road, only dangers of revealing so many common, orthodox fallacies - starting with the notion that such centralized authority and restrictive capacity is ever a good idea. Bernanke promised that if given such authority "they would never do it again." Now he and his cohort have put the Fed in position where not only might it happen again, they would be the cause.
Monetary repression, even misdirected, cannot create a recovery. That much is proven. It demands at first so much negative pressure in only the hopes of future and widespread payoff. That is the part that was proven, that there is no widespread payoff, just the bleak economic future; leaving only the negative pressure and the potentially devastating means to escape it for those that were left the ability to do so. Central bankers claim always that only means they need more flexibility and authority to do even worse, but common sense demands that they just stop before they really unleash the fury. What has been done over the past decade has been fully bad enough; we really, really don't need to explore how far it might all go if pushed. Maybe that would be a fitting even biblical end to the system and the ideology, to leave once and for all absolutely no doubt, but I quite easily suspect that every living person on earth would prefer to not even explore the possibility.
