The Nationwide Bank of Romania (BNR) financial policy assembly of four July 2019 noted that the acceleration of economic growth in Romania was stronger than anticipated in the first quarter of 2019, while inflation remained at four.1%, nicely above the 2.5% goal. At the similar time, the members of the BNR government thought-about exterior economic imbalances to be a matter of concern, as nicely as greater tensions in the labor market.
”Annual inflation was flat at 4.10% in Might, considerably under the goal range. Throughout the first two months of Q2, it had been on the opposite aspect of the forecasts, slightly above the four.03% degree noticed in March. The rise was mainly due to the proven fact that the acceleration of core inflation and, to a lesser extent, the rise in VFE prices led to a partial decline in the costs of tobacco products, the annual dynamics of gasoline costs. and managed costs. The annual corrected CORE2 inflation price had grown quicker than forecasted and rose from 2.7% in March to three.2% in Might – the peak from September 2011 – in accordance to the minutes of the financial policy meeting.
The members of the government said that the advance cost was due to the improvement of service prices – solely partly due to taxes levied on telecom operators and the slight deterioration of RON in relation to the euro – and to the dynamics of processed food costs, which somewhat affected the rise in prices of some worldwide agricultural products
. Members felt that the improvement of primary inflation showed an upward strain on demand and wage will increase, in line with the measurement and strengthening of the economic cycle. economic growth and a gentle pick-up in labor prices. Other alerts have been seen as an improve in the annual growth price of industrial producer prices in the domestic market for shopper items that had grown in current months, and an improve in the GDP deflator in 2019 Q1; reference was made to short-term inflation expectations, which, in accordance to some studies, have just lately continued to rise, ”the document states.
In the first quarter, authorities growth was stronger than anticipated acceleration – to 5% from four.1% to 2018 This fall, as the sudden recovery of its quarterly dynamics is doubtless to point out a better advance in extraordinary combination demand than the forecast for this era
“Household consumption again turned the key to economic growth as expected, with a pointy acceleration in purchases of items and providers, adopted by a change in inventories, which was arduous to provide you with uncertainties about unequivocal economic conduct and thus economic growth in the final 4 quarters, ”BNR board members stated.
The proportion of gross fastened capital formation was unexpectedly restored to the constructive area solely due to the rise in new development work. In this context, the BNR famous that the impression of home demand on GDP dynamics elevated considerably, whereas internet exports had a much more adverse effect on the dynamics of imports of goods and providers at the similar time slower. export growth fee
”Consequently, the commerce deficit grew significantly quicker than in the similar yr earlier, which additionally led to a widening of the current account deficit every year, regardless of enhancements over the period. and secondary revenue balances. In this context, the members of the government felt that, given its measurement and improvement, and due to its economic structure, the exterior imbalances in the financial system have been much more worrying, ”the report is read
Growing labor market tensions
BNR Board members expressed their concern over high tensions in the labor market and harassed lately. successive will increase in the number of staff in the financial system and the report low degree of the ILO’s unemployment price in current months, as properly as the recruitment efforts of corporations.
“Due to the major difficulties in recruiting companies, the latter are increasingly focusing on digitalisation and automation – including the aim of increasing efficiency – or recourse to foreign labor, as recent wage cuts have shown in industry, especially in the automotive industry, and in research and specialized research,” BNR stated. [19659004] Wage pressures are subsequently expected to remain high, no less than in the brief term, bearing in mind that, in accordance to the double-digit improve recorded in April, common gross wage earnings as properly as common real internet wage revenue will decrease, albeit barely weakening. Q1
In April, the growth fee of industrial wages additionally remained at double-digit degree, as productiveness growth was not clear. Some members of the government stated that the scarce labor drive turned an obstacle to the sustainable economic growth of the new EU member states, also due to migration
Monetary circumstances
The members of the authorities burdened that the most necessary ROBOR rates are a lot larger than the Political Curiosity from Might to June, values which might be solely slightly lower than that recorded in April, but also the normalization of the common interest rate on interbank payments, which had shifted slightly under the rate of interest during that interval. deposit operations – a surplus of liquidity that has re-entered the money market
”As well as, the low progress of new deposit wages from April to Might, but particularly in Might, was referred to. altering rates of interest on new housing and shopper credit in households, most probably due to the entry into drive of the IRCC at 2.36. per cent. It was noted that from July 1, the IRCC degree had all of the sudden risen to 2.63 % and would remain constant during Q3. On this context, the uncertainties brought on by the introduction of a benchmark for shopper loans and its potential influence on the switch and angle of financial coverage and, finally, the general coverage framework, are part of the BNR
Board members additionally discussed the sharp downturn in the Euro / RON trade price at the end of Might and June At the beginning, along with the improvement of the region, marks the indicators of the future easing of the Fed and the European Central Bank. The ECB’s financial policy, which promotes the attractiveness of investments in this market. The next downturn in the foreign money pair – due to greater interest rates and the position of the euro area and the central banks of the area – was also underlined, and it was thought-about that the potential sharp improve in this development would contribute to medium-term inflationary risks, already undermining the disruption to the present account. Some members of the authorities warned that, in the face of double deficits, the change in change rates couldn’t be dominated out, especially if the risk-perception modifications in relation to the native financial system / monetary market.
