Thursday, August 29, 2019

China, General Motors and Unintended Consequences of the Trump Trade Policies

With Donald Trump tweeting this stream of consciousness about American companies operating in China:

...I thought that it would be interesting to look at one of America's largest companies that operates in China, General Motors, the beneficiary of $13.4 billion in assistance from U.S. taxpayers during the darkest days of the Great Recession.

According to GM's 2018 Annual Report, we find the following references to China:

"We also have equity ownership stakes in entities that meet the demands of customers in other countries, primarily in China, with vehicles developed, manufactured and/or marketed under the Baojun, Buick, Cadillac, Chevrolet, Jiefang and Wuling brands" (page 1)

Here is a table from page 2 of the annual report showing sales of GM vehicles in China:

In 2018, GM sold 3.645 million vehicles to Chinese consumers, making up 13.8 percent of China's vehicle sales in 2019 and putting them in second place for market share.  This is down from 4.041 million (14.3 percent) in 2017.  While sales in China  were down in 2018, General Motors sold only 2.954 million vehicles in the United States, 691,000 less vehicles than they sold in China.  As well, sales in China accounted for 43.5 percent of General Motors total worldwide sales of 8.384 million vehicles.

General Motors also operates its GM Financial automotive financing arm in China through joint ventures.

According to GM's annual report, the company realizes that there are risks to an American company doing business in China for several reasons as we see on page 12:

"Our significant business in China subjects us to unique operational, competitive and regulatory risks. Maintaining a strong position in the Chinese market is a key component of our global growth strategy. Our business in China is subject to aggressive competition from many of the largest global manufacturers and numerous domestic manufacturers as well as non-traditional market participants, such as domestic technology companies. In addition, our success in China depends upon our ability to adequately address unique market and consumer preferences driven by advancements related to infotainment and other new technologies. Increased competition, increased U.S.-China trade restrictions and weakening economic conditions in China, among other things, may result in price reductions, reduced sales, profitability, and margins, and challenges to gain or hold market share. In addition to increased competition, Chinese regulators have announced aggressive "green" policy initiatives and quotas for the sale of electric vehicles, which have challenging lead times. 

Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China. In order to maintain access to the Chinese market, we may be required to comply with significant technical and other regulatory requirements that are unique to the Chinese market, at times with challenging lead times to implement such requirements. These actions may increase the cost of doing business in China and reduce our profitability. In particular, the announced intention of several Chinese cities to implement new China 6 emissions regulations in July 2019 represents a risk for the sales of our Chinese joint ventures." (my bold)

General Motors claims that the company's Automotive China Joint Ventures generated equity income of $1.981 billion in the year ended December 31, 2018 and while the company projects that industry sales will remain flat with a continuation of pricing pressures in 2019, the company should be able to sustain strong China equity income by focussing on improved vehicle mix, cost efficiencies and downstream performance optimization.  Here is a table showing the finances and operational data for Automotive China JV for the year ending December 31, 2018:

Let's close this section of this posting with what GM has to say about the Chinese market:

"We view the Chinese market as important to our global growth strategy and are employing a multi-brand strategy led by our Buick, Chevrolet and Cadillac brands. In the coming years we plan to leverage our global architectures to increase the number of product offerings under the Buick, Chevrolet and Cadillac brands in China and continue to grow our business under the local Baojun and Wuling brands, with Baojun focusing its expansion in less developed cities and markets. We operate in the Chinese market through a number of joint ventures and maintaining strong relationships with our joint venture partners is an important part of our China growth strategy." (my bolds)

From the data presented in this posting, you can see that the Chinese market and General Motors manufacturing and sales joint ventures form a very, very important part of the company, its sales and ultimate profitability.  With cars sold in China making up just under half of all of General Motors worldwide sales, the company would be a far smaller and less profitable entity if it were forced to leave China and rebuild itself as the General Motors of the past."

With all of this in mind, let's close by looking at a recent op-ed piece that appeared in China's Global Times, a news media outlet that acts as the mouthpiece for China's Communist Party:

"US President Donald Trump has ordered US companies to "immediately start looking for an alternative to China." If US firms obey his dictate, such actions will have serious consequences.

China is now the biggest market for some US-based enterprises, such as US automaker General Motors (GM). The automaker's China sales came to 3.65 million cars in 2018, exceeding its total sales in the US market, where GM delivered nearly 3 million vehicles. Some statistics have shown that China's car market is even bigger than those of the US and Japan combined. GM is already facing weak sales in the US. The automaker will suffer a fatal blow if it loses the Chinese market.

GM is a big player in the US auto industry, an important component of the US economy that is particularly prominent in some Midwestern and Southern states. 

According to, motor vehicle and parts dealers in the US had about 2 million employees as of March 2019. If GM's profits fall or it loses money, the whole US auto industry will be affected, the country's auto supply chain will shrink and mass unemployment will result.

In China, the vehicle industry is a fully competitive market. If GM withdraws from China, homegrown brands and   automakers from countries outside the US will fill the gap in auto sales. As long as China has the world's largest vehicle market, there will be no shortage of auto-related investment. China has the initiative in this game… 

To keep its foothold in China, GM has to keep producing in China - despite Trump's order…

US companies are welcome to invest and operate in the Chinese market, but if some US companies want to obey Trump's order and join Washington's trade war, the result is bleak. A decision to give up the Chinese market is just suicide."  (my bolds)

Not surprisingly, Washington's trade actions against China will have a series of unintended consequences for Corporate America, not the least of which is a drop in sales, a corresponding drop in profits and, most painfully, a drop in share prices which will directly affect the value of stocks held by the executive officers of America's largest corporations.  The example of General Motors shows us how quickly a company that is reliant on China for a significant portion of its operations could become vulnerable to the whims of the current president.

Wednesday, August 28, 2019

Twitter and the Truth About Hong Kong's Protest Movement

The ongoing protests in Hong Kong are not necessarily what they appear to be.  The protestors are using a very organized military-style approach to battling riot police and the Chinese side is using disinformation if Twitter is to be believed.  In this posting, I want to take a look at how Twitter is fighting back against the Hong Kong protest narrative that it does not wish to promote.

The Chinese side of this protest is fighting back against the Hong Kong protest movement by allegedly using Twitter.  According to an announcement by Twitter, one of the world's leading social platforms was forced to take actions against a "significant state-backed information operation focused on the situation in Hong Kong".  In this case, Twitter suspended a total of 936 accounts which it believed were originating from inside the People's Republic of China even though the originators of the accounts would have used a VPN to access Twitter since it is banned in China. 

Here is the announcement:

Here is an example of a violation of Twitter's terms of service by "Dream News":

Here is what Twitter had to say about its banning of the accounts:

"Covert, manipulative behaviors have no place on our service — they violate the fundamental principles on which our company is built. As we have said before, it is clear that information operations and coordinated inauthentic behavior will not cease. These deceptive strategies have been around for far longer than Twitter has existed. They adapt and change as the geopolitical terrain evolves worldwide and as new technologies emerge. For our part, we are committed to understanding and combating how bad-faith actors use our services.

Today we are adding archives containing complete Tweet and user information for the 936 accounts we’ve disclosed to our archive of information operations — the largest of its kind in the industry.

We will continue to be vigilant, learning from this network and proactively enforcing our policies to serve the public conversation. We hope that by being transparent and open we will empower further learning and public understanding of these nefarious tactics."  (my bolds)

The use of the word "nefarious" in this context may be a bit of an overstatement given that we all know that governments around the world (including those in the West) are using social media platforms to propagandize all of us.

Let's take a quick look at Twitter's rules for "Authenticity":

Notice that you cannot use Twitter's services to "artificially amplify or suppress information or engage in behaviour that manipulates or disrupts people's experience on Twitter".  Apparently, in Twitter's reality, there is no room for discussion when it comes to the protests in Hong Kong - the only acceptable narrative is that China (one of the world's two "bad guys", a distinction that it shares with Russia) is somehow at fault and that any tweets to the contrary contravene its rules for "Authenticity".

The ongoing protests in Hong Kong are not necessarily what they appear to be.  We can pretty much assure ourselves that the United States/Washington and its vilification of all things Chinese  is involved in funding, training or organizing the pro-democracy demonstrations.  In this post-truth era, it is almost impossible to suss out the truth on this (or any other) series of events and the actions by Twitter are increasingly making it difficult for anyone to discern both sides of the story.

Tuesday, August 27, 2019

On the Front Lines of Hong Kong's Civil Unrest

The civil unrest in Hong Kong against the recent moves by China continue unabated.  According to Dimsum Daily, the men and women at the front lines of the Hong Kong have received basic training on efficient protesting and countering riot police actions that are outlined on three info graphs.

Here is a page from the document which outlines the five groups of protestors:

Here is an explanation of tasks and reminders for each of the groups translated into English:

1.) Wo Lei Fei - 

a.) Tasks - this group is in charge of providing critical resources and first aid to protestors that need assistance, to oversee the protest situation and to barricade roads.  

b.) Reminders - keep an arm's length distance between Wo Lei Lei and others, to keep an eye on flag bearers, make sure that resources are always in abundance and ensure safe passageway for other protestors.

2.) Yung Mo or Valiant Knights -

a.) Tasks - this group is in charge of deploying resources, using weapons against the riot police and as front line defence.

b.) Reminders - co-ordinate with whistle blowers and take extra precautions.

3.) Kei Sau or Flag Bearers - 

a.) Tasks - transmit information efficiently and maintain order.

b.) Reminders - ensure that sufficient distance is kept with Yung Mo and pay attention to the  latest information updates.

4.) Yuen Kung or Distant Attackers - 

a.) Tasks - deploy resources not inside the war zone (i.e. transportation, escape routes, change of attire, spare change at transit stations to facilitate escape), use long-distance weapons against the riot police (i.e. sling shots).

b.) Reminders - ensure that sufficient distance is kept with Yung Mo and pay attention to the  latest information updates.

5.) Siu Fong Yuen or Firefighters - 

a.) Tasks - extinguish any fire that is caused by the protest as well as any tear gas canisters.

b.) Reminders - ensure that sufficient distance is kept with Yung Mo and pay attention to the  latest information updates.

Here is another page from the document showing how each group is to be set up:

You will note that Yung Mo protestors are at the front followed by Lei Sau with Wo Lei Fei maintaining distance between itself and the other groups.  The very existence of this info graph is rather surprising and shows that the anti-China movement in Hong Kong is better organized than it first appeared to be....that is, if the document itself is genuine. 

The protestors are using other methods to fight against riot police including the use of lasers to blind both police and facial recognition cameras as well as using traffic cones to neutralize tear gas canisters that are fired by riot police as shown on this video:

Here is another video showing the action and tactics used by demonstrators:

As you can see from this posting, the demonstrators in Hong Kong are far more organized and have learned a great deal about how to push back against Hong Kong's police forces since the anti-government demonstrations first started in March 2019.  That said, with the first live round being fired by anti-demonstration forces, it is clear that the government-backed forces hold the upper hand when it comes to the use of deadly force similar to occurred between Indiana Jones and the Arab swordsman in the Indiana Jones and the Temple of Doom movie:

Monday, August 26, 2019

A New Global Fiat Fiat Currency

While Fed head Jerome Powell's speech at Jackson Hole received most of the media's attention, a speech by the head of another influential central bank is proposing a radical change to the world's financial system.

In his speech given on August 23, 2019, Governor of the Bank of England and former Governor of the Bank of Canada, Mark Carney, gave a speech entitled "The Growing Challenges for Monetary Policy in the current International Monetary and Financial System".  After a lengthy analysis of what faces the United Kingdom economy in light of the looming Brexit exit, Mr. Carney went on to examine the challenges for central bankers and their monetary policies in the current international monetary and financial system (IMFS) ecosystem.  He begins by noting the following:

"For decades, the mainstream view has been that countries can achieve price stability and minimise excessive output variability by adopting flexible inflation targeting and floating exchange rates. The gains from policy coordination were thought to be modest at best, and the prescription was for countries to keep their houses in order.

