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Over the past month, one of the more alarming developments in Europe has been the move to eliminate high denomination bank notes like the €500 bill. Indeed, as Bank of America reports, having changed its mind on the matter over the past few years, the ECB is now considering abolishing the €500 note. In a recent interview, Executive Board member Benoit Coeure said that “the ECB is assessing the fate of the €500 euro banknote, as concerns about its use in money laundering and crime grow and its usefulness for large payments comes into question” adding that “competent authorities increasingly suspect that they are being used for illegal purposes, an argument that we can no longer ignore.” (like all other ECB matters, there appears to be infighting on this issue too, and subsequently another ECB member Yves Mersch stated that the he would like to see “proof that high-denomination notes are used by criminals”). So what, big deal, eliminate it. The people will still have 5, 10, 20, 50, 100 and 200 euro bills right.

Well, here’s the thing: the €500 note is the second highest currency denomination in G10, after the CHF1,000 note. More importantly, the total value of €500 notes in circulation amounts to €306.8bn and has been rising.

As a share of the value of total euros in circulation, the €500 note is the second-highest, after the €50 note. In other words, if overnight the €307 billion worth of €500 bills were eliminated, the notional value of the entire amount of European physical currency in circulation would decline by 30% to €700 billion! And there you have it: while it may not be banning all European cash outright, we are confident the ECB would be delighted if one third of it was to start, while pretending to be fighting financial crime, terrorism, corruption and dryg dealers. Of course, what Europe would be truly doing is setting the scene for ever more aggressive NIRP, and by removing the highest denomination bank notes, it would make evading negative that much more difficult and costly (albeit would certainly favor gold). Here Bank of America points out that while abolishing the €500 note may even end up weakening the EUR currency. This is what it said:

we would expect that abolishing a note that represents almost 30% of the total Euros in circulation would be negative for the currency, keeping everything else constant. The share of the €500 note in the total value of Euros in circulation has been falling since 2009 and this has coincided with a weakening Euro in real effective terms. This is not evidence of causality, but we should not ignore it. If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies. Indeed, the CHF1000 note is already very popular, representing more than 60% of the CHF  notes in circulation, unless the SNB follows the example of the ECB and also abolishes the CHF1000 note.

Maybe not: the EUR would certainly not weaken against the Dollar if at the same time as Europe is eliminating its highest denomination bill, the US were to likewise to eliminate its own “high denomination” bills. This is the push by current Harvard School of Government senior fellow Peter Sands who recently was booted from beleaguered British bank Standard Chartered (whose exposure to China is among the highest in Europe).

Sands appeared on CNBC earlier today to double down on his “modest proposal” that the US should eliminate its highest denominated bill, aka the Benjamins, because doing so would “deter tax evasion, financial crime, terrorism and corruption.” Ok fine, remove the $100 bill: surely it won’t affect much right. Wrong. As the latest Treasury data shows, $1.08 trillion of the total $1.38 trillion in physical. In other words, there is now an all too explicit “trial balloon” push to ban the one banknote that accounts for a whopping 78% of all US currency in circulation.

So there you have the real reason why suddenly high denomination bank notes are the target: it is not because “drug dealers” and tax-evaders use them, but because between banning Europe’s €500 bill and the US $100 bill, over 56% of all physical currency currently in circulation in Europe and the US would disappear. And all in the name of “fighting crime”, when the real reason is to set the stage for NIRP and to progressively move down the chain and ban increasingly smaller denominations. Will this drive to start the elimination of physical cash succeed? We don’t know, but for once the Greeks are far ahead of the curve. As Kathimerini reports, “citizens who keep cash outside the banking system are running in droves to bank branches to ask for details and clarifications on reports that the European Central Bank is planning to withdraw 500-euro notes.”

With the country already in a seven-year crisis, many people have opted to hide their money at home, in vaults, mattresses and other places. Banking sources say that many people have chosen 500-euro notes because they are more practical for carrying and hiding – after all, just 20 such notes come to 10,000 euros. In 2015 alone deposits in Greece declined by 40 billion euros, with banks estimating that at least 20 billion of that went into safe deposits and mattresses. Following the publication that European authorities were questioning whether it makes sense to have 500-euro notes in circulation, many in Greece – especially older people – rushed to deposit the money in their accounts. ECB governing council member Benoit Coeure spoke yesterday in favor of the withdrawal of the largest notes, stressing that the ECB will make a decision to that effect soon. A new Morgan Stanley survey on Greece showed that 80 percent of people who withdrew their deposits from the banking system in recent months have not returned them, with 93 percent being determined not to do so. The survey also found that confidence in the Greek banking system remains low, as 62 percent of people are uncomfortable about placing money in a bank account.

Naturally, by removing the highest denomination bank note, all Europe would do is make it that much more difficult to find alternatives to holding large amounts of money in physical form and thus outside the banking system, where money is about to be taxed with negative rates.

There is the question whether this no to clever ploy will backfire, and instead of forcing people out of cash, instead lead to a run on bank cash, which will then be converted into physical precious markets. The Greeks have already figured it out; we wonder how long until the US population follows suit.

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