“The annual growth rate of loans to the private sector stagnated and remained relatively stable in April and May, and was only slightly below the Q1 average. The annual growth rate of the domestic currency share had stopped at double-digit rates, but it slowed down slowly, mainly due to loans to households, whose dynamics, however, had benefited from the substantial contribution of new consumer credit. – Monthly amount – New historical altitude in May. The rate of change in foreign currency shares was somewhat positive in the same month, for the first time in seven years, solely as a result of corporate sector developments. The share of the Leu component of the total private sector loan portfolio had been rising and was 66.2 percent, ”BNR stated.
Forecasts
Members of the Government concluded that, according to the latest knowledge and analyzes, annual inflation rates are doubtless to remain close to the target range in the brief time period with small fluctuations, and to comply with the trajectory suitable with the medium-term forecasts revealed in the Might 2019 inflation report; it was 4.2 % in December 2019 and 3.three % at the finish of 2020.
“The availability elements might have less inflation in the coming months than in the previous forecast, given the sudden decline in pure fuel costs since July and the comparatively slower dynamics of gasoline costs. It was pointed out that the outlook for oil prices in the close to future remained uncertain and that current developments in VFE prices and future developments, as properly as the fiscal and budgetary measures that may come into pressure this yr, primarily brought on risks to the close to future inflation forecast. subsequently essential for medium-term inflation expectations. Some members of the authorities felt that the better-than-expected performance of domestic agricultural production in sure segments was potential, which affected the future dynamics of meals costs, "they stated
. BNR’s Board of Directors, Fundamentals would in all probability be considerably inflationary in the brief time period than expected, because general demand, wage prices and short-term inflation expectations are expected to exert considerably stronger pressures
. Economic fluctuations, authorities members stated economic growth is possible to decelerate in the second and third quarters, but remain comparatively more cautious after rising expectations in the first quarter, and quarterly dynamics are expected to decline progressively, together with weaker agriculture in the third quarter. In accordance to the evaluation, this outlook meant that the constructive output hole would nonetheless develop slightly larger than anticipated in Might. ”
Estimates of exterior imbalances and their short-term outlook recommend both the dynamics of domestic absorption and non-price competitors in the fast-paced Romanian financial system, as nicely as weakening euro space and international economic growth, as nicely as increased risks of commerce struggle and uncertainties around Brexit. Reference was also made to the financial conduct of the ECB and other giant central banks and to the probable angle of the central banks in the region, even in the midst of quicker inflation in these nations.
Towards this background, members of the authorities are as soon as once more demanding a balanced macroeconomic coverage in order to avoid overburdening monetary policy, which has no unwanted effects on the financial system. As well as, the importance of proper dosing and the fee of adjustment of monetary coverage stance was strengthened to anchor inflation expectations and to restore annual inflation rates to the inflation goal whereas making certain monetary stability. At the similar time, considering macroeconomic circumstances and domestic and external dangers, it was thought-about important to keep a decent control of money market liquidity.
In these circumstances, the BNR Board unanimously determined to keep the money market. an rate of interest of 2.50%, while maintaining strict control of the liquidity of the money market; As well as, the deposit fee remained unchanged at 1.50% and the Lombard credit limit was three.50%. In addition, the NBR Board unanimously determined to keep the present minimal reserve ranges for each credit institutions and overseas foreign money liabilities.
Money is not a source of wealth, for it simply provides as a medium of exchange for goods or services nor is money just paper bills issued by government. Wealth is created by goods and services produced by labor, land and capital. Money takes time to develop and be recognized as a legitimate source of exchange, for when an commodity is demanded in the marketplace by consumers and seen as highly desirable under the presumption of the Theory of Marginal Utility. Money isn’t determined by some decree of government, for when it is, it is only due to force and coercion. Government constantly disrupts sound market activity in the economy when it manipulates money and its value by inflation. It is about time to abolish fiat currency and the influence of central banks over the money supply and setting interest rates for the return to commodity money and natural interest rates.
