Crypto Market Commentary
22 October 2019
Doc's Daily Commentary
The 10/17 ReadySetLive Update with Doc & Mav is listed below.
Mind Of Mav
The Cashless Paradox
This month saw the rollout of a first-of-its-kind ban in a major US city.
Often called the poorest big city in America, Philadelphia is blazing a trail that is meant to uplift, or at least protect, the most disadvantaged and displaced by fintech proliferation.
Philly has long been ranked the poorest metropolitan area of the country’s biggest cities. The poverty rate hovers at a stubborn 26%. Pew’s 2018 study found that 41% of those living under the poverty line said their health was poor compared to just 18% of wealthier residents. More than half of respondents interviewed for the study said they grew up poor or near poverty.
That poverty translates to a reinforced dependence on cash.
In response, in February Mayor Jim Kenney signed off on the law that prohibits most retail locations from refusing to take cash or charging cash-paying customers a higher price. Violators can face fines of up to $2,000 per violation.
The law made Philadelphia the first major U.S. city to ban cashless stores.
Proponents of the new ban argue that cashless stores effectively discriminate against poor consumers who do not have access to credit or bank accounts. Nearly 6 percent of residents in the Philadelphia region were unbanked — they had no bank accounts — in 2017, and roughly 22 percent were considered “underbanked,” — they have an account but still use check cashers and other alternative products — according to the Federal Deposit Insurance Corporation.
“From all the research I have done over the years, the idea that worries me the most is that the more cashless our society becomes, the more our moral compass slips. If being just one step removed from money can increase cheating to such a degree, just imagine what can happen as we become an increasingly cashless society. Could it be that stealing a credit card number is much less difficult from a moral perspective than stealing cash from someone’s wallet? Of course, digital money (such as a debit or credit card) has many advantages, but it might also separate us from the reality of our actions to some degree. If being one step removed from money liberates people from their moral shackles, what will happen as more and more banking is done online? What will happen to our personal and social morality as financial products become more obscure and less recognizably related to money (think, for example, about stock options, derivatives, and credit default swaps)?” [Dan Ariely, The (Honest) Truth About Dishonesty: How We Lie to Everyone – Especially Ourselves.]
Apart from cash being a wireless technology with near-infinite battery life, and one that needs no telecom connectivity, it is its inherent anonymity that makes it a very valuable instrument. Yet, most advocates of a cashless society advocate it precisely because it gets rid of anonymity. The extent of cashlessness might well be defined by the extent that people value anonymity and privacy. What this means in practice is that unless the demand for anonymous transactions is satisfied, Western society might not cross what the editorial correctly describes as “the threshold level after which the network effect will take over.” The question is whether the desire for anonymity prevent a forming a critical mass of Indians that rely on electronic payments. This, more than technical considerations, might dictate the pace at which cash is displaced from its throne.
On the opposite side, as technology gives consumers more ways to pay, including with their smart phones, some stores have gone cashless to improve efficiency, reduce the risk of robbery, and avoid the hassle of handling cash.
Americans are less reliant on paper bills and coins, according to another Pew Research Center survey released in December. The survey of 10,683 U.S. adults found that 29% said they made no purchases using cash during a typical week, up from 24% in 2015. Likewise, those who made all or almost all of their weekly purchases with cash dropped from 24% in 2015 to 18% today, according to the survey.
So, we arrive at what I refer to as the “cashless paradox”: stuck between a monetary system that holds society back while a new monetary system can’t adequately move society forward . . . yet.
It’s an unavoidable truth that phasing out cash is not a free lunch. The government monopoly on paper currency is a very lucrative business to surrender. The United States, for example, has been averaging profits of 0.4% of GDP annually in recent years. If the US government had to issue bonds to buy back the entire supply of dollar paper currency, it could add more than 7% of GDP to the national debt. For the Eurozone, the corresponding figures are 0.55% of GDP for annual profits from printing currency and 10.1% of GDP to buy back all paper currency. On top of that, paper currency has some special qualities which at present no other transaction medium quite duplicates (yet): near total privacy, near instantaneous clearing of transactions, robustness to power outages, and of course, deep penetration into social consciousness and culture.
But if one looks more deeply, it becomes apparent that the virtues of paper currency open the door to many vices. Large-denomination notes, which constitute 80–90% of the global hard currency supply, largely circulate in the underground economy, helping facilitate tax evasion, crime, and corruption, and on a big scale. Tax evasion at all levels is more than 3% of GDP in the United States, and likely much higher in most European countries. No one likes taxes, but if the government is able to collect more revenue from tax evaders, it will be in a position to collect less taxes from everyone else.
Although far more difficult to quantify, the direct and indirect social costs of criminal activity are potentially far more important than tax evasion. If scaling back paper currency leads to even a marginal reduction in illicit activities, it would be a huge benefit. Sure, there are substitutes for cash in all underground transactions. But cash is king for good reasons, and there is no substitute on the near horizon. If one appears, governments have ways to marginalize it. Circumscribing cash will not end crime and terrorism, but it will deal them a significant blow. Moreover, scaling back on cash is probably the single most effective step a country like the United States can take if it is interested in discouraging employers from avoiding minimum wage restrictions and social security reporting, not to mention employing illegal immigrants. Beyond the practical considerations, sharply reducing the role of cash raises a host of philosophical and practical questions.
My argument for phasing out paper currency is essentially orthogonal to the debate on cryptocurrencies. Phasing out paper currency would already have made a lot of sense 20 years ago. Yes, digital currencies raise important questions for the future, but more as competitors for other financial instruments and institutions, not so much for paper currency. In fact, all evidence suggests that the world’s mountains of cash are not going to fade anytime soon, unless governments actively move to phase out paper currency. The simplest way to start would be for governments to cease printing new large-denomination notes, an action that can be taken quite straightforwardly by most treasuries and central banks. This is just a step on the road to actively phasing out most paper currency, which, as I argue, is the right destination to aim for.
There are many casual objections to reducing the role of cash, but that is mostly what they are, casual objections. The blueprint described here, which leaves small bills around indefinitely (eventually replaced by coins) and provides for free or heavily subsidized debit cards to low-income households, answers most objections that would arise during a long transition period.
The second and distinct argument for (mostly) phasing out paper currency is that it would make it easier for central banks to invoke negative interest rates either when inflation is stuck at very low levels or, far more significantly, when the economy is in deep recession and requires substantially negative real interest rates to help stimulate demand.
Paving the way for unfettered and fully effective negative interest rate policy ought to be thought of as a major collateral benefit of phasing out paper currency. It certainly would put countries in a much better position to deal with the next financial crisis, and it would be very helpful for freeing up monetary policy in ordinary recessions in a low interest rate world.
Just as some believe that phasing out currency will bring untold evil into the world, there are those who believe that negative interest rate policy will undermine civilization. Up to a point, I have tried to deal with all the reasonable arguments that have been made in favor of keeping cash exactly as is. For example, financial stability is a legitimate concern, but it is fair to say that most central bankers and financial policymakers would rather suffer a short period of negative rates followed by normalization than a decade at the zero bound. Of course, various institutional and legal obstacles need to be overcome for negative rate policy to be fully effective.
As for the international dimensions of the problem, a coordinated phaseout of currencies among advanced countries would be the most effective policy. The domestic benefits alone, however, are more than enough to justify phasing out most paper currency, even for the United States and Europe. For smaller advanced economies, and for Japan, whose currencies are not used internationally, the case for winding down paper currency is especially compelling.
The topic of paper currency may seem a mundane one, and it has long been debated only in obscure corners of monetary economics. In fact, however, it is hugely consequential. Most economists and policymakers seem content to let paper currency ride quietly into the sunset over the next 100 years or so, thinking the system works pretty well and that the issue really doesn’t matter that much.
They couldn’t be more wrong. The massive quantities of cash circulating today, and especially large-denomination notes, are a huge public policy problem that needs to be urgently discussed, not taken as an immutable fact of life.
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