How The Drug Trade Floats The Banking Industry

Taki's Magazine has published an article entitled "Narco Liquidity" (h/t Bayou Renaissance Man), in which the author discusses the size of the narcotics trade (6% of the world's economy, or the same as petroleum markets) and how critical it is to maintaining liquidity in the banking sector. The author goes so far as to argue that "illegal narco monies apparently rescued the banking industry from collapsing due to a calamitous lack of liquidity during the second half of 2008—the so-called 'credit crisis.'" The latter third of the article, however, discusses the planned move by the EU to ban large denomination bills (something that the U.S. is apparently considering, as well). The author observes:

The cashless society is coming, yet much narco capital is held in cash. This poses fascinating questions, like how money laundering takes place in a digital economy, and whether we can sustain a purely licit economy, in practice not in theory. Equally worrying, and not unlikely, is the chance that cartels switch cash (or merchandise) for gold, diamonds, or any legal commodities that liberate them from the currency trap, thereby distorting the value of those commodities and their markets. The game will change and the players will adapt. 

The point is that, for all the advantages a cashless economy might confer upon society, it is not certain that digital currencies will successfully lock out the proceeds of illicit trade. If successful, however, the cost of isolating narco wealth creation may be unaffordable, compared with the beneficial impact of narco liquidity on today’s global economy, especially in times of crisis. Locking narco capital out of the banking system might be good for the price of gold in the long term. Whatever happens, though, the narcos’ net economic power—if diverted—may create a greater, not lesser, threat to our society, its institutions, and their corruptibility. Worst-case scenario, where current economic dangers materialize simultaneously, without the steady stream of narco liquidity the bottom could fall out of the global economy.