Govt: destroying the basis of all interhuman relations
And in this way, again and again, governments have destroyed the markets of the world. And in destroying the markets they have gone so far as to destroy completely the system of money, making it necessary to develop a new monetary system.
What we have to realize is this: Every kind of human arrangement is connected in some way or other with money payments. And, therefore if you destroy the monetary system of a country or of the whole world, you are destroying much more than simply one aspect.
When you destroy the monetary system, you are destroying in some regards the basis of all interhuman relations. If one talks of money, one talks about a field in which governments were doing the very worst thing which could be done, destroying the market, destroying human cooperation, destroying all peaceful relations between men.
The Nationwide Bank of Romania (BNR) financial policy assembly of four July 2019 noted that the acceleration of economic growth in Romania was stronger than anticipated in the first quarter of 2019, while inflation remained at four.1%, nicely above the 2.5% goal. At the similar time, the members of the BNR government thought-about exterior economic imbalances to be a matter of concern, as nicely as greater tensions in the labor market.
”Annual inflation was flat at 4.10% in Might, considerably under the goal range. Throughout the first two months of Q2, it had been on the opposite aspect of the forecasts, slightly above the four.03% degree noticed in March. The rise was mainly due to the proven fact that the acceleration of core inflation and, to a lesser extent, the rise in VFE prices led to a partial decline in the costs of tobacco products, the annual dynamics of gasoline costs. and managed costs. The annual corrected CORE2 inflation price had grown quicker than forecasted and rose from 2.7% in March to three.2% in Might – the peak from September 2011 – in accordance to the minutes of the financial policy meeting.
The members of the government said that the advance cost was due to the improvement of service prices – solely partly due to taxes levied on telecom operators and the slight deterioration of RON in relation to the euro – and to the dynamics of processed food costs, which somewhat affected the rise in prices of some worldwide agricultural products
. Members felt that the improvement of primary inflation showed an upward strain on demand and wage will increase, in line with the measurement and strengthening of the economic cycle. economic growth and a gentle pick-up in labor prices. Other alerts have been seen as an improve in the annual growth price of industrial producer prices in the domestic market for shopper items that had grown in current months, and an improve in the GDP deflator in 2019 Q1; reference was made to short-term inflation expectations, which, in accordance to some studies, have just lately continued to rise, ”the document states.
In the first quarter, authorities growth was stronger than anticipated acceleration – to 5% from four.1% to 2018 This fall, as the sudden recovery of its quarterly dynamics is doubtless to point out a better advance in extraordinary combination demand than the forecast for this era
“Household consumption again turned the key to economic growth as expected, with a pointy acceleration in purchases of items and providers, adopted by a change in inventories, which was arduous to provide you with uncertainties about unequivocal economic conduct and thus economic growth in the final 4 quarters, ”BNR board members stated.
The proportion of gross fastened capital formation was unexpectedly restored to the constructive area solely due to the rise in new development work. In this context, the BNR famous that the impression of home demand on GDP dynamics elevated considerably, whereas internet exports had a much more adverse effect on the dynamics of imports of goods and providers at the similar time slower. export growth fee
”Consequently, the commerce deficit grew significantly quicker than in the similar yr earlier, which additionally led to a widening of the current account deficit every year, regardless of enhancements over the period. and secondary revenue balances. In this context, the members of the government felt that, given its measurement and improvement, and due to its economic structure, the exterior imbalances in the financial system have been much more worrying, ”the report is read
Growing labor market tensions
BNR Board members expressed their concern over high tensions in the labor market and harassed lately. successive will increase in the number of staff in the financial system and the report low degree of the ILO’s unemployment price in current months, as properly as the recruitment efforts of corporations.
“Due to the major difficulties in recruiting companies, the latter are increasingly focusing on digitalisation and automation – including the aim of increasing efficiency – or recourse to foreign labor, as recent wage cuts have shown in industry, especially in the automotive industry, and in research and specialized research,” BNR stated. [19659004] Wage pressures are subsequently expected to remain high, no less than in the brief term, bearing in mind that, in accordance to the double-digit improve recorded in April, common gross wage earnings as properly as common real internet wage revenue will decrease, albeit barely weakening. Q1
In April, the growth fee of industrial wages additionally remained at double-digit degree, as productiveness growth was not clear. Some members of the government stated that the scarce labor drive turned an obstacle to the sustainable economic growth of the new EU member states, also due to migration
Monetary circumstances
The members of the authorities burdened that the most necessary ROBOR rates are a lot larger than the Political Curiosity from Might to June, values which might be solely slightly lower than that recorded in April, but also the normalization of the common interest rate on interbank payments, which had shifted slightly under the rate of interest during that interval. deposit operations – a surplus of liquidity that has re-entered the money market
”As well as, the low progress of new deposit wages from April to Might, but particularly in Might, was referred to. altering rates of interest on new housing and shopper credit in households, most probably due to the entry into drive of the IRCC at 2.36. per cent. It was noted that from July 1, the IRCC degree had all of the sudden risen to 2.63 % and would remain constant during Q3. On this context, the uncertainties brought on by the introduction of a benchmark for shopper loans and its potential influence on the switch and angle of financial coverage and, finally, the general coverage framework, are part of the BNR
Board members additionally discussed the sharp downturn in the Euro / RON trade price at the end of Might and June At the beginning, along with the improvement of the region, marks the indicators of the future easing of the Fed and the European Central Bank. The ECB’s financial policy, which promotes the attractiveness of investments in this market. The next downturn in the foreign money pair – due to greater interest rates and the position of the euro area and the central banks of the area – was also underlined, and it was thought-about that the potential sharp improve in this development would contribute to medium-term inflationary risks, already undermining the disruption to the present account. Some members of the authorities warned that, in the face of double deficits, the change in change rates couldn’t be dominated out, especially if the risk-perception modifications in relation to the native financial system / monetary market.
“The annual growth rate of loans to the private sector stagnated and remained relatively stable in April and May, and was only slightly below the Q1 average. The annual growth rate of the domestic currency share had stopped at double-digit rates, but it slowed down slowly, mainly due to loans to households, whose dynamics, however, had benefited from the substantial contribution of new consumer credit. – Monthly amount – New historical altitude in May. The rate of change in foreign currency shares was somewhat positive in the same month, for the first time in seven years, solely as a result of corporate sector developments. The share of the Leu component of the total private sector loan portfolio had been rising and was 66.2 percent, ”BNR stated.
Forecasts
Members of the Government concluded that, according to the latest knowledge and analyzes, annual inflation rates are doubtless to remain close to the target range in the brief time period with small fluctuations, and to comply with the trajectory suitable with the medium-term forecasts revealed in the Might 2019 inflation report; it was 4.2 % in December 2019 and 3.three % at the finish of 2020.
“The availability elements might have less inflation in the coming months than in the previous forecast, given the sudden decline in pure fuel costs since July and the comparatively slower dynamics of gasoline costs. It was pointed out that the outlook for oil prices in the close to future remained uncertain and that current developments in VFE prices and future developments, as properly as the fiscal and budgetary measures that may come into pressure this yr, primarily brought on risks to the close to future inflation forecast. subsequently essential for medium-term inflation expectations. Some members of the authorities felt that the better-than-expected performance of domestic agricultural production in sure segments was potential, which affected the future dynamics of meals costs, "they stated
. BNR’s Board of Directors, Fundamentals would in all probability be considerably inflationary in the brief time period than expected, because general demand, wage prices and short-term inflation expectations are expected to exert considerably stronger pressures
. Economic fluctuations, authorities members stated economic growth is possible to decelerate in the second and third quarters, but remain comparatively more cautious after rising expectations in the first quarter, and quarterly dynamics are expected to decline progressively, together with weaker agriculture in the third quarter. In accordance to the evaluation, this outlook meant that the constructive output hole would nonetheless develop slightly larger than anticipated in Might. ”
Estimates of exterior imbalances and their short-term outlook recommend both the dynamics of domestic absorption and non-price competitors in the fast-paced Romanian financial system, as nicely as weakening euro space and international economic growth, as nicely as increased risks of commerce struggle and uncertainties around Brexit. Reference was also made to the financial conduct of the ECB and other giant central banks and to the probable angle of the central banks in the region, even in the midst of quicker inflation in these nations.
Towards this background, members of the authorities are as soon as once more demanding a balanced macroeconomic coverage in order to avoid overburdening monetary policy, which has no unwanted effects on the financial system. As well as, the importance of proper dosing and the fee of adjustment of monetary coverage stance was strengthened to anchor inflation expectations and to restore annual inflation rates to the inflation goal whereas making certain monetary stability. At the similar time, considering macroeconomic circumstances and domestic and external dangers, it was thought-about important to keep a decent control of money market liquidity.