This consensus is increasingly untenable for several reasons. Globalisation has steadily increased the impact of international developments on all our economies. This in turn has made any deviations from the core assumptions of the canonical view even more critical. In particular, growing dominant currency pricing (DCP) is reducing the shock absorbing properties of flexible exchange rates and altering the inflation-output volatility trade-off facing monetary policy makers. And most fundamentally, a destabilising asymmetry at the heart of the IMFS is growing. While the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed." (my bold)

Here is a graphic showing how the U.S. dollar dominates the global economy:

The dominance of the U.S. dollar means that developments in the United States economy have significant spillover effects in the economic performance and financial health of other nations, a dynamic that is increasing the risk of a global liquidity trap.  A liquidity trap occurs when interest rates are very low and there is a high amount of savings by households and businesses which means that central bank monetary policies are ineffective.  Here is a video that will provide you with more background information on liquidity traps:

Mr. Carney goes on to note that the current international monetary system (IMFS) is lowering the global equilibrium interest rate or r* by:

1.) feeding a global savings glut as emerging market economies accumulate reserves of "safe: U.S. dollar assets as protection from the inadequate and fragmented global financial safety net.

2.) reducing the scale of sustainable cross border flows which results in lowered potential global economic growth.

3.) increasing the downside skew of likely economic outcomes.

At this point, all of these factors have worked together resulting in global economic policy uncertainty reaching record highs as shown on this graphic:

In the past, economic expansions and contractions were relatively symmetrical across the globe.  This has changed substantially over the past two years; at the start of 2019, two-thirds of the global economy was growing at rates below its potential.  In contrast, the U.S. economy was very strong with nearly full employment; this forced the Federal Reserve to tighten its policies which resulted in a stronger dollar.    The strength of the U.S. dollar has a significant impact on global trade volumes.  Research by Emine Boz et al shows that a 1 percent U.S. dollar appreciation results in a 0.6 to 0.8 percent decline with a year in the volume of total trade between countries in the rest of the world.  It is the growing asymmetrical economic patterns that are putting the global economy under significant strain.  This is particularly pertinent given that the share of global economic activity sourced from emerging market economies has risen from 45 percent at the time of the Fed's last tightening cycle to 60 percent today and it is expected to rise to 75 percent by 2030.

One of Mr. Carney's solutions to dampening the dominance of the U.S. dollar on global trade is the development of a Synthetic Hegemonic Currency.  He notes that retail transactions are increasingly taking place online through the use of electronic payments rather than cash.  One of the new entrants to the payments infrastructure universe that he touts as a solution is Libra, a payments infrastructure "...based on an international stable coin fully backed by reserve assets in a basket of currencies including the U.S. dollar, the euro and sterling".  This cryptocurrency which  can be thought of as a fiat currency backed by fiat currencies (i.e. a fiat fiat currency) could be exchanged between participating retailers and users on messaging platforms.  Here is a screen capture from Libra's website showing their vision:

Libra claims that it will reinvent money, transform the global economy and make it so that people everywhere can live better lives.

When the international monetary and financial system adopts this new Synthetic Hegemonic Currency (i.e. cryptocurrency), it will dampen the domineering influence of the U.S. dollar on global trade; this would mean that shocks to the U.S. economy would have less potent spillovers through exchange rates and make the flow of capital to emerging market economies less volatile.  As well, emerging market economies would be more inclined to diversify their assets away from the U.S. dollar, reducing the downward pressure on equilibrium interest rates, alleviating the aforementioned issue of a global liquidity trap.

Let's close with two further thoughts from Mr. Carney:

'In the longer term, we need to change the game. There should be no illusions that the IMFS can be reformed overnight or that market forces are likely to force a rapid switch of reserve assets. But equally blithe acceptance of the status quo is misguided. Risks are building, and they are structural. As Rudi Dornbusch warned, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could”.

When change comes, it shouldn’t be to swap one currency hegemon for another. Any unipolar system is unsuited to a multi-polar world. We would do well to think through every opportunity, including those presented by new technologies, to create a more balanced and effective system."

This proposal by one of the world's most influential central bankers is unprecedented.  It clearly shows us two things:

1.) that the current fiat currency reality that we live in is unwinding, forcing central bankers to use their imaginations and come up with a fiat fiat currency which is backed by essentially nothing and 

2.) central bankers really have no idea what they are doing and the monetary policy mess that they have created since the Great Recession.

Friday, August 23, 2019

The Russian and Chinese Responses to the Pentagon's Intermediate-Range Missile Test

After the U.S. withdrawal from the 1987 Intermediate-Range Nuclear Forces Treaty or INF at the beginning of August 2019 because of so-called violations by the Russian, the United States was very quick to test a missile that would have fallen under the umbrella of the treaty which banned missiles with a range of between 500 and 5500 kilometres.  This treaty was put into place primarily because both the Soviet Union and the United States could easily conceal shorter-range, land-based nuclear cruise missiles that could strike with little or no warning.

Here is the announcement of the missile test which took place on San Nicolas Island in California by the Pentagon:

Here is a video showing the ground-based launch of the conventionally configured (i.e. not nuclear) cruise missile:

According to the United States Naval Institute (USNI), the missile was a modified Tomahawk Land Attack Missile or TLAM built by Raytheon and fired from a jury-rigged Lockheed Martin MK-41 Vertical Launch System cell mounted on a trailer, the same launcher used in the Aegis Ashore missile defense system which is currently used for launching interceptor missiles.  This system which has been set up in both Poland and Romania caused Russia to claim that the United States was in breach of the INF.  The speed with which the test took place after the collapse of the INF place suggests that the Pentagon had been working on the system well prior to Washington's announced withdrawal.  The test was overseen by the Pentagon's Strategic Capabilities Office which exists to alter existing weapons systems for new warfare capabilities.  According to the Pentagon, the test was a success with the missile accurately striking its target more than 500 kilometres away.

While we heard some vague rumblings from Russia about the launch, President Vladimir Putin had some interesting comments about the United States and its missile program:

1.) Press conference prior to a meeting with French President Emmanuel Macron on August 19, 2019:

"I would like to recall that it was not Russia that withdrew unilaterally from the ABM Treaty. We did not walk away from the INF Treaty either. Now, extending the Treaty on Strategic Offensive Arms (START III) is on the agenda. We have not yet seen any initiatives from our American partners although our proposals are on the table.

We are worried about the Nuclear Test Ban Treaty and the potential militarisation of outer space, and here we have something to discuss. We would even like to discuss these items in detail to clear up the position of France on these vital issues, including space militarisation.

I would like to recall and repeat here in France that we assume a unilateral commitment on medium- and shorter-range missiles. If such attack systems are deployed by the US, we will also have them, but we will not deploy them anywhere unless US systems like this appear.

Regrettably, we have not yet heard any response to what we have expressed many times in public. We get the impression that they simply do not hear us. That said, I think the Europeans are interested in listening to us and responding appropriately."

2.) Joint news conference with Finland's President Sauli Niinisto on August 21, 2019:

Here's the question:

"Several days ago, the US tested a missile that was banned in the past by the INF Treaty. I know that security is a very sensitive issue for Europeans. I would like to ask you if you have discussed or are planning to discuss this new reality during your meeting."

Here is Mr. Putin's response:

"I can say we are disappointed with what we see. Obviously, testing a ground-based medium-range missile violates the INF Treaty and aggravates the situation in the word in general and in Europe in particular. I will explain what I mean.

First of all, the Americans tested this missile too fast, too soon after they announced their withdrawal from the treaty. In this sense, we have grounds to believe that the work on this missile (on the ‘landing’, as this is a sea missile) had begun long before they started searching for a pretext to withdraw from the treaty. To tell the truth, I have not heard the Americans saying they do not plan to deploy these missiles in Europe. If they did say so, that would be good, of course.

We have talked about this; I have said this many times, and two days ago, I said this in Marseilles. I can repeat it here in Helsinki: Russia will not deploy missiles – although, of course, we will be working on short-range and medium-range systems like this – unless corresponding missile systems produced in the US are deployed in a given region. We have not received any response from our American or European partners so far.

I am concerned that the tested missile, according to the Pentagon, is a Tomahawk, or a sea-based missile. It was reconfigured to be land-based. These missiles can be launched from existing launchers in Romania or ones that will soon be located in Poland. It only requires a change of software. I am not sure that our American friends will even inform their European partners about the software they use in these systems. For us this means a new threat appearing that we must respond to."

Not only was this test undertaken to send a message to Russia, it sent a strong message to China.  On August 3, 2019, U.S. Defense Secretary Mark Esper made comments about deploying missiles to Asia as shown in this article from Military Times:

According to the article, the Pentagon estimates that a low-flying cruise missile with a range of about 1,000 kilometres could be tested this month (as noted above) and could be ready for deployment in 18 months.  A ballistic missile with a range of between 3000 to 4000 kilometres would take five or more years to deploy.

The recent missile test by the United States and the comments by Mark Asper brought about this response from China's Daily News, an organ of China's Communist Party:

Note these sentences:

"China, an outsider to the INF regime, has refused to be dragged in and become a third party in Russia-US intermediate-range missile negotiations, as the premise and basis for trilateral arms control negotiations do not exist.

Trilateral talks would be to no purpose since not only has the current US administration shown it is willing to tear up any agreement whenever it feels like it, but even if it did take part in them, it would be doing so in bad faith, since its true intention in withdrawing from the INF Treaty is to make the treaty no longer binding on itself." (my bold)

As we can see, the testing of a medium-range missile by the United States has opened Pandora's box. A series of consequences have been created by this move, the most important of which is the launching of a new global arms race as both Russia and China are being forced to respond to protect their homelands from potential American aggression.  

Thursday, August 22, 2019

The Ban on Cash - The Journey Continues

This blog has, in the past, posted my thoughts on the looming cashless society.  While I have been distracted by the political theatre that has taken over the news cycle since the 2016 U.S. presidential election and the accompanying anti-Russia narrative, as you will see in this posting, those who we elect to put in charge of us are making significant moves to change the monetary system

Thanks to a friend, I was provided a link to this media release from the Citizens Electoral Council, an independent political party in Australia:

Australia's Morrison government is led by Scott Morrison who was sworn in as Prime Minister in August 2018.  He is a former Treasurer and, as such, has inside information on the nation's fiscal and monetary situation.  The measure was recommended by a 2017 report entitled the Black Economy Task Force and was supposed to be in place in July 2019 but has been delayed until January 1, 2020.  

The black economy task force report states the following:

"The black economy is a significant, complex and growing economic and social problem. In our opinion, it could have increased in size by up to 50 per cent since 2012.

The costs it entails are not only financial in nature (lower tax revenues and higher welfare costs), but also societal. The black economy is manifestly unfair, allowing some to play by their own rules and penalising businesses, employees and consumers who do the right thing. Under cover of the black economy, vulnerable workers are exploited, criminal groups flourish and social capital and trust are undermined.

The black economy is not standing still, but rapidly shifting and evolving in step with wider economic, technological and social changes. It is a growing problem which, if not dealt with, can develop a dangerous momentum of its own: a ‘race-to-the-bottom’ which we are already seeing in particular areas.

In 2012, the Australian Bureau of Statistics estimated that the black economy equated to 1.5 per cent of GDP, with the illicit drug industry adding a further 0.4 per cent of GDP. This estimate is now outdated. We consider that the black economy could be as large as 3 per cent of GDP (roughly $50 billion) today, given the trends we identify in this Report.

A sense of urgency is needed from policymakers, leaving behind business-as-usual approaches from the past. A new strategy and commitment is required: one which addresses underlying causes, not symptoms, while keeping regulatory burdens low; one which goes beyond tax; and one which breaks down agency silos and embraces joint action and the intelligent use of data and analytics. This Taskforce was a genuinely whole-of-government undertaking, bringing together 20 Commonwealth agencies.

This agenda has a clear purpose and objective: to make our society both fairer and more equitable by creating a level playing field. To the extent that this yields a revenue dividend, the Government’s capacity to fund needed services (or provide tax relief or lower deficits) will be greater.

Combatting the black economy is not just a matter for governments. We all need to be part of the solution." (my bolds)

Here is a graphic from the report showing the alleged indicators of a black economy in Australia's economy:

While these numbers are interesting, there is no way that governments can accurately assess the size of the black economy given that transactions are not reported to any government or bank.

To battle the black economy, the report proposed the following strategy (among others):

1.) Move to an economy-wide cash payment limit.

2.) Mandate the payment of salary and wages into bank accounts.

The authors note that there is already a drop in the use of cash for payments around the world:

That said, there are still a very significant portion of the general public that prefers to deal in cash for legitimate transactions.  In fact, in Australia, 37 percent of payments are still made in cash.

