Cashless America:  The Set-Up (Part 1)

PracticalDad Note: There’s been considerable and increasing talk within the past month about the notion of banning all physical currency.  There are plenty of more-experienced than mine with information out there, but this article started as commentary from my two older kids when I explained the digital currency notion to them.  The article ultimately became too lengthy and I decided to split it into two parts, the first – this part – being the set-up on the cashless America concept.  I’ll follow shortly with the take-away from Eldest and Middle in another article with some responses that surprised me.

There have been a spate of articles and interviews within the past several months about the concept of doing away completely with physical currency in the American economy and moving to a purely digital currency.  Articles and papers have come forward from several influential sources and in late March, Janet Yellen – the chair of the Federal Reserve – made a comment that questioned whether physical currency such as coins and bills was actually a worthwhile store of value.  It’s obviously an idea that’s being passed around the Ivory Towers and Hallowed Halls of Power, so certain folks are going to take a run at making this the wave of the future.  But radical ideas such as these take time and so I thought that I’d get the input of Eldest and Middle since it’s their rising generation that will be affected the most. 

For the record, Eldest is a rising college senior who has by now not only traveled abroad, but studied abroad as well and is now home to replenish the bank accounts before returning for the final year of college.  Middle is her younger sibling, a high school senior who has likewise traveled abroad and is in the midst of AP Economics, much to his chagrin.  He initially thought that it would be fun given some of the conversations about money and real world that we’ve had over the years but now believes – as I do after perusing his text and notes – that it really is not much more than mental masturbation.  So the other morning, I asked them to take some time through the course of their day to consider the following question:  what would be your thoughts on eliminating all physical currency and moving to a purely digital currency, with transactions managed solely by the use of debit cards? 

Let’s take a moment first to look at what’s being proposed.  The initial concept was posited by Harvard economist Kenneth Rogoff in a 2014 paper, Costs and benefits to phasing out currency.  According to Rogoff, there are two principal reasons for the gradual and final abolition of physical currency. 

The first goes to providing additional firepower to central banks in their effort to spur inflation to rates of about 2%.  A core tenet of present monetary theory is that a moderated inflation – no more than about 2% – is a good thing as gradually rising prices enable producers to continue to hire and pass along rising wages to workers, who then spend that money and help perpetuate what is, in theory, a virtuous cycle.  Note: This is the theory and ignores such real world effects as free-trade globalization, currency pegs/manipulation, and all of the things that actually occur in the real world.  As the global economy has tried to recover in the years since the Financial Crisis and the collapse of Lehman – when a monstrous amount of capital was utterly destroyed – the numerous central banks have created a tsunami of liquidity in order to offset deflationary pressures and hopefully create a moderated inflation that meets the core tenet.  Deflation is feared because in the experience of the Great Depression, producers lost control of all pricing power and were largely driven out of business, feeding the unemployment as more and more jobs were eliminated.  But we’ve since gone through an extended number of years of Zero Interest Rate Policy, aka ZIRP and the ability of the central banks to use interest rates as an effective tool against this deflationary environment is reaching what is referred to the effective lower bound.  In terms that any kid taking AP Economics would learn is that there is no longer any marginal value to changes in rates, although certain European nations and the EU are pursuing Negative Interest Rate Policy as the banks are now charged by the central banks for keeping deposits.  The concept behind this stunning bizarro policy – which thoroughly upends literally millenia of conventional wisdom touting the value of saving – is that spending must be spurred and money must not be kept as savings, but instead forced out into the economy in order to be spent and spur economic activity. 

Understand a central concept here:  a dollar bill is not just called currency, but also referred to in econo-speak as a “Zero-Interest Negotiable Bond”.  It is a piece of paper that pays the bearer absolutely no interest whatsoever but can be easily traded from one user to another in the course of daily economic life.  The upshot is that as interest rates approach zero, there is no longer any real impetus to keep money in the bank but instead, to just go ahead and keep it under the mattress or even use it in lieu of credit cards which actually have high rates when contrasted with the rates available for various savings products.  But as rates not only approach zero but actually go below zero into negative interest territory – in reality, where the banks are presently charged for keeping money on deposit and have simply not yet passed that cost onto the retail depositor – then the average person will conceivably ignore the banking system and save money by simply removing their money from the banks completely.  The upshot is that a larger percentage of total money is then outside of the banking system and beyond control of the central banks, even further lessening the tools that they have to affect the economy.

The second aspect of the Rogoff proposal is that an outsize proportion of illegal and/or unreportable-tax transactions are handled via physical currency.  Pay cash for a used vehicle for instance, but report a smaller amount than actually paid via cash in order to mitigate state sales tax when title is transferred; because there’s no actual check to serve as documentation, cash can conceivably hide money from the tax coffers.  So eliminating all physical currency transactions means that all transactions thus occur within a monitorable system, eliminating the prospect of illegality and tax fraud.  The sop to this aspect is the same sop to critics of electronic domestic surveillance – this would only affect criminals and cheats and honest, law-abiding citizens would have no worry since they’re doing nothing wrong.&nbsp: Given the weaponization of such agencies as the IRS, I’m not certain that I’m the least bit comfortable with that surmise.

There’s another aspect of this that bothers me, and that pertains to the financial solution to the Cyprus banking crisis of several years ago.  As a recap, the Cypriot banking system – a favorite offshore banking location for wealthy Russian oligarchs – ran into problems and was on the verge of collapse.  But instead of a government sponsored bailout as in the US, circa 2008, the Cypriot government pushed through a “bail-in” in which bank depositors were forced to give up a portion of their deposits to help keep the banks afloat.  In their ideal world, the hit would’ve been on the large Russian depositors with smaller depositors saved but in our present system, in which the uber-wealthy have access to cash and information, the Russians had largely removed their funds by the time that knife fell and while the smallest depositors were exempted, the original targets had all moved onwards to safer grazing territory.  This might sound faintly interesting but for the realization that the “bail-in” concept was originally floated by the FDIC, the US governmental agency tasked with insuring bank deposits.  The notion was that there had to be a better way than just spending more government money and that better way was found with the depositors.  So bear with me here: if you’re worried about the bank on a very short term basis, as happens during a good, old-fashioned bank run, your option is to pull out the money as cash and keep it safe under the mattress.  But if there’s a cashless society, then the only place to move your money is to another institution since there would be currency.  You are, in effect, effectively trapped within a system that could decide it was better off to use the depositors money in the form of a “bail-in” of teetering banks.  And if you think that the pain would be spread amongst everyone, remember that the uber-wealthy depositors in Cyprus had most of their money removed by the time that the ball dropped on the bail-in. 

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