In these circumstances, the BNR Board unanimously determined to keep the money market. an rate of interest of 2.50%, while maintaining strict control of the liquidity of the money market; As well as, the deposit fee remained unchanged at 1.50% and the Lombard credit limit was three.50%. In addition, the NBR Board unanimously determined to keep the present minimal reserve ranges for each credit institutions and overseas foreign money liabilities.
There’s a school of economics that likens the economy to a computer, one that we all power. Every time we buy something — or walk away from an offer — we feed data to the computer, which transmits this price- and demand-information from consumers to producers to financiers, so that demand can be met with supply.
The proponents of this theory admit that this “computer” produces a lot of waste as it buds off different solutions — new businesses, products and services — and then prunes away the ones that fail, but, they say, this waste is far less than the waste we’d experience if we shut the “computer” down and switched to a “planned economy.”
As Leigh Phillips and Michal Rozworski argue in their crucial, slim 2019 book “The People’s Republic of Walmart,” any large, complex economy tends toward high degrees of integration between firms, because the “computer” of the economy of buyers and sellers is balky, slow and often catastrophically unrealiable:
Here’s one way that the economy-computer fails: the “bullwhip effect.” That’s when a retailer experiences a rush of sales for a product and sells out, and so places a bigger order. The distributor notices that their retailers are raising their orders, so they place a bigger order with the wholesaler. The wholesaler then boosts their order with the manufacturer, who places bigger orders with their material suppliers and so on:
Just as the little wave at the start of a bullwhip turns into a succession of bigger waves, so that a simple twitch of the wrist can cause the tip of the whip to break the sound-barrier, so too can a transient increase in demand ripple up the supply chain, creating vast overproduction of goods.
This, in turn, leads to the other side of the bullwhip effect: a series of overcorrections that produces shortages. The retailer now has a shelf full of whatever their customers briefly wanted. But the surge is over, so those products just sit on the shelf. The retailer doesn’t just cut their order to the previous, normal level — they actually reduce their typical order, because they’re overstocked.
Once again, this effect ripples and expands through the supply chain. The distributor is oversupplied, so they cut orders to the wholesaler. The wholesaler cuts orders to the manufacturer. The manufacturer cancels its orders with its material suppliers — and now a bunch of miners or loggers get laid off.
This can actually destroy capacity. The airlines offered early retirement to all their senior pilots, cabin crew and planners during lockdown, and now they’re canceling hundreds of flights every day:
This is a disgusting ripoff, and the airlines could be handling it better, but they probably can’t lure all those employees out of retirement. The total American aviation capacity has been reduced, and it will take years to increase it.
InPeople’s Republic, Phillips and Rozworski describe how large capitalist firms operate a secret, behind-the-scenes planned economy. Monopolistic retailers like Walmart and Amazon don’t just place orders with large consumer packaged goods monopolists like Procter and Gamble and Unilever. These gigaretailers actually reach into the production schedules of their primary suppliers and schedule extra shifts of workers, increase the orders of material inputs, and so on. This is the only way to avoid the bullwhip effect and meet demand with supply without wild, capacity-destroying cycles of overshots and undershots.
This is basically a digital/cybernetic version of the Soviet planned economies, where different links in the supply chain explicitly coordinated with one another, not by making a series of bids and puts that transmitted supply and demand information, but by sending actual information about what they’d need and when. It’s a linear descendant of cybernetic projects like Salvador Allende’s Cybersyn, but controlled by unelected billionaire commissars instead of democratically accountable regulators and legislators:
As the aviation example shows, we are living through the bullwhip effect today. Writing in Freightwaves, Craig Fuller makes a compelling case that the inflation crisis could rapidly swing the other way, as slow-moving logistical chains and slow-circulating demand information leads to an oversupply:
Retail inventories are extremely high. Big box retailers’ warehouses are overflowing with “large discretionary categories, such as furniture and household goods.” Meanwhile, freight order have come to a screeching halt, as major retailers cancel their shipping reservations because that inventory isn’t moving.
The trucker shortage is over. The typical springtime surge in trucking demand was nowhere to be seen — instead, there was a decline in trucking demand.
Used car demand just experienced its biggest drop in two years. Prices are plummeting:
Same for lumber. Lumber commodity prices tanked 30% over the past month, (from $1,252 to $949 per thousand board feet).
