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Posts Tagged ‘negative interest’

Doug Casey on the Disturbing Trend to Tax Savings and Eliminate Cash

Posted by M. C. on April 2, 2020

Government is a parasite, it’s not your friend. It’s a dead hand on society. Propaganda has made people think it’s necessary. Many people love the government, however, because it gives them free stuff that’s taken from some and given to certain voters.

https://internationalman.com/articles/doug-casey-on-the-disturbing-trend-to-tax-savings-and-eliminate-cash/

by Doug Casey

International Man: Let’s start with the basics. What exactly are negative interest rates? Could they exist in a free market without state intervention?

Doug Casey: Right now, over $17 trillion of bonds, and a lot of bank accounts—especially in Europe—are offering negative interest rates. It’s something that can only exist in Bizarro World, something that’s really a cosmic impossibility in a normal world. It’s especially true since almost all the world’s banks are zombies—bankrupt. Fractional reserve banking—which is only possible in a world where central banks control the money supply—is intrinsically unsound.

The economy is head over heels in debt. If things slow down—as they do now, due to the hysteria over The Virus—lots of loans will go into default. It won’t be because of The Virus itself, however. Coronavirus is just the pin that broke the bubble.

Negative rates are a political phenomenon, not a market phenomenon. It’s quite amazing to see bankrupt governments issuing negative rate bonds. It’s what’s been called return-free risk.

The whole financial world is in a bubble because of the trillions of currency units created since the crisis unfolded in 2008. Bonds are in a hyper bubble—the worst possible place to be. They’re a triple threat to capital—interest rate risk, currency risk, and default risk. And, again, at negative rates, they are truly a return-free risk.

Negative interest rates are being enforced by governments and central banks for several reasons.

First of all, governments are so head over heels in debt that they can’t afford to pay actual market-based interest rates.

If the US government, for instance, was paying even 6%, historically a more or less normal interest rate, on its $23 trillion of debt, that would be about $1.5 trillion a year in interest. That, just by itself, would more than double the current annual deficit.

That’s one reason governments like negative interest rates: it disguises their bankruptcy. They live on borrowed money. Tax revenues are nowhere near adequate to fund their spending—not to mention that spending is going to skyrocket while their revenues plunge for the foreseeable future.

Another reason governments like negative interest rates is that they encourage people to consume as opposed to save, which is also bizarro-world stupid. The only way you grow wealth is by producing more than you consume and saving the difference. The problem is that in today’s world the way to save is in currency in a bank account. If the currency loses value simultaneously with negative interest rates reducing the number of units, savings will drop.

If you’re penalized for saving, you’re going to do less of it. You’re going to go out and spend the money now on a bigger house, a new car, or perhaps a wild party. This is one reason why Third World countries never progress on their own. Their currencies are unstable, worthless, and not worth the trouble of people saving them. So, they never develop a capital base. It’s why poor people with bad habits stay poor.

From every economic point of view, negative interest rates are pure destruction. They make everything worse for prudent savers and better for profligate borrowers. But printing money and lowering rates are the only things that central banks can do to ward off a deflationary collapse. Their actions will only deepen and lengthen the Greater Depression.

International Man: Exactly. By using the force of government to create the conditions for negative interest rates, central banks are giving the signal that the cost of money is less than nothing. They are really stealing the prosperity of the future.

Doug Casey: That’s right. People have to realize that the government does not represent “we the people”. The government is a discrete entity, as separate from society as General Motors, General Electric, or Google. They have their own interests. There’s no “us” benefitting from all this.

Government is a parasite, it’s not your friend. It’s a dead hand on society. Propaganda has made people think it’s necessary. Many people love the government, however, because it gives them free stuff that’s taken from some and given to certain voters.

International Man: President Trump has repeatedly called for negative interest rates. Do you think the US will see negative interest rates?

Doug Casey: Anything is possible because the US government has its back up against the wall. Worse, the people themselves think government is a magic cornucopia. They all want it to “do something.”

And they’re capable of doing absolutely anything. Why? The people employed by the US government and the Fed actually believe the Keynesian claptrap. It’s a secular religion to them.

