The Huge Twist the Bankers Didn’t See Coming

Why does the money in your pocket have value?

It’s a pretty simple question. But it’s probably one most people don’t know the answer to.

They might say it’s just the way it is.

In a way, that’s the correct answer.

As long as enough people accept bits of paper with deceased heroes on them in exchange for goods, services and labour, then voila, the system works.

It just does.

But it’s still only bits of paper.

Or more often ones and zeros in a computer program, these days.

You see paper cash is slowly dying. Electronic cards and smartphone wallets are replacing it.

Face++ is a Chinese start up that’s even going to allow you to pay with your face!

Technology is enabling this shift. But it’s the old school financiers who are behind the drive. In recent years there’s been a concerted effort from these bastions of finance — the central banks and their commercial allies — to do away with physical cash.


There’s a few reasons. And they’re mostly about control and power.

I’ll explain more shortly…

But to cut to the chase, the good news is their grand plans for total financial domination have hit a snag.

Good news if you’re against the big government-central bank cartel, that is.

In fact, their war on cash looks likely to end in a very surprising way…

So, what’s the beef with paper money?

I mean it’s worked pretty well for the last century, hasn’t it?

Well yes, it has.

But it’s now a threat to central bank power.

And it’s all to do with the growing trend of negative interest rates.

Right now, we have an extraordinary situation where central banks are starting to implement these policies of negative rates. That is, they want banks to charge customers for the pleasure of having the bank hold their cash.

Switzerland, Japan and Sweden are all in the ‘negative rates club’.

In short, the idea behind it is that you can stimulate growth by making money in the bank unattractive. You push investors up the yield curve, into riskier assets that should stimulate jobs and growth.

That’s the theory, anyway.

I’ll leave the arguments as to if this actually works for another time. But the short answer is no, it just pushes up asset prices and debases wages, creating wider divisions in society and social unrest.

But here’s the thing.

Paper cash puts a limit to how much the central banks can do this. Therefore, limiting their power.

It’s like this…

Under the mattress

Imagine you had a few billion dollars in cash. Like a lot of companies actually do.

And the bank wanted to charge you 0.5% to hold it.

Well instead of holding it in the bank you could take the paper notes, store them in a warehouse and hire armed security for a fraction of the cost.

In other words, the existence of paper money puts a limit to central bank power. At a certain point of negative interest rates, paper cash becomes a store of value OUTSIDE the banking industry but not INSIDE it!

Now, central banks clearly don’t like having their power curtailed.

And bank notes, as an alternate storehouse of value, are a constraint on central banks’ power.

We view this constraint as undesirable,’ Citigroup Global Chief Economist Willem Buiter and a colleague, economist Ebrahim Rahbari, wrote in an 8 April 2015 research piece.

They laid out three ways that central banks could foil cash hoarders: One, abolish paper money. Two, tax paper money. Three, sever the link between paper money and central bank reserves.

So, for years we have seen the slow drift to electronic money. 

Governments love it.

It makes tracing, taxing and controlling people a lot easier.

But in my opinion, it’s dangerous. Centralised power comes with centralised corruption and inevitable cronyism. I’m sure you remember the bank bailouts in recent years. You won’t see governments bailing you out if your business fails!

You might also remember in 2010 when the US government banned financial transactions to Wikileaks. This was after they exposed the footage of the army helicopter firing at unarmed civilians in Iraq.

Instead Wikileaks was forced to use bitcoin for donations, instead.

A move which, as it turns out, made Wikileaks an 8,000% return on their money with bitcoin’s phenomenal rise.

Whatever you think about Wikileaks and Julian Assange, I think you’d agree that using the financial system as a means of silencing dissent and government exposure is not a good thing long term.

Unless you think the idea of living in an Orwellian dystopia, complete with thought police, is a good thing?

Freedom versus control

And it turns out a group of people in 2009 realised that — all in all — decentralised, anonymous money is actually good for society.

This was the year bitcoin was born.

And it brings us to the unexpected rise of cryptocurrencies that we’re seeing today.

Much to the chagrin of the central banks who thought they’d get away with their war on cash. This twist in the tale has certainly caught them off-guard.

Cryptocurrencies are becoming the new store of value. An independent system of money, free from central bank, government and big business interference.

Sure, bad people can use it for bad intentions. But you can say that about all freedoms. Bank robbers didn’t exist until banks did.

And ever since Eve bit the apple, freedom has come with a cost. The cost of evil intent. Freedom has been — and always will be — a double-edged sword.

But without it you get the fascist and communist societies of the 20th century.

There are now over 1,314 cryptocurrencies at last count. Each one is an experiment in freedom.

The freedom to set up a company in a unique way. The freedom to devolve power to thousands of individual token holders. The freedom to share, sell and trade all manner of resources. The freedom to control your own data.

And of course, the freedom to transact financially. Anonymously and securely, at a fraction of the cost to do so currently.

Does there need to be regulation?


But only a very small amount…

The technological developments we’re seeing now wouldn’t have been possible under the weight of crony capitalist regulations. A lot of the so-called protections simply entrench incumbent power.

And you only need to look at the last decade of banking scandals in Australia to see how little this regulation actually works.

I do acknowledge that cryptocurrencies make some people nervous.

They change deeply embedded societal structures. They change the fabric of your daily life. The security of certainty.

But you could say the same about being released from jail.

The 20th century philosopher Karl Popper recognised that freedom comes with some feeling isolated and anxious.

But this anxiety, Popper said, must be borne if we are to enjoy the greater benefits of living in an open society: freedom, social progress, growing knowledge, and enhanced cooperation.

It is the price we have to pay for being human.

Cryptocurrencies are a move in the direction of freedom. If we are willing to pay the price.

Good Investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia