Peter's Perspective
29th April 2016 by Peter Churchouse

Worthless Cash.

I travel a lot. And any time I’m on the road, before I leave, I have cash in the currencies of all the countries I’ll be visiting delivered to my office.

Very few people do this.

Most folks these days have full faith in their ability to pull out cash from an ATM in whatever country they are visiting.

That is not my expectation. I don’t count on being able to find an ATM when I need it. And I don’t necessarily expect that ATM to necessarily deliver me cash.

Just about everyone I know has experienced their ATM cards not working in foreign countries.

And changing money at a foreign exchange booth in the airport is like volunteering to get mugged.

No, I always prefer to carry a bundle of hard cash that I know will pay for any taxi to my destination, some meals, some provisions or shopping as needed.

Every trip ends with at least some amount cash left over, which gets stashed safely at home for the next trip.

Over the years this box has become a treasure trove of notes of various hues, sizes and conditions. It houses all sorts of pesos, rupiah and rupees of various kinds, dong, renminbi, yen, pounds, various kinds of dollars, euros, Swiss francs – you name it.

Before any trip the box is looted for appropriate currencies.

My trip last week however served as a reminder of just how fragile and temporary paper money really is.

I was a guest on my friends 167-foot motor yacht, travelling through the Mentawai Islands west of Sumatra.

Afterwards I spent a couple days in Jakarta, Indonesia’s capital, doing some meetings, kicking the tyres on a couple of companies… the usual boots-on-the-ground stuff.

On day two of our little expedition, we anchored in a quiet bay close to several world class surf breaks.

In less than half an hour, we were visited by five or six dugout canoes with a range of young folks plying their wares – mostly items carved in local softwoods.

Wooden decorative fish, wall plaques, pieces shaped like surfboards with the local islands carved into them, little boxes – the sort of stuff you would feel like a sucker buying in a shop or market, but are happy to do so from the creators of such handicrafts, floating around in a tropical paradise.

Indonesian Craftsmen Boat sale

After lengthy negotiations, a price was agreed on some items I had no idea what I might ever do with.

I pulled out my stash of Indonesian Rupiah and counted it out.

The young carver took the cash and inspected it… a furrowed brow and a quizzical look on his face. After a brief conversation with his friends, the cash was handed back to me with a shaking head.

Their verdict was unanimous. My cash was not acceptable.

Was I carrying funny money?

I checked it against notes that my friends had, and they were surprisingly different. My notes were blue, theirs were red. On closer inspection, I found that my notes had a date stamps of between 2000 and 2003. Theirs were dated within the last four or five years.

The new notes were printed in the wake of the Asian financial crisis which erupted in 1997 when the Indonesian currency depreciated by around 80% against the US dollar.

Subsequently, back in “civilisation” I tried to exchange these notes at a bank, only to have them politely but firmly rejected.

Subsequently I learned that my notes were replaced by new notes in 2004, and my older notes have not even been accepted legal tender since 2008.

BUT I am told that if I take them to Bank Indonesia, the country’s central bank, by the end of January 2018 I might be able to exchange them for money of the day.

To me, this episode was a small yet potent reminder of the fragility of fiat currency.

Look at where we are right now in the global money game.

It is not just about developing world economies like Indonesia doing dubious stuff with their currencies.

And look at where we are heading in this new era of negative interest rates.

Negative interest rates mean owning money (in the bank) costs money.

This provides an incentive to simply stash that cash under the mattress rather than pay a bank to store it for you.

The incentive isn’t just there for individuals, as Bloomberg last month noted,

Munich Re [one of the world’s largest reinsurance companies] is resorting to the equivalent of stuffing notes under the mattress as the reinsurer seeks to avoid paying banks to hold its cash under the European Central Bank’s negative interest rates.

The German company will store at least 10 million euros ($11 million) in two currencies so it won’t have to pay for the right to access the money at short notice, Chief Executive Officer Nikolaus von Bomhard said at a press conference in Munich on Wednesday. “We will also observe what others are doing to avoid paying negative interest rates,” he said.

In a scenario where negative rates become so punitive that individuals and companies convert digital money into paper, then banks can’t do what they’re supposed to do – i.e. provide loans to people who want to invest, funded by people who have surplus cash.

Will we ever find ourselves in such a predicament?

I realise that many people scoff at the idea. But the last few years have taught us that anything is possible.

How many of us predicted that USD 8 trillion of sovereign debt globally would yield you less than zero in 2016?

But what happens if there is a squeeze on cash? (i.e. a rush to convert digital money to paper)

Is it even possible? And what would the government do?

One possibility is to simply say that after XYZ date, the notes under your mattresses are no longer legal tender. So you better get them into the bank.

It is becoming increasingly tempting for governments to look to do away with paper money altogether.

Negative interest rates are part of the reason.

Cash allows you to avoid paying negative rates that governments want you to bear.

This is a problem for them. So what to do? Three sources of solution come to mind.

One, eliminate cash altogether – do away with it.

Two, tax the use of cash in all commercial transactions.

Three, do away with the fixed guaranteed rate that exists between the currency and central bank reserves, deposits.

This paves the way for government to devalue your cash.

Moreover, paper money allows anonymity. It allows discretion.

Better to make every single transaction an electronic transaction which is tracked and reported to your respective government.

All the better to tax you with and track your every financial move. None of this anonymous cash stuff!

Negative interest rates are bringing such polices much closer to a reality. This is not some economic science fiction story anymore.

We need to face a reality here… the post-GFC experience has completely shattered conventional monetary theory.

Easy money has NOT produced the results that central banks believed it would – growth and inflation. It just hasn’t happened.

But coming back to the currency matter.

Did you know that French residents as of September last year are not allowed to pay cash for any item from a business in an amount in excess of €1,000?

Say you want to buy a cheap second hand car from your local car dealer for say €2,000.

By law you can pay only €1,000 of that amount in cash. The balance has to be via a bank transfer of one kind or other – a cheque, online bank transfer, a credit card even.

But not in cash. It is now illegal.

In France any cash withdrawals from your bank in excess of €10,000 in any single month are required to be automatically reported to a government agency Tracfin.

Norway’s second largest bank no longer accepts or handles cash.

And Sweden is openly interested in completely eliminating the use of cash altogether.

These are wealthy, developed countries!

Highly respected economists such as Harvard’s Kenneth Rogoff have in effect advocated such policies.

Much of the impetus for this kind of control over how you and I spend our hard earned money started after the 9/11 event in the US.

The U.S. government (and others) understandably wanted to track how terrorists funded themselves and moved money around the world to pay for the mayhem they were committed to pouring forth.

But very quickly this has morphed from being an initiative to thwart terrorism to become now a creeping, all pervasive mechanism for controlling and monitoring all of our money, terrorist related, criminal or not.

It is just as much about taxes as terrorism and crime. It is now becoming more about tracking of our financial lives than it is about criminality.

Just as governments can and want to identify pretty much your every move, your every phone call, your every email, your every tweet, Weibo, Snapchat, Whatsapp, now they are moving to use technology to monitor your every single financial transaction.

And given that you will be required to undertake ALL financial transactions with such instruments (not cash), then your friendly government will have total access to every item of spending and income that you ever have had.

I do realise that this sounds quite extreme, but negative interest rates and the creeping crack down on cash are both realities.

And in the upcoming edition of The Churchouse Letter we’ll be outlining our recommendations for exactly how to navigate these unchartered waters.

Good investing,


P.S. The scale and scope of today’s negative interest rate environment is completely unprecedented in all recorded human history.

In the upcoming edition of The Churchouse Letter we tackle this head on and provide key recommendations for everyday investors.

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