Plus, Trump himself is truly an economic ignoramus. Now, as I say that, let me hasten to add that the good thing about Trump is he’s a cultural conservative. That’s why he gets a tremendous amount of support from the red counties. I think that that’s fine, but from an economic point of view, he’s dangerous. He’s an authoritarian with a touch of megalomania, and he’s capable of anything.

Anything’s possible in this country at this point. Not least because Boobus americanus seems to want “strong leadership.”

International Man: Since negative interest rates can only exist from state intervention, they are just a euphemism for a tax on savings. What impact do you believe they will have on the economy as they discourage savings and capital formation?

Doug Casey: The longer it goes on, the sooner the countries that have negative interest rates are going to start looking like Third World countries. One of the reasons Third World countries are backward is that they don’t have any domestic capital. Why not? Because there aren’t domestic savings. And it takes capital to build things.

Governments are actually destroying the foundations of society with their current policies. It will take a while to happen in the West, because of the tremendous amount of capital that’s been accumulated and saved up over hundreds of years. But sure, they can absolutely destroy it. The Romans did it 2,000 years ago. The Venezuelans and Argentines are showing how to do it today.

That said, borrowed money and artificially low interest rates feel really good at first.

If I borrowed $1 million tomorrow morning, I could have a wonderful party for the next year. My standard of living would be artificially higher for a while. But when the time comes to pay it back, it’s going to be genuinely lower, and for a long time.

That’s exactly what the West is doing right now, living out of saved capital and mortgaging its future. That’s what negative interest rates encourage.

International Man: How will negative interest rates impact the average person? Will bank deposits be subject to negative interest rates in the US?

Doug Casey: Well, it would be stupid. When I use that word, incidentally, I mean “showing an unwitting tendency to self-destruction.” A pity, but it could happen.

Artificially low interest rates—or perhaps negative interest rates—drive people out of cash and liquidity and into speculating in the financial markets. It can affect the average person positively for a while, maybe artificially doubling the size of his retirement nest egg. That is, until the bubble bursts, and he loses a very real 90%. It’s a disaster.

There are absolutely no good consequences to manipulating interest rates in either direction.

Money is the lifeblood of the economy, and interest rates are the price of money. It practically guarantees that the Greater Depression is going to be worse than even I thought it would be.

International Man: Do you think it’s possible that people will pay to have their money in a bank account?

Doug Casey: Well, if we had a sound banking system—which we don’t because it’s a fractional reserve system—there would be two very separate and distinct kinds of bank accounts. They’re separate businesses, actually.

One with demand deposits where you pay the bank to store your money safely, paying for the privilege of writing checks against it. In the past, you had to pay banks for the privilege of storing your money—gold—and writing checks against it.

The other kind of bank account is a time deposit, which is totally different. That’s where you leave your money with the bank for a certain period of time at a fixed interest rate, so the bank can lend it to somebody for a fixed interest rate—for a matching amount of time.

Let’s say they give you 3%, and they lend it for 6%, capture the 3% spread as their profit, risk reserves, and so forth. That’s the way a time deposit bank account should work. And that’s how it worked before central banking and fractional reserves.

Historically, you paid the bank money for a demand type deposit, and you got a return—with some risk—on a time deposit. But those distinctions have been totally lost. Banks now lend out demand deposits. It’s equivalent to Allied Van and Storage lending out your furniture.

International Man: How does the growth of negative interest rates coincide with the trend towards eliminating cash?

Doug Casey: They dovetail perfectly. They go hand-in-glove with each other.

Countries all around the world are moving towards eliminating cash. For example, in Sweden, it’s very hard to get cash. In China, it’s very hard to get cash. Everybody transfers funds electronically, without any form of physical money. All money is in digital bank accounts. A negative interest rate of, let’s say, 1% means that you’re really being taxed 1% in addition to everything else.

It’s even worse than that, though, because when cash vanishes, you have zero privacy. Everything has to go through your bank account. They know precisely what you’re buying, what you’re selling, from whom, what you own—unless you’re going to barter, the way things were done in prehistoric times.

It‘s a catastrophe from the point of view of personal freedom, and another reason why everybody should have a significant store of gold coins, preferably small ones, a quarter ounce or less. And silver coins, too. Silver is a great bargain right now, at a roughly 120:1 ratio with gold.

If they eliminate cash and we go to an entirely digital currency, they‘re in total control of you, because you won‘t be able to do anything, go anywhere, or buy anything without the direct or indirect approval of the authorities.

