The View

With digital currencies on the march, cash won’t be king for much longer

Previously unsavoury proposals gain more support from economists and authorities

PUBLISHED : Thursday, 17 March, 2016, 11:01pm
UPDATED : Thursday, 17 March, 2016, 11:01pm

In his sweeping history of the Third Reich, historian Richard Evans quotes Joseph Goebbels, the regime’s minister of public enlightenment and propaganda. In 1933, Goebbels said: “It is not enough to reconcile people more or less to our regime, to move them towards a position of neutrality towards us. We want rather to work on people until they have become addicted to us.”

Today, governments have struggled and failed to revive economic growth and global trade. They remain weak after almost eight years of near zero rates. