The Cashless Society

Cultural, Economics, Premium POM

Reverse Lotteries and Real Purchasing Power

By JC Collins

The elimination of paper currency and the inevitable end of anonymous transactions are fast approaching.  As frightening as this reality may be, there are both pros and cons to the reduction of paper currency in circulation and the regulated use of electronic currency.

The obvious con is directly related to individual sovereignty and privacy rights.  The ability to perform anonymous transactions will become impossible under the protocols of a cashless society.  For many, this seemingly natural right to remain anonymous is unfortunately overshadowed by criminal activity and underground economies, both of which are supported by paper currency in circulation.

Justifications can be made for both the positive and negative characteristics of this loss of transactional anonymity, and in turn, a level of personal sovereignty.  The scope of this piece will not focus on the sovereignty challenges presented with the framework of a cashless society, or the validity of tax laws and regulations.

Instead, the focus will be on the methodology and process of reducing the amount of paper currency in circulation, and some of the fiscal challenges presented by an “electronic currency only” economy.

The phasing out of paper currency has already begun with large denomination bills in most countries.  This has taken place over the last few years already with $100.00 notes, and will eventually affect $50.00 notes and $20.00 notes in due course.

All countries will have to act in some semblance of unison on the reduction of paper currency, starting with large denomination bills, in order to prevent illegal cross border activity.  Underground economies can continue in Country “A” if bordering Country “B” doesn’t also reduce and remove paper currency in circulation.

Eventually small denominated bills, such as $10.00 notes and $5.00 notes, along with coins, will be removed from circulation.  This process could take many years more as some allowable variation in the transition may be economically healthy in the early stages of multilateral implementation.

The concept of paper currency is as entrenched in the minds of people as any ideological and national identification, such as flags and songs.  In many cases national identity and cash are intertwined.  The severing of paper currency images from national identity will be an important step towards creating associations with larger macroeconomic and supra-sovereign entities, such as the United Nations and international financial institutions like the IMF.

When money is simply numbers on a screen the visual stimulus of domestic and national cash is removed, allowing for the replacement of national identification with global identification, such as carbon and oxygen credits, SDR assets, and a fully functioning world currency 10 or 20 years down the road.

One of the more probably challenges with reducing the amount of paper currency in circulation is getting those that “hoard” cash to turn it in to the banks, from where it will make its way to the central banks of each country.

Many countries may deal with this differently.  Some will simply demand it happen, while others may confiscate cash as it travels with velocity through the economy.  The approach taken will depend on many domestic factors, such as the size of underground economies.

It is estimated that in the United States, and many other developed countries, the underground economy equals up to 10% of GDP.  This is a substantial amount.  When considered along with the estimates that 50% of all cash in circulation is being used to hide transactions, the need for a different approach becomes obvious.

You can write laws and regulations preventing the use of paper currency in official transactions, but that will not prevent underground economies from hoarding the remaining cash and reducing the amount of injection points with the regular economy.

One method of reducing paper currency which has been discussed is to hold a reverse lottery of sorts, where random note serial numbers are pulled, at which point they become worthless and are taken out of circulation.  Anyone holding the lottery notes would instantly lose the associated wealth.  Under such a program there would likely be a rush of paper currency back to the central bank as wealth retention is sought.

It is also estimated that 70% of a nation’s paper currency is held abroad, especially with the United States.  Such a lottery system would ensure a flood of cash back into the Federal Reserve.  The government would like this because it would reduce corruption and make cheating on taxes all but impossible.

The flood of physical cash back into the United States would not cause hyperinflation because the exchange for paper currency with electronic currency would ensure the “money location” remains the same, whether it’s overseas or held domestically.

One of the widely discussed cons associated with the elimination of paper currency is the confiscation of wealth through negative interest rates.  Bank accounts can be debited every month, week, day, etc.., based on the negative interest rate at the time.  This transfer of wealth from private individual accounts to central bank requires some further explanation.

The goal of any central bank and economy should be to have a stable unit of account.  Inflation and interest rates which support targeted inflation growth do not offer the stability which is required for a unit of account.  Inflation, the higher it gets, becomes increasingly unstable and will lead to the sort of imbalances and instability which the world has seen in the past.

On top of that, inflation reduces the real purchasing power of paper currency.  Savings of $100,000 over 20 years will lose a substantial amount of real value through inflation. Perhaps as much as $20,000 or more.

Now consider the loss of wealth which would occur under a negative interest rate system where bank accounts are debited and the wealth transferred to the central bank.  Such a negative interest rate system would only be sustainable under a framework where inflation and deflation are held in check with one another and no loss or gain occurs through either.

Under such a system, the loss of value, or wealth, would not be substantially different, whether its loss of real value through inflation, or loss of wealth through negative interest rate account debits.

The traditional theories of economic growth and stagnation cannot be fully relied on in this modern world of financial engineering.  Expansions and contractions of the money supply, which are largely determined by the management of interest rates and the relationship between inflation and deflation, will function under a multilateral framework where growth will be achieved through the continued modernization of undeveloped countries.

Reader and POM contributor Dee touched on a very important point in her recent comment, where she referenced the level of sovereign debt in the world, measured against world population numbers, demographics, and increase of paid taxes.

The level of debt in the world today is sustainable when calculated to consider the multilateral taxation of a growing human population.  The modernization of undeveloped countries, and the migration of rural populations into urban centers in countries such as China, will create a manufactured, or engineered, level of growth for the international multilateral monetary system.

As such, the traditional shifting balance between inflation and deflation can be replaced by a method of stagnation growth built upon the architecture of a multilateral monetary system which utilizes multilateral liquidity in the form of a stable unit of account, such as the SDR.

Today, the need for negative interest rates comes from the increasing deflationary pressure which is inherent with the imbalances of the unipolar USD system.  The ability of central banks to go even deeper into negative interest rate territory is limited by the amount of paper currency in circulation.

It’s a freakish catch-22 when systemic deflation is growing by the day, which in turn leads to the hoarding of cash.  The central bank answer to the deflationary shocks is to go even deeper into negative interest rate territory.  But this negative interest rate policy, and associated savings debit, will also lead to the hoarding of cash, as individuals attempt to protect their wealth from confiscation.  The obvious solution, from a central planning perspective, is the elimination of paper currency in circulation.

Let’s keep in the mind that wealth, or real purchasing power, is being loss regardless, whether it’s through inflation or negative interest rates.  With decreasing inflation and the world on the verge of a deflationary crisis, the negative interest rate policy will be somewhat offset by the reduction of inflation.

The problem down the road will be how to prevent central banks from confiscating wealth through negative interest rates when the deflationary threat has passed and there is no longer paper currency in circulation.

Outside of all that’s been explained above, the demand for paper currency is decreasing because of the continued increase in alternative methods of electronic cashless payments.  In time cash will become technologically obsolete.  – JC