International Man: What can people do to protect themselves?

Doug Casey: There are two things you can do at this point.

One, you should buy precious metals, in your own possession, or stored securely in some offshore location, so that you‘re diversified politically and geographically as well.

Second, now is an excellent time to speculate in gold stocks. With gold in the $1,600 area, every active gold mine in the world is coining money. In fact, their margins are increasing with the collapse of oil prices, since fuel is a major cost, on the order of 20% for most mines.

And at some point soon, fund managers who now don‘t even know that gold or gold stocks exist, are going to pile in to gold stocks.

There are so few of them, and the market caps are so small, that it‘s going to be like trying to funnel the contents of Hoover Dam through a garden hose. Mining is a crappy business, but right now, it’s a super speculation.

There are no guarantees, but it‘s as good a speculation as I can think of right now.

Those are the two things that you should own. And they both revolve around gold.

Editor’s Note: Unfortunately, there’s little any individual can practically do to change the trajectory of broke governments in need of more cash. There are still steps you can take to ensure you survive the turmoil with your money intact.

New York Times best-selling author Doug Casey and his team just released a guide that will show you exactly how. Click here to download the free PDF now.

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David Stockman on What an Audit of the Federal Reserve Could Reveal

Posted by M. C. on January 4, 2020

The point is, inflation targeting is one of the greatest efforts at misdirection that a government agency has ever concocted. This gives them a license to constantly intervene and meddle in the financial markets—pointlessly fiddling with the whole price structure of debt and equity assets.

There’s about $1.5 trillion of excess reserves in the banking system.

So, they’re paying out to the banks upwards of $23 billion a year in order to keep excess funds on deposit at the Fed, rather than putting it to work in the macroeconomy.

How stupid is that?

https://internationalman.com/articles/david-stockman-on-what-an-audit-of-the-federal-reserve-could-really-reveal/

by David Stockman

International Man: Trump is calling for a weaker dollar and negative interest rates. What does this tell you about Trump’s understanding of economics?

David Stockman: It tells you that he has no understanding of economics at all!

I think Trump is not even a primitive when it comes to economic comprehension. His views are just plain stupid when it comes to exchange rates. He seems to think it’s some grand game of global golf, where the strongest player gets the lowest score.

What sense does it make tweeting as he did recently in attacking the Fed?

According to Trump, the US economy is so much better than the rest of the world’s economies, and therefore we should have the lowest interest rate as a result. It has nothing to do with economic logic or with principles related to sound money. I think he’s just thrashing about trying to create a warning that if things go badly, it’s the Fed’s fault.

The whole narrative on the economy is wrong…

Even John Maynard Keynes himself said that you ought to try to balance the budget and even generate a surplus at the top of the cycle.

We’re right in the middle of the worst kind of economic policy in my lifetime, anyway—going back to the 1960s.

Trump is completely clueless about how we got here, how he got here, and where we’re going…

International Man: The Fed recently said it could increase its tolerance for inflation before it considers raising interest rates. It would be a major policy shift. What’s really going on here?

David Stockman: I think what’s going on is that they’re looking for another excuse to capitulate to Wall Street next time it has a hissy fit because it believes the Fed owes them another shot of stimulus and more liquidity.

Let’s address the underlying issue now. The 2% inflation target is absurd to begin with. There is no historical or theoretical evidence to suggest that inflation at 2% is better for growth and prosperity than inflation at 1.5%, 1%, or even -1%.

This is just made up, just like the money they created that’s been snatched from thin air, adopted as official policy in January 2012.

It becomes a rolling excuse for running the printing press and accommodating both the politicians in Washington, D.C., who want low interest rates so that debts are cheap to finance and the gamblers on Wall Street who want low interest rates because they result in higher asset values and cheaper costs for carry trade speculators.

The idea that we haven’t had enough inflation as it’s measured by one indicator—the Personal Consumption Expenditure (PCE) deflator—is kind of crazy for two reasons.

First, there’s a lot of other inflation measures that say we easily achieved 2% inflation.

The 16% trimmed-mean CPI is a very handy tool. It has the same CPI data at the product code level as that in the regular CPI, but in order to smooth out the monthly figure, it takes out the lowest and highest 16% of individual prices.

It’s probably more accurate than CPI because it removes the outliers but puts them back in as soon as they reach the center of the distribution.

The trimmed-mean CPI has averaged 2% since January 2012. During the last 12 months, it’s reached 2.34%, way over the Fed’s 2% target.

There are lots of issues here…

International Man: There are increasing calls for central banks to combat climate change. The IMF, the European Central Bank, and several others have chimed in. What does this mean, and why are central bankers suddenly so keen on this topic?

David Stockman: This is beyond stupid. What could the central banks possibly do to help the global economies adjust to climate change? Climate change may or may not be happening, and if it is, it’s due to planetary forces that central banks have absolutely no power to impact or counteract…

International Man: If Rand Paul finally gets his audit of the Federal Reserve, what do you think they’ll find?

David Stockman: What he’s going to find is just more detail on the absurdities of what they’re doing already.

I think one that you would look into is this policy called Interest on Excess Reserves (IOER). They targeted that number at 1.55% right now. There’s about $1.5 trillion of excess reserves in the banking system.

So, they’re paying out to the banks upwards of $23 billion a year in order to keep excess funds on deposit at the Fed, rather than putting it to work in the macroeconomy.

How stupid is that?…

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Danish and Swiss Banks to Charge Customers 0.75% Interest on Large Deposits – Mish Talk

Posted by M. C. on September 23, 2019

Coming to your bank soon!

https://moneymaven.io/mishtalk/economics/danish-and-swiss-banks-to-charge-customers-0-75-interest-on-large-deposits-Pu8bhyF1rkaOlu-VDBzlgw/

Mish

by

Last week, Denmark’s central bank cut its deposit rate to -0.75%. Banks will pass this on to large customers.

Please consider Denmark’s Jyske Bank Lowers its Negative Rates on Deposits.

Jyske Bank said on Friday people with more than $111,100 in their bank accounts will be charged more for their deposits as it seeks to pass on some of the costs of recent rate cuts by the European and Danish central bank.

Jyske Bank, Denmark’s second-largest bank, said it would introduce a negative interest rate of 0.75% for all corporate deposits and for private clients depositing more than 750,000 Danish crowns ($111,100) from Dec 1.

Last week, Denmark’s central bank cut its key deposit rate to minus 0.75%, a record low among developed economies. “It is a lot of money and we have to pass on part of this bill to our customers,” he said. “I don’t hope that we will have to go lower but I don’t dare to promise it.”.

Denmark’s largest bank, Danske Bank has said it has no plans to introduce negative interest rates on deposits. Switzerland’s UBS has said it will impose a negative rate of 0.75% on clients who deposit more than 2 million Swiss francs ($2 million). ($1 = 6.7559 Danish crowns)

Simple Question

If you live in Denmark and have a bank account in excess of $100,000 or so, why would you have it at Jyske Bank which charges 0.75% while Danske Bank, the country’s largest bank doesn’t?

Possibilities

  1. There is something seriously wrong at Danske Bank and people don’t trust it.
  2. Danske Bank welcomes deposits and can do something with the money. But if so, at what risk?

Any Danish readers care to answer?

Perhaps we have an answer from Bloomberg in the following discussion.

Jyske Shares Jump on Interest Rate Charge

Bloomberg reports Negative Rates Just Got Real for a Record Group of Bank Clients

Shares in Jyske closed more than 5% higher marking their best performance since December 2017, as investors calculated the impact that the new policy will have on the bank’s net interest income.

Jyske has “set the ball rolling,” said Per Hansen, an investment economist at broker Nordnet.

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Negative Interest Rates and Financial Repression | Mises Wire

Posted by M. C. on September 14, 2019

https://mises.org/wire/negative-interest-rates-and-financial-repression

We are repeatedly told that the unprecedented monetary stimulus by the Federal Reserve and other central banks is necessary to stimulate the economy, create jobs, and generate economic growth. The truth is that this scheme is designed to stealthily steal from the productive classes in order to enrich the unproductive financial class and the counterproductive political classes. It is a con game.

Financial Repression

With politicians and central bankers seemingly gone mad with their obsession for money printing and ultra low interest rates, it is nice to know that academic economists have a term (i.e., financial repression) for the policies that have created our current economic conditions.

