Tag Archives: Negative Interest Rates

The War on Paper Money Part 2: India Recalls 500 and 1000 Rupee Notes

Many loyal customers of Jack Hunt and followers of this blog may recall our article from April of this year titled War on Cash. That article dealt with the potential for the future abolition of currency, both in the United States and abroad.

The speculative nature of that blog has suddenly become far more credible with the recent startling news from India.

India Eliminates High-Value Rupee Notes

Indian Prime Minister Narendra Modi announced a few weeks ago that 500 ($7 USD) and 1000 ($14 USD) rupee banknotes will be withdrawn from circulation, allegedly as part of a crackdown on rampant corruption and counterfeit currency.

As of midnight Tuesday November 1st, the country?s two largest banknotes were no longer considered legal tender after Prime Minister Modi?s surprise announcement just hours before.

Citizens will have 50 days to exchange the old money for new at banks, but only by providing ironclad identification. Individuals who deposit over 250,000 rupees ($3,700) face severe tax penalties starting at a rate 45% of the deposit value.

Impact of Removing High-Value Notes

The impact of such a policy becomes even more significant when one considers that almost 50% of Indians do not hold a bank account and over 80% of Indian transactions are conducted in cash including for large purchases like cars or a homes. It?s not uncommon to Indians to pay over 1-2 Million Rupees for a home in India.

The surprise step is purportedly designed to bring several billion dollars of cash in unaccounted wealth back into the mainstream economy. This move will also, allegedly, hit the finances of Islamic extremists targeting India who are suspected of using fake 1000 rupee notes to fund terrorism.

While abolishing these notes might reduce crime and tax evasion perpetrated by a few, the removal of the high denomination notes restricts economic freedom of all Indians.

Regardless of your country of citizenship, the more one is required to use a bank account the more the banks (and its partner the government) know about where and how depositors spend their money. Ultimately, it?s another form of a government stealing liberty from its citizens.

Could the ECB Kill the 500 Euro Note?

It is also reported that the European Central Bank (ECB) has begun planning the demise of the 500 EURO note, the one banknote which not only makes up 30% of total European circulating currency by value, but also provides the most cost efficient alternative to Europe?s effective money “tax,” better known as NIRP (Negative Interest Rate Policy). The prospects for NIRP to expand worldwide including to the U.S. have also been highlighted in previous blogs at this site.

Former U.S. Treasury Secretary, Fed Chairman wannabe and Harvard alum Lawrence Summers recently wrote a dissertation urging countries around the world to stop issuing high denomination banknotes, allegedly to deter crime and corruption.

Summers was quoted as saying, ?Even better than eliminating the 500 Euro note would be a global agreement to stop issuing notes worth more than, say, $50.? In another recent blog titled ?It?s time to kill the $100 bill,” Secretary Summers made it clear that the elimination of paper money is only in its infancy.

Elimination of Cash a Real Possibility

Not surprisingly, just like in Europe and India, the argument is that eliminating high denomination U.S. currency will somehow eradicate crime. Quoting the former Secretary of the Treasury, ?a moratorium on high denomination notes will make the world a better place.?

If the Fed heeds the advice of Mr. Summers and EU Central Bank president Mario Draghi, or follows the actions of Indian Prime Minister Modi, eliminating all currency may be in our future. Currency is the only paper based alternative store of wealth to a negative interest rate digitalized future that is potentially in store for all of us.

That being said, what would be left as an alternative to a currency (or lack thereof) related to a potential economic collapse? Gold and silver, of course. Precious metals have been the one true tangible currency for thousands of years.

Gold Demand at Record High Level in Q1 2016

Amid a world of negative interest rates and slow growth, investors have stepped up the demand for gold in record breaking fashion. Considering the uncertain global economic environment, investors can?t seem to get enough of gold right now, and there?s little sign that demand is letting up.

That is the assessment from the recently released World Gold Council?s Gold Trends quarterly report. The report showed gold demand rose 21% to 1290 tonnes in the first quarter of this year compared to Q1 2015, marking the second largest quarter on record. This, despite a decrease in central bank buying and a lesser demand for gold jewelry as well.

