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The End of Cash?

Velocity of Money
Source: www.stlouisfed.org

Money velocity in its simplest terms is a measurement of how fast money is moving through the economy. Another way of looking it is that money velocity is simply a comparison between GDP and money supply. If money velocity is falling then that tells us money supply is increasing at a faster rate than GDP.

M1 is notes and coins in circulation, plus traveler's cheques, demand deposits and other chequable accounts. A rising velocity is a sign that the economy is relatively healthy whereas a falling velocity might be an indication of a slowing economy or an underperforming economy.

The velocity of M1 is back down at levels seen during the 1980's and early 1990's recessions. The reality is that it may even be worse. The chart below shows the velocity of money over the past century. This chart uses M2, which is M1 plus savings accounts, time deposits less than $100,000 and money market accounts for individuals. The picture it shows could be of concern as it shows that the velocity of money has fallen below the levels of the 1950's and 1960's and is trending into the territory of the Great Depression and War of the 1930's and 1940's. Note as well how the velocity of M2 was trending negatively during the roaring twenties. Could it have been a harbinger of things to come?

Velocity of Money
Source: www.bea.gov , www.stlouisfed.org

A falling velocity of money is not just limited to the US. In the Euro zone and Japan and even China and Canada money velocity has been falling. All of this comes against a backdrop of some of the biggest stimulus ever known. The US has gone through QE1, 2 and 3. Japan it seems has been on QE for years. The Euro zone and China have had their own versions of QE. Some have called the QE's a tsunami of money. And global debt has grown by $57 trillion since the financial collapse of 2008. Yet the western economies remain moribund, stuck in neutral or slowing again.

The illusion of growth can only be purchased with more debt. Yet the consumer is for the most part buried in debt. The consumer is not exactly hoarding his money as while savings rates have improved they remain sharply below earlier periods. If anything as numbers show in the US, mortgage debt is being paid off (or maybe just written off). The consumer just seems to be trying to tread water. Corporations are hoarding money and governments in Europe and elsewhere have been preaching austerity. If the western economies were healthy, the velocity of money would be growing. There is a limit it seems to credit growth, yet what growth there has been has been insufficient.

Despite all the debt that has been created since the financial crisis of 2008 it seems it is not enough or the economies would have expanded further. When the world finally came out of the Great Depression and War it was a big increase in production and people being put to work in good jobs that grew the economies of the 1950's and 1960's. Then came the inflationary 1970's and to get their way out of the mess debt began to expand. That worked during the 1980's and also into the 1990's but it all began to falter badly following the high tech/internet collapse of 2000-2002. Another massive debt binge helped create the housing bubble that took us to the financial crash of 2008. And now this time despite massive injections of QE and debt growth the western economies are at best moribund with low growth.

It is against this backdrop that I read that there is according to some "a relentless war against cash payments". By all accounts, it is accelerating and there are those who would like to eliminate the use of cash all together. If the velocity of money is falling with cash still circulating who knows what it would to do to a cashless society. Tech "geeks" might love a cashless society but for many it is their means of survival and it would most likely be the end of privacy, as we know it.

Ostensibly, the reason for ending cash is to put a stop to terrorists, jihadists, drug dealers, money launderers, tax evaders and many others. But the reality of it would be that everyone would be forced to make their payments through the financial system and allow governments to track their citizens. Many would most likely not object to it. But it would most likely impact everyone including many in a negative way.

It is difficult to say where the call for a cashless society came as it is an idea that has been around for some time. But the cry has come loud from the Euro zone where interest rates are now negative. When interest rates are below zero it costs money to keep your funds in the bank. Cash already pays nothing so holding cash is preferred to keeping your money in a financial institution that charges you. Out of this, Citibank's Willem Buiter has suggested that a) abolish currency, b) tax currency, and c) remove the fixed exchange rate between currency and central bank reserves/deposits.

It is not surprising to learn then that some pension funds and others in the Euro zone want to withdraw their money from the bank and hold it in cash as they realized it is cheaper to store and move cash then it is to pay the bank the negative interest rates. There are numerous stories and blogs around the internet that highlight what is becoming known as "the war on cash".