However, it is not a new term. Its use dates back to at least 1973 when two Stanford University economists, Edward Shaw and Ronald McKinnon, used the term in separate publications. The phrase was initially meant to criticize various policies that reduced economic growth in undeveloped countries, rather than as an indictment of the world’s leading modern economies.

Financial repression is a revolving set of policies where the government insidiously takes wealth from the private sector, and more specifically makes it easier for government to finance its debt. In today’s environment this includes:

  1. ZIRP or “zero interest rate policy” where many of the world’s central banks keep their lending rates to banks at or near zero. Naturally, this makes the interest rate on government debt lower than it otherwise would be.
  2. QE or “quantitative easing” is the central bank policy of buying up government debt from banks. This increased demand increases the price of government bonds and reduces the interest rates on those bonds.

These are the two major policies of financial repression currently in use. The combination of the two policies has allowed governments to borrow money, both short- and long-term bonds, at extremely low interest rates. This, in turn, has kept the government’s interest payments on the national debt relatively low.

Other signs of financial repression in the United States include requiring banks to hold government bonds for their capital requirements, which the Basil III accords increased; high reserve requirements, which paying interest on excess reserves effectively accomplishes; and capital controls that restrict or tax the exportation of wealth. And then there is the “War on Cash.”

All these policies also come under the rubric of “macroprudential policy” under which government bureaucrats hyper-regulate and oversee the entire financial industry. Macroprudential policy provides another aspect of financial repression: government control or outright ownership of banks and financial institutions while simultaneously providing banks with barriers to competition. It is difficult to precisely define macroprudential policy, but it would seem to mean a group of imprudent policies that only make sense if you are trying to maintain the macro mess we find ourselves in.

Negative Interest Rates?

When you combine financial repression with bail-in provisions for banks and unstable currencies you end up with the nearly unfathomable phenomenon of negative nominal interest rates on government bonds. Several European countries have already sold two-year bonds for more than their face value, so that bond buyers are paying more than 1,000 euros for which they will only receive 1,000 euros in two years time.

Why would anyone accept that deal if you could just hold the 1,000 euros in cash? Well, there is the natural inclination to keep your money safe in a bank. So people with vast sums of money do not want to keep several million euros in cash. They would rather keep it in a bank and earn interest.

The problem with that approach is that banks are not paying interest and, more importantly, some governments have established bail-in provisions for systemically important big banks, similar to what happened during the financial crisis in Cyprus. These provisions mean that depositors in failed banks will receive “haircuts” for any uninsured deposits. A “haircut” means depositors would lose some percentage of their uninsured deposits. Alternatively, uninsured bank deposits and bonds could be exchanged for equity shares in the bank…

Across the room is the mirror image of bad government. It is based on cruelty, deceit, fraud, rage, division, war, greed, arrogance, and excessive pride. The effects of bad government are depicted with the city in ruins, demolished houses, and no commerce except for the making of armor and weapons. The city streets are deserted and out in the country two armies are poised for war.

On the side of good government sits an image of justice on a throne. Across the room, an image of tyranny sits on the throne. The panorama of the frescos is breathtaking and all too accurate, and financial repression is merely the latest contribution of the modern state to the concept of bad government.

[Originally published June 2015.]

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Christine Lagarde’s Move from IMF to ECB is Bad for Europe | Mises Institute

Posted by M. C. on July 6, 2019

Moving from one crime family to another.

https://mises.org/power-market/christine-lagardes-move-imf-ecb-bad-europe

Tho Bishop

Earlier today, the internet was aflutter with rumors that we were on the verge of an international crisis following schedule changes involving Russian President Vladamir Putin and Vice President Mike Pence. While it appears there two events were unrelated, a different sort of tragedy struck the international stage hours later when it was announced that Christine Lagarde had been named the new head of the European Central Bank.

Joining the ECB after a lengthy stint as head of the IMF, Lagarde certainly has the resume to be the next “great” central banker. Unfortunately, she has a record of folly which we’ve come to expect from such a title.

In the words of our friend Mike Shedlock, “It’s rare to find someone who is consistently wrong on everything. Christine Lagarde…comes close”

A conventional policymaker that fears deflation most of all, Lagarde has been a high profile defender of the negative interest rate policies we’ve seen doing damage in Europe and Japan. Her selection is being widely seen as an endorsement for continuing the policies of the outgoing Mario Draghi at a time when the ECB desperately needed a hawk to help defuse their trillion-Euro time bomb.