Factors Driving Gold Demand

Driving that appetite for the precious metal were significant inflows into exchange traded funds (ETF?s) according to the World Gold Council, which is the gold industries association of the world?s largest gold producers. Those inflows totaled 364 tonnes for the quarter, which was the highest quarterly level since Q1 2009. In the same period a year ago, those ETF inflows were a mere 26 tonnes. The SPDR Gold Trust ETF, one of the most popular gold tracking ETF?s, is up 20% this year.

world gold council logo gold demand

The World Gold Council’s recent report showed that gold demand reached record high levels in Q1 2016.

Even though inflation, considered a cornerstone to gold?s popularity, remained in check throughout much of the developed world, global uncertainty fueled investor demand for gold. The price of gold rose 15% in the first quarter of this year. It was the strongest quarterly price performance in nearly three decades.

It wasn?t just signs of a stressed economy that drove investors into gold. Negative interest rates in Asia and Europe contributed as well, the World Gold Council noted.

Council officials attributed the rise to three principal factors: negative interest rates instituted by central banks in Japan and Europe (and talk that the Fed also discussed negative interest rates); Chinese currency devaluation; and the likelihood that the trajectory of interest rate hikes in the U.S. will be slower than initially expected.

Gold, Silver & Negative Interest Rates

Could negative interest rates be on the horizon? As we discussed in a recent article on this site, a documented “war on cash” has already been initiated in several countries worldwide. In Sweden, Switzerland, Denmark and the euro zone, central banks are using negative interest rates policy (NIRP) as a primary weapon in trying to force feed stagnant economies into growth. Here in America, Janet Yellen recently said that if circumstances warrant, negative interest rates are ?on the table.? Another Federal Reserve governor was quoted last fall as stating ?negative interest rates are inevitable in the U.S.? The same thought process is in play at the Bank of England.

How Negative Interest Rates Could Affect Banking

Some highly respected central bankers and influential financiers have suggested that negative interest rates should also usher in the abolishment of cash, a topic we recently elaborated on at this site. These supposed intellectuals theorize that by imposing negative interest rates on consumers, depositors will spend their money as opposed to paying a bank to store their cash. These same bankers publicly state that the masses won?t object to negative interest rates because currency in a bank is easier to spend than cash in our electronic world. The truth is more likely that central bankers and federal governments simply want to abolish cash and go to an all-electronic form of currency. Imposing zero or negative interest rates is major step in attaining that end result.

I believe that depositors will not view money in the bank as a convenience because they can spend it more easily. Much of the world is cash-poor already and they won?t give up their cash for a perceived convenience. The public will ultimately find alternatives to avoid paying a fee, in this case negative interest, to a bank that is likely already robbing them with ATM fees, minimum balance fees, etc., etc?

Think about it from your own personal perspective. What would you do if all the banks announced that, at the start of the business day tomorrow, all your deposits are now subject to various fees and charges equating to negative interest rates? From now on you will essentially pay the bank to warehouse your money, much like some individuals pay the local self-storage facility to warehouse boxes of their junk.

Are you really willing to pay your bank to store your money? I doubt it. Since this is an arrangement never envisioned or experienced in the history of America, bank customers will likely yank their cash out of the bank, assuming the cash is actually there. They will store it at home or move it into assets that will hopefully maintain its value such as collectibles, gift cards, cashier?s checks and of course precious metals.

An Argument For Gold and Silver

This is not a hypothetical essay on eliminating cash. Negative interest rates and cash elimination are under serious discussion by central bankers and influential politicians worldwide. There are several European consumer banks already committed to imposing negative interest rates on depositors this year.

If there ever was a message that makes a clear-cut argument for buying gold and silver, this is it. In a world where your bank deposits effectively lose money annually, the 0% interest that gold earns annually suddenly doesn?t look so bad. If negative interest rates are the next stage of the global financial crisis, gold and silver may become one of the only forms of money to protect you.

By Douglas Trinder, Precious Metals Analyst, Jack Hunt Gold & Silver