Back on the 2nd of February I discussed a disturbing development in the world of monetary policy and central bank action.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

Well maybe not only criminals as this next bit from the Financial Times shows.

The €500 note, beloved by gangsters and Greek savers, is now being investigated for ties to terrorism.

So the official story is to tell us that it is being done to reduce crime and terrorism and if you want a job at the ECB all you need to do is to think up another excuse along those lines!

The ECB announcement

Yesterday there was a further announcement from the ECB.

It has decided to permanently stop producing the €500 banknote and to exclude it from the Europa series, taking into account concerns that this banknote could facilitate illicit activities. The issuance of the €500 will be stopped around the end of 2018, when the €100 and €200 banknotes of the Europa series are planned to be introduced.

What is an “illicit” activity?

There is an issue here and it comes from the FT quote above which mentions Greek savers. What was illicit about them wanting 500 Euro notes? Well they took the money out of the banking system and higher denomination notes are the easiest way of doing that. Indeed those the bankers who run the central bank will no doubt have noted that the money in fact has not gone back. The ECB still has to deploy some 69.1 billion Euros of ELA (Emergency Liquidity Assistance) in Greece and yesterday we got an update on the position of some deposits. From Kathimerini.

In March there was an 182.3-million-euro drop to 41.2 billion euros, while since July 2015, just after the government introduced capital controls, the decline has come to 6.6 billion euros. The annual decline from a year earlier (March 2015) is 25.9 billion euros.

Is that the illicit activity the ECB wants to stop? After all in Greece a bank run caused trouble for it which is significant when you consider its small proportion of the Euro area monetary system. What about Italy for example where the new Atlas bank recovery fund is being used up at a rather expresso rate? There is also Portugal where even the Novo Banco turned out to be old school and caused trouble for the Bank of Portugal. If we see the problems raised by little Greece ( which are ongoing…) then adding even Portugal would give the ECB quite a headache.

Is the 500 Euro note used for crime?

The largest of the ECB national banks does not seem to think so. From the German Bundesbank annual report.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity……… the volume of notes devoted to such transactions is unknown and would be extremely difficult, if not impossible, to estimate.

As you can see the evidence simply does not exist which is awkward to say the least for those who parrot the establishment line. From Jon Henley in The Guardian.

€500 ‘Bin Laden’ banknotes to be axed

Indeed there is more.

The €500 note, reportedly so prized by criminals that it trades above its face value

You might have though that the Bundesbank might have spotted this or indeed the other national central banks as it says they have no evidence either. Still I suppose “reportedly” offers a get-out cause. Oh and I thought that Bin Laden was supposed to be no longer with us.

Evidence for my case

By contrast there actually is evidence for my argument that this is being done to protect the banks. From the Bundesbank again.

for instance in the wake of the Lehman crisis that broke out in September 2008……….between October 2007 and October 2008, the value of €500 notes in circulation went up by around €40 billion.

So the main driver of any extra demand for 500 Euro notes was fears over the banking system. Is that a new version of an illicit activity?

Why the 500 Euro note?

Back on the 2nd of February I explained why it was in the firing line.

It was only on Friday that I pointed out that according to Gabriel Sterne that via the 500 Euro note then you could hold the equivalent of one billion US Dollars in the smallest possible space. In case you are wondering it is 3 metres cubed as opposed to 12 in US Dollars, 16 in Japanese Yen and a bloated 21 in UK Pounds.

Negative Interest-Rates

Many of you will be thinking that any war on cash will start this way as access is withdrawn. It is also clear that this is being implemented by a central bank which has negative interest rates ( deposit rate of -0.4%) and via QE has driven many bond yields negative as well.

As you can see the world of negative yielding bonds has found something of a home in the Euro area and I hope Italain readers will forgive my wry smile at the reality of negative yields there. But wait it is not just government bonds anymore as Mario Draghi sends out his buyers to chomp like Pac-Men on corporate bonds as well.

Did not know this -> Roughly €60 billion in corporate debt carry a negative yield (via BofA) pic.twitter.com/ssV5bhICpb — Antony Filippo (@Vconomics) May 4, 2016

Those who find themselves increasingly facing a world of negative interest-rates and yields are likely to find even a 0% return attractive. For central bankers as the Bundesbank points out this present a problem.

As long as cash exists, shortterm interest rates can never be pushed far into negative territory…….. Hence the existence of cash constitutes an effective lower bound for short-term interest rates.

Somewhere approaching -2% I think.

Comment

There is much to consider in this as of course most of us have chosen to use cash less and electronic money more. This has been illustrated by this from the boss of Mastercard in Business Insider.

“By the time we get to another generation, 30 years down the track, will there be any cash? I very much doubt it. The idea of carrying coins — 2p, 1p, 50p all cluttering up your pocket — it will be an anachronism. It will seem as antediluvian as carrying a pouch full of gold.”

I am not sure about a 500 Euro note cluttering up your pocket and he is obviously pushing his company’s line but the later example of contactless paying on London Transport is valid. But there is a world of difference between choosing to do something and being made to as all observers of human nature and behaviour will be aware of.

Also as the group pushing for negative interest-rates are usually those who advocate helicopter money there is a conceptual issue. More helicopters will be required for the drop! That I supposed will be badged as a boost for GDP. Also as the main store of large helicopters is the UK RAF that alternative route may be blocked next month.

Oh and in time there may well be another issue as Blake Lavak pointed out to me on Twitter.

@ notayesmansecon to be replaced by the Euro 1000 banknote as soon as Draghi gets his beloved inflation, surely. Remember the lira.

Who would have thought that Pink Floyd would have written the central bankers theme song?

Money so they say is the root of all evil today.

Also how would they deal with Wu Tang Clan?

Cash Rules Everything Around Me

C.R.E.A.M.

Get the money

Dollar, dollar bill y’all

That is before we get to the US $2 million album which is probably idealised and considered illegal by central bankers at the same time.