Imagine a country’s central bank sitting on 30 billion US dollars. The country’s currency is the Malanga dollar. The central bank announces that they will exchange 1 US dollar for 2 Malanga dollars. Is this situation tenable? No. The situation is hopelessly bankrupt.
A trader with enough financial clout could borrow 80 billion Malanga dollars and ask the central bank to exchange them. The central bank would need 80 billion divided by 2, that is, 40 billion US dollars, while they only have 30 billion. Where will the central bank find the missing 10 billion? Even if they manage to find them, the trader will just borrow more Malanga dollars and do it again.
The central bank will have no other option than to devalue the Malanga dollar. Say that they start defending an exchange rate of 1 USD for 3 Malanga dollars. This means that the trader will have acquired 30 billion US dollars, originally representing 60 billion Malanga dollars, but will now be able to exchange them for 30 x 3 = 90 billion. So, after repaying his loan of 60 billion, he will have made a profit of 30 billion Malanga dollars.
The lesson here is the central bank cannot announce both the exchange rate that it will defend and exactly how much money it has to do so.
This game is not just theoretical. On the contrary, this is exactly how George Soros took the Malaysian and Thai central banks to the cleaners in 1997. They were effectively bankrupt after George Soros was finished with them.
Central banking is full of gotchas. Before you know, you are toast. It is great fun to separate the one or the other arrogant idiot from large amounts of his money. I admire George Soros!
Sweden is shaping up to be the first country to plunge its citizens into a fascinating — and terrifying — economic experiment: negative interest rates in a cashless society.
The real reason why they want to go cashless: The move helps make robberies less likely and may reduce organized crime … and tax evasion. Laffer, however, predicts that the taxation base will keep adjusting to new attempts at increasing taxation and ultimately neutralize its effects.
Furthermore, not only there are already quite a few things that you cannot do with electronic cash, but you can only expect the amount of social engineering to grow. For example, there are already numerous cases around the world where the bank will prevent you from wiring from your account in order to deposit fiat money at a bitcoin exchange. There will be new rules all the time that will prevent people from paying other people for reasons that the government or the fiat banks do not like. This will further reduce the value of electronic cash in comparison to alternatives.
If there are enough Swedes who need fiat cash, they will inevitably find a way to solve the problem. They may, for example, start using euros or dollars instead of Swedish crowns (SEK) as fiat cash. So, a Swedish economy without Swedish bank notes is possible, but not necessarily one without cash. If that is the situation that materializes, they will have made the situation worse for them (foreign cash) instead of better (Swedish cash).
The Laffer economic fundamentals will include the desire of Swedes to pay for things that the government does not like or to collect payment without the government being informed. The arbitrary political rules of this game will become increasingly leaky. That will inevitably open up new one-way bet opportunities to gamble against the fiat regulator and take him to the cleaners.