If government monopoly profiteers de-cash society, in order to impose negative interests, is that not also a crime?

Sir, Kenneth Rogoff writes:“[In] advanced economies, the idea of recalibrating the use of cash is an entirely reasonable one. While paper currency has many virtues that will continue into the distant future (including privacy…) the vast bulk is held in large denomination notes such as the US $100 and the €500 that have little significance in most retail transactions. A broad array of evidence suggests that high-denomination notes… mainly serve to facilitate tax evasion and crime.” “India’s cash bonfire is too much, too soon” December 10.

I have two questions: 

First: Is not the US $100 and the €500 the most effective tools for privacy?

Second: Is not cash, one of the last resources you could use to defend yourself against negative interests?

In future presidential electoral debates anywhere, a citizens obligatory question could be: "Sir, do you want to screw us getting rid of cash, so as to make it easier for you to pay off government debts with negative interests?"

@PerKurowski

The only bank credit-allocation taking place, in UK and China, is based on credit risk weighted capital requirements

Sir, David Pilling when writing about deregulation of bank interest rates opines that: “China now needs a better allocation of capital. It needs less money to be pushed into heavy industry, and more into services and innovative industries, many of them outside state control.” “Beijing cannot control babies or banks” November 5.

No Mr. Pilling, as long as China follows the dictates of the Basel Committee, as seemingly it does, that type of “better allocation” of bank credit does not exist. With the credit risk weighted capital requirements, the only real allocation, or more correct misallocation of bank credit that exists, is favoring what is perceived as safe and hindering the access to bank credit of what is perceived as risky. And of course that applies to UK too.

And Pilling also mentions: “Ending financial repression is an important step in the right direction”

No Mr. Pilling. The real financial repression, the one resulting from favoring with ultra low or no capital requirements for banks when holding assets of sovereigns, and which started in 1988 with the Basel Accord, is alive and kicking, even in your UK.

PS. What the Basel Committee has done is not much different from China trying to control babies.

@PerKurowski ©

The invisible hand was and is slapped by the not so visible hand of the Basel Committee.

Sir, Subitha Subramaniam’s writes: “the biggest distortion facing financial markets today comes from the repression of interest rates by the world’s central bankers. Under a laissez-faire approach, advanced economies with huge debt burdens that reduce long-term growth potential could be allowed to default as a self-correcting mechanism to restore growth.”, “The rise of the visible hand in economic policy” FTfm May 4.

That is indeed a source of distortion, and in a letter to FT in August 2006 “Long-term benefits of a hard landing”, I argued in favor of the self-correcting option. But the visible hand began acting and producing big distortions much earlier.

In 1988 the Basel Accord (Basel I) introduced risk-weighted equity requirements for banks. In 2004, with Basel II, these were, for example:

AAA to AA rated sovereigns 0 %; AAA to AA rated corporations 20 %; Unrated corporations 100 %; Below BB- rated corporations 150%

And for the Basel Committee’s basic 8 percent equity requirement, that translated into equity requirements that went from zero to 12 percent; which allowed for the leverage of bank equity, and of the support banks receive from the society, to range all the way from infinite down to 8 to 1; which of course allowed banks to earn much higher risk-adjusted returns on equity on what had a low equity requirement than on what had a high equity requirement.

This completely distorted the allocation of bank credit to the real economy; and this is what happens when you regulate banks without defining their purpose.

Understanding that source of distortion is essential in order to understand what has happened and what is happening. That was what dangerously overpopulated safe havens as AAA rated securities, sovereigns like Greece and real estate like in Spain. Currently one of the drivers of the ultralow interests on sovereign bonds is precisely that there the parking equity requirement tariffs are the lowest for the banks.

@PerKurowski

Does not the price increases suffered by the Gatsby count as inflation too?

Sir, Wolfgang Münchau refers, as so often is done these days, to the problem of low inflation, and which has even caused “Germany´s conservative central bank to call for wages to rise faster than in the past”, “A desperate Bundesbank has abandoned principle” August 4.

But the fact that there is no inflation recorded could also be a result of how we measure it. For instance, if our inflation basket included assets Plutocrats buy, like stocks, prime property, paintings, collectibles and other fancy stuff, we would certainly observe a quite high inflation… something that by the way should be expected considering how money, assisted by quantitative easing and fiscal deficits, has primarily flooded their pockets.

And really, talking about money which has lost purchasing power… what about all those savings that now buy so much less because of the low interest rates?

And so of course there is inflation… but perhaps not where some would like it to be… though I must confess that, inflation for the plutocrats and no inflation for the poorer, does indeed sound like a Piketty designed plan to combat inequality… could it be a targeted financial repression?

No!, as I have mentioned so many times before, much more important is it for Münchau, and for the Bundesbank, to take some time out to reflect on how the European economies are becoming weaker and weaker, as a result of the risk taking austerity imposed by the Basel Committee´s risk-weighted capital requirements for banks.

Are car loans with adequate risk premiums to "risky" citizens really riskier than loans to “infallible” sovereigns?

Sir Gillian Tett, jogging our memory with the problems of mortgages linked to subprime borrowers, expresses concern for that subprime, even so called “deep subprime” car loans have been growing too much lately, “American subprime lending is back on the road” April 11. Poor her, she need not to worry, these loans are completely different from those loans that were so badly awarded because they could be dressed up in AAA clothing.

But she is indeed right when stating that “cheap money has a nasty habit of creating distortions in unexpected places”. Just look at all those of her colleagues who now suggest government should take advantage of extraordinarily low costs of finance in order to do so much more. That ignores that the cost of those currently so low interest rates, in much a direct result of the fact that banks do not need to hold much capital against loans to the “infallible” sovereigns, will most likely be paid by the lenders in the future, by one or another sort of financial repression.