As Daniel Lacalle put it:

Read more: The ECB Continues to Incentivize Reckless Behavior by Daniel Lacalle

Earlier this year, Alasdair Macleod outlined the damage being done by the policies Lagarde is expected to continue.

Pumping yet more credit into the Eurozone is as effective as giving adrenalin to a dead horse. Lack of credit is not the problem. Put simply, there is a global momentum of economic contraction evolving, which any business and lending banker would be foolish to ignore. There is a developing crisis, the consequence of earlier monetary inflation in the credit cycle. Economic actors may not understand the origins of the crisis, but we can be certain they are becoming acutely aware of its looming presence. And as the crisis rapidly develops, those that require additional loans will already be insolvent.

The signal sent by the ECB to lending-bankers is likely to be misinterpreted when credit contraction is the looming threat: if TLRTO-III is the smoke, there must be a fire, possibly out of control. Better surely to call in existing loans to businesses rather than waiting to be repaid from profits unlikely to materialise. An encouragement to lend early in the credit cycle is more effective and less likely to be misunderstood than a similar encouragement later in the credit cycle. This is why a renewed TLTRO policy will almost certainly fail.

The inability of bureaucrats, with their heads buried in spreadsheets, to appreciate the role of human psychology is not the ECB’s only failing. Its executives do not even understand what interest rates represent, thinking it is simply the price of money. This is why it believes in keeping interest rates suppressed as a means of increasing credit. Earlier in the credit cycle, rate suppression does generate some credit expansion, mainly in financial rather than non-financial activities, because lower interest rates lead to higher prices for financial assets. That is basically a spreadsheet, almost non-human function. Large industrial corporations are opportunist, borrowing to fund buy-backs and to take over weaker rivals. Smaller and medium-sized business borrowers are usually offered credit only later in the cycle, when it is a mistake to accept it.

Consequently, in a zombie economy, such as that of the Eurozone, the only borrowers are wealth-destroying, socialising, debt-entrapped governments, taking full advantage of the Basel accords, which rates them for lending banks’ purposes as riskless borrowers…

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Trump’s Fed Nominee Advocated Abolishing Cash

Posted by M. C. on May 22, 2018

This war on you and your cash day here at MCViewPoint.

…cash should be phased out of circulation so the Fed can charge negative interest rates and force consumers to pay fees to keep money in savings accounts.

The article is interesting but this says what yo need to know.

http://truthinmedia.com/trumps-fed-nominee-advocated-abolishing-cash/

By

Barry Donegan

Trump Federal Reserve Board of Governors nominee Marvin Goodfriend reportedly said in 2016 that cash should be phased out of circulation so the Fed can charge negative interest rates and force consumers to pay fees to keep money in savings accounts.

The Mises Institute notes that Goodfriend first floated the idea in a 1999 paper called “The Case for Unencumbering Interest Rate Policy at the Zero Bound” and again promoted the concept at a 2016 Federal Reserve conference in Jackson Hole, Wyo.

Goodfriend reportedly said that the Fed needs the option to push interest rates negative, which would cause consumers to pay fees in order to keep their money in savings accounts, and that cash should be eliminated to prevent banking consumers from pulling their money out of banks to avoid paying those fees…

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A Free Haircut With Your Cashless Purchase

Posted by M. C. on May 10, 2015

We have discussed the drive for a cashless society. Government and crony bankster surveillance of your purchases is one reason. What you buy, where you buy it and for how much. The government needs to know. There are other reasons also.

European countries are beginning to limit and eliminate cash transactions. Larger transactions are check, credit card or some other electronic format. No US bill denomination above one hundred dollars is being printed. This is all to prep the populace to accept a cashless life. What is so bad about that you may ask.

1. When you hear ‘negative interest‘ that is the bankster’s way of saying they want to charge you to keep money in the bank. You can withdraw cash and keep it out of their reach. You can’t withdraw electronic currency and stuff it in the mattress. Negative interest is coming.

2. European countries are beginning to limit and eliminate cash transaction sizes. Larger transactions are check, credit card or some other electronic format. This is all to prep the populace to accept a cashless life and haircuts. Read the rest of this entry »

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