Domestic intermodal freight (going from rail to truck or vice-versa) is slowing. Prices are dropping. We just hit an all-time low in intermodal freight rates — it’s 21% cheaper to ship intermodally than by truck.
Fuller: ‘Prices for freight will come down. Supply chain bottlenecks will ease. What were recently inventory shortages are now gluts, and will likely result in price discounts, not increases. This is a late-stage supply chain correction.”
Fuller says that this bullwhip cycle was exacerbated by shutdowns in China, and there is obvious truth to this, but I think it’s worth looking further back up the causal chain to understand inflation.
Recall that the capitalist planned economies of The People’s Republic of Walmart depend on monopolies — the reason Amazon and Walmart can reach into P&G and Unilever’s production systems is that they are all giant, industry-dominating firms who face little direct competition.
This is the same dynamic — monopolism — that allows big companies to exploit our fear of looming inflation to hike prices, something their CEOs actually boast about on their shareholder calls:
Monopolism — and its handmaiden, finacialization, which rewards firms for issuing debt and gambling on complex derivatives rather than making things — is also behind the dismantling of US industrial capacity and offshoring it to China, making the US economy dependent on the choices of CCP bosses half a world away.
The less a country can make on its own, the more vulnerable it is to shocks on the other side of the planet. The more the markets reward emptying out buffer stocks, casualizing workers, and selling off your physical plant, the more your company is at risk of failing if anything goes wrong, anywhere.
The story that inflation is “too many dollars chasing too few goods” puts undue influence on “too many dollars” and not enough on “too few goods.” The 40 year neoliberal experiment in letting the economy-computer run itself was a sham from the start, a way to trade democratically accountable market structuring through public regulation for secret, unaccountable market structuring through back-room deals between monopolists.
The idea that we should fix “too many dollars” by taking away workers’ jobs and cutting their wages so they can’t afford the necessities of life ignores the possibility that we can work on “too few goods” instead — by onshoring production of key inputs like lithium, and by shortening supply chains so there’s fewer ripples in the bullwhip’s path.
Long, brittle supply chains have given us the bullwhip effect from hell. Yes, there are energy shortages as a result of Russia’s invasion of Ukraine, but there’s also no onshore capacity for solar panel production, leaving Americans to bid against desperate, Russian-gas-starved Europeans for Chinese panels.
As with used cars and furniture and other commodities, solar panels are — even now — bunching up in the supply chain between China and the EU, with an overcorrection likely to follow.
Here in the USA, we could face deflation — after all, if lumber prices are dropping 30% per month, why wouldn’t you delay your project for another month and see if you can pick up another 30% discount?
If the economy only “works” when working people have to choose between food, fuel and health care, when bosses can reduce your pay and cut your hours because you can’t get a job elsewhere, then the economy doesn’t work at all.
Focusing on monetary policy — rather than productive capacity — is a trap that the wealthy set for us. The tell is obvious: “too much money creation” is never a problem when it’s financing military spending or tax cuts. The rich know that the true predictor of an economy’s health is its ability to produce goods, and fretting over its production of money is largely a distraction.
[Image ID: An icon of a person cracking a bullwhip; their head has been replaced with the frowning head of Uncle Sam. Each ascending peak of the whip’s passage has a different icon; in order: ATM, shop, truck, warehouse, shipping containers, container ship, factory. In the background is a blurred out supermarket aisle, stocked high with goods.]
Many have argued that banning or restricting use of cash will reduce criminal transactions within the underground economy. However, just how much underground economic activity constitutes truly harmful criminal acts, as opposed to productive activities that evade taxes or other regulations but nonetheless increase social welfare, is unclear. Further, the likely effects of a cash ban on genuinely predatory activities such as extortion, human trafficking, drug-related violence, and terrorism are extremely difficult to quantify.
Advocates of phasing out currency also see it as a means of allowing monetary authorities to implement negative interest rate policies. Negative rates could then be imposed on all money holders, acting as a direct tax on their money monetary balances. The necessity of this tool is questionable at best – there are only three instances in the past quarter century where negative interest rates could possibly have been helpful, hardly meriting the extreme measure of eliminating cash. Negative interest rates in a cashless economy end up giving an unelected regulatory body discretionary power to tax money and would require massive restructuring of financial institutions and norms.
It is the advocates of restricting hand-to-hand currency who bear the burden of proof for such an extensive reshaping of the monetary system, no matter how cautiously or slowly implemented and no matter whether all cash is eliminated or just large-denomination notes.