  • France's finance minister Michel Sapin blamed the Charlie Hebdo murders on the attacker's ability to buy weapons with cash. Result France announced capital controls that included €1,000 cap on cash payments a drop from €3,000. Spain restricts cash payments to £2,500 and Italy restricts them to £1,000.
  • J.P. Morgan Chase has put restrictions on borrowers from making cash payments on credit cards, mortgages, equity lines, auto loans and prohibiting the storage of cash in safety deposit boxes.
  • Banks in the Euro zone that pay negative interest rates are looking at ways to prevent withdrawals of cash. It raises the question so when is a demand deposit account not a demand deposit account. Banks would not have sufficient cash on hand to cover mass withdrawals. Huge withdrawals to avoid negative interest rates would impact negatively their fractional reserves.
  • The Swiss National Bank (SNB) is on record as stating that it doesn't like to see the hoarding of cash to circumvent their negative interest rate policy. Can banks actually refuse to give customers their cash that is legally theirs? It would seem that way.
  • A number of banks in Sweden apparently have cashless branches and they refuse to pay out cash. Customers are moving their accounts to banks that will allow them access cash.
  • In the US, customers who withdraw $5,000 or more are to be reported. Many banks have also instituted maximum cash withdrawals. Capital controls in the banking system it would seem are becoming normal.
  • According to a report HSBC in the UK is interrogating customers on how they earn and spend their money and restricting large cash withdrawals to £5,000.
  • The State of Louisiana passed a bill - Bill 195 that would make it easier to track the sales of stolen goods. The bill could have far-reaching consequences in effectively putting every flea market, goodwill, garage sales, Craigslist, and Kijiji out of business. Apparently, the bill requires that second hand goods be paid with credit cards, cheques, money orders, debit cards, or electronic transfer. They no longer can use cash. The bill also required that second hand sellers obtain a considerable amount of information on each buyer. The process seemed to fly in the face that a US dollar is legal tender for all debts.

These examples are merely a few that I have read where cash appears to be under attack. Negative interest rates are not dissimilar to a tax on savings. The use of cash is considered a suspicious activity. Restrictions on the use of cash appears to be becoming more prevalent. In Canada, banks do put restrictions on how much one can withdraw from an ATM. Large withdrawals or deposits come under the auspice of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Despite using terrorists, jihadists, money launderers and others as an excuse for a cashless society the real target could be the cash underground economy that for the most part can't be monitored or taxed. The size of the Canadian underground economy has been highlighted recently in a report that puts its size at $42.4 billion in 2012 or 2.3% of GDP. A cashless society would be going after everyone to collect taxes from contractors that take cash under the table for renovations to individuals holding Saturday morning garage sales and churches holding rummage sales.

The move to a cashless society is not something that is going to happen overnight. So far, it seems to be being implemented slowly and in stages. Banks, central banks and governments are behind the movement. The technology is already there to move to a cashless society. Eliminating cash allows governments to track everyone both the innocent and the guilty.

The trouble is what impact could the move to a cashless society have on the economy? Already the velocity of money is falling rapidly. In a cashless society, M1 could become a relic of a bygone era. And it could also cause considerable problems as currency to pay for goods and services has been around for centuries and a cashless society might not be fully acceptable by significant portions of the population. The loss of privacy could be only one issue related to a cashless society.

The end of cash could raise more questions than answers. On the surface, it would leave a huge unanswered question as to "what is money worth?" Not much, it seems in a world of negative interest rates and rising bank fees just to place ones money in the bank. Negative interest rates are a distortion of the market as holding cash would be punitive. It could force people into investing in higher risk securities. It could also be good for gold, as gold remains an historical store of value. There is also the law of unintended consequences when one tries to enforce what amounts to what one may call a command economy.

Given that the recent US GDP numbers were quite low and probably negative once one strips out inventory buildup it would not be surprising that the velocity of money (M1 and M2) has fallen further. None of this is positive and it could be another sign that the global economy could be in more trouble then what is currently evident.


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