Now, let's look at the legislation which is called "Currency (Restrictions on the Use of Cash) Bill 2019".  In the draft version, we find the following:

1.) The limit for cash payments is set at $10,000.00

2.) The penalty for cash payments in excess of that amount will be punishable by two years in prison or 120 "penalty units" or both.  Like me, you are probably not familiar with the term "penalty unit" so here is a table showing what a penalty unit is worth:

This means that 120 "penalty units" are worth $18,600.

Here are a few excerpts from the legislation:

While the Australian government is touting this legislation as an effort to shut down the black economy, there is one key reason why this legislation will be necessary everywhere at some point in time.  Here is a graph showing the Reserve Bank of Australia's interest rates for the past three decades:

At 1 percent, Australia's key interest rate is at all-time lows.  Any efforts by Australia's central bank to stimulate the economy will require a the bank to push interest rates into negative territory.  With that in mind, let's look at a scenario.  You have $1000 in currency/cash.  You have two choices; you can deposit that cash into a bank account that is paying a negative interest rate and lose money or you can "hoard" the cash, using it to pay for your legitimate expenses.  If you choose to hold cash, you are defeating the purpose of negative interest rates which are intended to stimulate the economy by getting you to spend.  If the government insists on you spending your hoarded cash, one of the best ways to do it is to put a limit on the amount of cash that you can legally spend.  While the $10,000 limit in the current legislation seems like a very high limit for most of us, there is nothing to stop Australia's politicians from lowering that amount in the future.  

Let's close with a quote from the Citizens Electoral Council media release:

"This law is emphatically not about controlling money laundering and the black economy. The vast majority of money laundering and tax evasion is done by banks and corporations, not individuals. And who helps banks and corporations do it? The big four global accounting firms, including KPMG, whose boss Michael Andrew recommended this cash ban! The big four literally write the tax laws that enable corporations to evade tax, and dominate the offshore tax havens like the Cayman Islands that exist for tax evasion and money laundering. When Michael Andrew was the global boss of KPMG—the only Australian ever to lead the worldwide operations of a big four firm—two of KPMG’s biggest clients, British banks HSBC and Standard Chartered, were caught in 2012 by US authorities in massive money laundering operations. In other words, KPMG assisted its clients to launder money, but is using money laundering as the excuse to take away the rights of Australians to use cash!" (my bold)

Here are Michael Andrew's comments from the introduction to the Black Economy report:

Back to the CEC comments:

"Money laundering and tax evasion are nothing new, that they would suddenly require this “solution”. What is new is the plunge in the public’s confidence in the banks, especially since the global financial crisis. But instead of properly reforming the banks to restore the public’s confidence, through policies such as Glass-Steagall, which separates normal banking from the financial gambling that causes crises, authorities around the world have resorted to insane and in fact criminal measures that further destroy confidence in the banks.

The two most egregious measures are the criminal bail-in policy and the insane move to negative interest rates; bail-in steals deposits to prop up failing banks, while negative interest rates force customers to pay to keep their money in the bank. Both are coming to Australia….the Reserve Bank of Australia has aggressively slashed interest rates to 1 per cent, and in the banking crisis that is brewing right now they will feel compelled to follow countries like Japan and Switzerland down past zero and into negative territory, as the International Monetary Fund is recommending.

Both bail-in and negative interest rates destroy confidence in the security of bank deposits, which motivates people to take their money out of the bank and hold it in cash. This is the experience in Japan and Europe. So like some European countries, Australia is banning cash to force people to use the banking system so they cannot escape these policies, under threat of two years jail."

Given that governments are rarely composed of individuals possessed with a single original thought and the fact that the world's central banks have boxed themselves into a near-zero interest rate "corner" just as they have in Australia, we can be assured that Australia's moves to a cashless society are a harbinger of things to come for all of us and most likely sooner rather than later.  This is particularly pertinent given that we are now over ten years into the current economic expansion and that the Federal Reserve and other key central banks have almost no interest rate room left to stimulate the economy during the next recession.  On the upside for the ruling class, governments know that banning the use of cash and promoting it based on reducing crime will certainly appease the sheeple among us who spend their days wondering what the Kardashian family is up to now.