Previously published at Flag Theory
There is a war on cash, and the reason is NIRP. Here is what you can do.
The European Central Bank is considering banning €500 notes, as its president Mario Draghi says cash is "increasingly an instrument for illegal activities," while former United States Treasury Secretary Lawrence Summers has suggested that the US do away with the $100 bill. Limits on cash transactions are spreading across the developed world. Italy has made it illegal to pay more than €1,000 in cash for anything, and France has cut its limit from €3,000 to €1,000. Convinced yet?
British merchants must first register with the tax authorities before accepting more than €15,000 in cash. Germany's Deputy Finance Minister Michael Meister recently recommended a €5,000 limit on cash transactions, while Deutsche Bank's CEO John Cryan last month predicted that physical cash won't be around in 10 years.
What is ZIRP/NIRP?
Why are politicians and central banks waging a war on cash? The reason is ZIRP, or NIRP.
Zero or negative interest rate policy - ZIRP or NIRP, respectively - are macroeconomic concepts describing conditions with very low or negative interest rates. Since 2012, central banks in Denmark, Switzerland, Sweden and some eurozone countries have cut rates to below zero, which means that commercial banks must pay the central banks to park the cash that they are holding for clearing purposes. And it isn't just European countries that have lowered interest rates so dramatically - Japan has held a negative rate on commercial bank deposits as well.
The intent of the negative interest rates is to get commercial banks to incentivize the velocity of money, and thus stimulate economic growth. In turn, commercial banks pass on negative interest rates to clients. But negative rates are a profound reason for people to hoard cash instead of keeping the money in a bank account, where it will quickly decay. This only serves to exacerbate the problem of low velocity of money and economic stagnation. As a result, governments need to ban cash, claiming that it facilitates criminal activity, so as to justify the elimination of something that people would otherwise hold.
Japan (the canary in a coal mine for countries with significant debt-to-GDP ratios) has also been selling negative interest bonds for several years. This means that they are offering an investment that is almost certainly guaranteed to pay back less than the principle investment.
Obviously, banking is critical at this point in the global infrastructure. It's not going away overnight, but fintech is disrupting the banking sector, and it's likely that banking will look very different in coming years. For now, keeping your money in a bank with negative rates is a losing proposition.
What can be done?
Here are five actionable methods that will help you avoid the cash seizure and protect your money, through an internationalization strategy that avoids negative interest rates offered by banks, and hedges against systemic risk and economic collapse in a single country.
- Gold, Silver, and Precious Metals
Switzerland, Singapore and Hong Kong are probably the best places to store precious metals (besides your backyard). You will likely want to select a holding facility outside of the banking sector, so that it will not included on the bank's balance sheet. There is no capital gains tax in these countries, and they have international airports and a relatively neutral stance internationally.
- Offshore Bank Accounts
Despite the negative interest rate environment, some banks do offer interest-bearing accounts. Oftentimes, these are in emerging markets, and the rates can fluctuate often.
Each bank has the ability to determine the rate that they will pay. Therefore, choosing the right bank in the right jurisdiction can make all the difference. Here is a list of over 50 offshore banks, many of which can open an account for you while you remain right in the comfort of your own home.
Holding funds in another currency is a hedge made available by many offshore banks. Two preferred alternative currencies are the Hong Kong dollar and Singapore dollar. Banking in both jurisdictions is exceptional, and their governments run a tight ship, with each country running at budget surplus. Both Hong Kong and Singapore are routinely ranked in the top three each year among places to do business, and as previously mentioned they're not bad places to store silver and gold as well for those excess profits you change from fiat to phys.
Digital currency that allows you to hold the private keys is very comparable to cash.
Just as anyone has the right to hold or spend cash (rather than keep it in a bank account, where it will slowly decay due to ZIRP or NIRP), a digital currency controlled by private key cryptography gives complete control to the holder of the keys.
There are many different cryptocurrencies out there, each with its own underlying codebase and group of miners who secure the network by performing difficult mathematical equations. While there are hundreds of different cryptocurrencies available, most of them are but a clone or fork of another coin. Only a few actually hold their own merits, while the vast majority will fail, being absent of any merit whatsoever. I am particularly bullish, and would suggest to anyone interested that they should research more on Bitcoin, Ethereum, and Dash which are currently ranked No. 1, 2, and 7, respectively, in terms of market capitalization.
If you are interested in Flag Six of Flag Theory, you can check out our pillar content here.
- Physical Land
Physical land - preferably that which is arable, and has water and mineral rights - is a viable alternative to fiat currency, as land will likely appreciate over time (they certainly aren't making any more of it). In the US, you can hold land using a land trust and a trustee who will keep the land held for your benefit, allowing you to remain almost entirely anonymous and private.
In some countries outside of the US, a plot of land is oftentimes non-reportable for tax purposes. Essentially, by buying physical land, you are trading fiat currency - which as discussed earlier, is decaying in value, and faces the threat of government seizure, inflation, hyperinflation, deflation, stagflation - for something physical and tangible, with real utility.
There is also another wild card when it comes to purchasing land: many countries offer permanent residency or citizenship to foreign investors who buy land, providing that they meet certain criteria. If you do decide to take up this opportunity, you will have not only parlayed your fiat dollars into land, but also managed to secure a meaningful travel document and alternative citizenship.
- Permanent Residency or Second Passports
Your ultimate insurance and hedge against instability in any one country is the ability to freely move and permanently reside in another jurisdiction.
If you had made a land investment in Malta, Greece, Cambodia, Antigua, St. Kitts, Grenada, or Dominica, you would have found yourself with a fully fledged citizenship and passport in as little as 3 months. Countries like Malaysia, Thailand, Portugal, Spain, the US, and Canada also have residency-by-investment schemes that can eventually lead to citizenship after a few years. You can compare all permanent residency and second passport schemes head-to-head at Passports.IO
This is the world we live in, with certain uncertainty ahead in the financial system. For decades, bankers, corporations and governments have been fattening themselves off cheap printed money, and becoming increasingly over-leveraged and insolvent through a debt super-cycle. Now, it's up to you to take action to secure your own financial future.