If Wolfgang Münchau is right, is it not better for Italy to default and get it over with?

Sir, Wolfgang Münchau writes that “no matter what Mr Renzi achieves [Italy] would be headed for certain default if the eurozone’s future inflation rate were to fall from a previous average of 2 per cent to 1 percent”, “Europe’s new boys face a tough fight on austerity”, April 7.

If Italy defaulting or not depends on Europe producing inflation is true, which I hope it is not, since it seems to convey the bad message that Italians are not the masters of their own future, would it not be better for Italy to default, clear the air, and start afresh? I mean this because arguing that Italy needs inflation to repay its debt, is to say that Italy will actually, de facto, default, through inflation, in real terms, on all those holding Italian debt.

And I also say these because Münchau writes that he “fails to see how the alternative can be made to work” that of a “primary surplus – before interest payments –of at least 5 percent on average for 20 years”.

Basel, stop forcing banks to lend to the King and AAAristocrats

Sir, you argue that the current proposed liquidity requirements for banks under Basel III be widened so as to include more qualified assets, like “blue-chip equities which trade in deep and liquid markets”, “Keeping it liquid”, December 19. It sounds logical, but in reality just adds another layer of that type of Basel II nonsense which has gotten our banks into problems. 

For a start, it can only create a false sense of security. As long as a bank has “good” assets a bank is liquid, as simple as that, and all the liquidity of some “deep” markets can dry up in minutes if the quality of those assets have been compromised. 

The fact that an asset is considered liquid already benefits the value of that asset, and so pushing by means of regulations for banks to hold liquid assets will just help to distort its real value, just the same way the Basel II or proposed III capital requirements based on perceived risk, distort the market in favor of “The Infallible” and against “The Risky”. 

You correctly mention that “the liquidity rule as it stands, is an instrument of financial repression by governments”, but let me remind you that is just the way current basic capital requirements repress, though on that we have not heard any protests from you. Hopefully you are at long last waking up to this fact. But, just extending the beneficiaries of the repression, to besides the King also include the Aristocracy, will only increase the discrimination against those not blessed, like against all who have no credit rating or a not so good credit ratings, but whose access to bank credit is just as or even more important for the economy. 

Basel II sounded logical too, that is as long as you ignored the fact that what is perceived as “risky” has never ever caused a bank crisis, only what has been erroneously perceived as absolutely safe does that… and in that sense, having more regulations that push “The Infallible”, is just a certain way of guaranteeing that when the next bank crisis occurs, it will be even much larger than need be. 

To me it is frankly incredible how a sophisticated paper like the Financial Times can have fallen into the mental trap of being able to believe that a little tweaking here and there, by regulators will do it. And this by regulators who recently allowed banks to leverage their equity 62.5 times to 1 to Greece. On the contrary, the world, and most especially Europe, needs to rid itself of the scheming and tweaking bank regulators who arrogantly push on, even in the face of absolute failure. 

Let the banks fulfill as best as they can their function of allocating economic resources. And for that, nothing distorts less, than one single capital requirement for all bank assets.

We must rid ourselves of the incredibly vicious regulatory centrifuge that will make our economies implode.

Sir, David Pilling writes about inflation being a tonic that grows the size of the nominal economy and keeps the ratio of public debt to gross domestic product more manageable, “Japan, too, needs outside thinking at its central bank”, November 29. So that's the trap! What a horror story... at least for those who have saved for their retirement investing in government debt.

First the bank regulators appointed by governments, declare that it is so much safer for banks to lend to the government than to lend to a small business and entrepreneur, and so banks need to hold 8 percent in capital when lending to “The Risky Citizen”, but can lend to “The Infallible Sovereign” holding zero or little capital (Basel II).

As a result banks will expect earning a much higher risk-adjusted return on equity when lending to “The Infallible Sovereign” than when lending to “The Risky Citizen”; while some lucky banks will also be able to grow into desirable “too-big-to-fail-banks”, by leveraging their equity more.

And as a natural consequences of this regulation “The Sovereign” gets saddled with too much debt, and since this could threaten its infallibility, they contract “outside thinking”, which suggests to them they use inflation so as to inflate themselves out of the problem.

And simultaneously, the most cooperating courtiers, the “too-big-to-fail banks”, get knighted as Systemic Important Financial Institutions, which will of course allow them to keep up the cycle of lending to the still "infallible sovereign".

What an incredible vicious regulatory centrifuge they invented. It will make our economies implode. Sincerely, I do not think they did it on purpose, because, otherwise, instead of just wanting the regulators out, I would want them shot.

Tax heavens are always the best antidote to tax havens… and governments should earn our taxes

Sir, I commend you for in “Taxing wealth”, August 30, daring to recognize “there is a case for shifting burden from activity to asset”. And I would agree! 

I assume though that you suppose those taxes on wealth would act as a more transparent tax substituting for how financial repression, with its negative real returns on government debt, seems currently intend to tax wealth. True? Because, if you are thinking in terms of an additional tax, then I guess, many would start searching urgently for a tax-haven.

And, of course, governments should earn our taxes!

The buck is being broken everywhere and investors know it.

Sir, Gillian Tett discusses the money market funds’ issue of “break the buck”, the return of less than 100 percent of investors’ cash, “The Achilles heel of America’s financial system”, July 31. 

The truth though is that the buck is being broken everywhere, especially if it is a real term buck, and investors have no other choice but to accept it … just look at Treasuries. 

And so clearly, the faster all explicit or implicit artificial guarantees are dismantled, the lesser distortions are produced, and the faster we might be able to return to some market sanity. 

But that would of course also requires the removal of all the regulatory distortions introduced in bank lending based on perceived risk, and which was and is the real cause of so much buck breaking going on.