What is the future of money and cash?

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by Shaun Richards

The issue of money and what it is considered to be has been something that has undergone quite a few changes in the credit crunch era. For example back then many would have described Quantitative Easing (QE) bond purchases as printing money and therefore being directly inflationary. Whereas we have learnt over time that the main effects escape consumer inflation measures and instead can be found in asset prices such as houses and bonds. Oh and don’t be too worried about if you got that wrong as the central banks did too as I recall the Bank of England assuring us QE would directly create inflation. If course that message got relegated if not redacted but we are left with the uncomfortable view that whilst one Pound is the same as another it has different impacts due to the way it is created. Money creation by banks is different to money creation by central banks. Putting that another way the “high powered money” of economics text books referring to central bank creation actually fitted better with bank creation.

Cryptocurrency

Next comes the issue of the crypto era or the various digital coins that have appeared. If we look back then Bitcoin was created back in 2009, but if you indicated that it would have the role it has now you would only confuse people  back then. Who would believe you? Telling them that the crypto world would have a market value of US $2.5 trillion as it did last week might have got you a padded cell. There are of course issues with using a marginal price for a collective concept like market value but as Todd Terry put iy.

Something’s goin’ on

Whilst the coin introduced this week ( Internet Computer) is already worth over US $40 billion it is hard to call it money for now when who even knows about it? Also it would appear that many of the advocates who are pleased at the way they have avoided central bank involvement seem to have replaced them with Elon Musk, at least for the time being. We started the week noting his impact on Dogecoin and then there was this.

We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel……….Cryptocurrency is a good idea… but this cannot come at great cost to the environment

So Elon seems to have his finger on the price trigger as we mull what is behind all of this.

To be clear, I strongly believe in crypto, but it can’t drive a massive increase in fossil fuel use, especially coal

There are all sorts of issues here as we wonder what his view of the Lithium mining for his batteries is? But we see that this new form of money has its challenges too.

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Bank of England

John Cunliffe of the Bank of England has been looking at this and he is concerned about the split between what is “public” and “private money”

Public money for general use in the UK is only available in the form of physical cash. It is highly visible, trusted and, indeed, is probably the image that many people in this country have in their mind when they picture money.

 

However, the majority of the money held and used by people in the UK today is not physical ‘public money’, issued by the state, but digital private money’ issued by commercial banks. Around 95% of the funds people hold that can be used to make payments are now held as bank deposits rather than cash. In everyday use, only 23% of payments pre pandemic were made using public money in the form of cash, down from close to 60% a decade earlier.

I am not sure where he thinks he is going with this because for most people private money is fungible with public money due to this.

And a deposit guarantee scheme gives holders of commercial bank money the protection of a backstop should the bank fail.

But the concept of money at banks was challenged not so long ago and we did see bank runs.

the government was forced to bailout the banking system at enormous cost to avoid the millions of citizens losing the money they held in the form of claims on commercial banks.

The response of ever more state backing such as the expanded deposit protection scheme as well as the “Too Big To Fail” culture means I would argue that public money is these days effectively more like 70-80% ( not all deposits are insured) than the 5% he claims.

This bit is more interesting though because it brings the crypto world into the equation.

 Money is in the end a social convention that can be very fragile under stress.

Perhaps Elon will demonstrate how fragile as as far as I can see he is operating without reference to regulation or the law. More disturbingly the law does not seem to be catching up with him whereas it is trying to with others.

Cryptocurrency exchange Binance is under investigation by the Justice Department and the IRS, with officials who probe money laundering and tax offenses seeking information ( Bloomberg)

Being a central banker John Cunliffe wants to downplay the role of cash.

As a result the use of public money in the form of physical cash has been declining……….A recent Bank of England survey, for example, found that 70% of respondents were using less cash than prior to the pandemic.

Whereas the actual amount of cash has been rising and at quite a rapid rate recently as you can see below.

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What about a Digital Pound?

There will be absolute panic at the Bank of England at the prospect of this.

As I set out earlier, there is now the very real prospect of non-banks, including the large technology platforms or ‘Big Techs’, issuing new forms of digital money, such as ‘stablecoins for general payment purposes. These are likely to have greater functionality and lower transaction costs than the current commercial bank digital money offering and could quickly attract a large number of users.

The panic will be at the impact on The Precious! The Precious! which would be singing along with Queen and David Bowie.

It’s the terror of knowing
What this world is about
Watching some good friends
Screaming let me out

Putting it another way this bit is curious.

Competition acts a spur to innovation.

The banking system has been exactly the opposite of that being at best mostly an oligopoly. Also the track record of the public-sector in keeping people’s data safe inspires little confidence here.

A second area in this values category is privacy.

Comment

Money has changed quite a bit in recent times although to be fair much of that as been in our perception of it. In some ways Pink Floyd had a decent stab at it.

Money
It’s a crime
Share it fairly
But don’t take a slice of my pie
Money
So they say
Is the root of all evil today
But if you ask for a raise
It’s no surprise that they’re giving none away
One aspect of the future is clearly the advent of central bank digital coins which will have two features. The first is negative interest-rates in the next recession and the second is an attempt to protect the role of the banks. That creates a problem because the first undermines the second.
Actual physical cash will come under more official pressure. They will claim that this is to deal with financial crime but the reality is that the future is likely to find even a 0% interest-rate attractive. Who a decade ago would have thought I would be both thinking and typing that? I think that is why we are seeing the cash in circulation rising as people are putting some aside for such eventualities. Thus the high tech world of digital money may be creating a subset of money under mattresses and floorboards.
Also we are seeing a lot of official talk about privacy. Are you thinking what I am thinking?
Oh and as a final point there are regular flurries about the end of US Dollar dominance. But all of these new ventures seem to define themselves in relation to it, so it seems to be doing okay…..
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