Kenneth Rogoff, the creator of the fictional 90% budget deficit cliff, is back spreading new myths. He has now ventured into white-collar criminology, without the benefit of any study of criminology. The results are yet another embarrassment for Rogoff. The title of his article is “Paper money is unfit for a world of high crime and low inflation.”
I’ll leave his claim about removing the “lower bound” on central bank monetary policy to others. I note only that he ignores the readily available (and superior) alternative of fiscal policy.
Rogoff (Almost) Recognizes Pervasive White-Collar Crime
Rogoff, of course, ignores the role of fraud epidemics in causing our recurrent, intensifying financial crises. In his article, however, he admits that criminal activity is the dominant factor driving currency usage.
“In the US and Japan, more than 75 per cent of currency is held in the largest denomination notes, the $100 bill and the Y10,000 note. The situation in the eurozone is different only in that there is a larger range of high-denomination notes going all the way to €500, but the basic point is similar.”
His title emphasizes that we live in a financial “world of high crime” in which “a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.”
“Tax evasion” is a crime of the wealthy and powerful, an important fact that Rogoff ignores. This makes Rogoff’s ignoring the three epidemics of accounting control fraud that drove the most recent U.S. financial crisis all the more bizarre. Tax evasion can still lead to prosecutions while accounting control fraud in the financial sector has been (de facto) decriminalized.
Rogoff’s Unintentional Ode to Ecuador’s Anti-Money Laundering Policies
Rogoff gives an unintended and probably unknowing ode to Ecuador’s anti-money laundering policies, which ban large-denomination notes. “Perhaps the right place to begin is by phasing out large denomination notes.” Under Rogoff’s logic Ecuador should be praised as a leader in the international effort against money laundering. Naturally, the Obama administration’s hostility to Ecuador is so virulent that FATF treats Ecuador as a pariah state despite its adoption of policies that Rogoff describes as unusually strong and effective efforts against money laundering.
Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction, as described below.
Rogoff’s Proposal Would Fail Because He Ignores Control Fraud
Rogoff claims that electronic currency would be a powerful anti-crime reform. “[Governments] would gain revenue by making tax evasion more difficult. There would also be savings from crime reduction.” Because he ignores control fraud, however, he falsely assumes that anonymous currency is required to obtain and move fraud proceeds. The CEOs of our largest, fraudulent banks could move their fraudulent proceeds anywhere they wished without any difficulty without anonymous transactions. Even drug dealers would simply have to move drug proceeds through corporate or real estate investments run by control frauds in order to generate fictional income and launder their funds.
Rogoff’s Proposal Would also Fail Because He Ignores the Race to the Bottom
Rogoff’s proposal to ban anonymous currencies (paper and electronic) would also fail because of the powerful incentives created by the international “race to the bottom” among jurisdictions. The real nations that aid money laundering (who are not on FATF’s list of purportedly non-compliant nations) and the real banks (HSBC) that aid the world’s most violent drug gangs launder huge amounts of money will continue to have powerful incentives to offer anonymous currency.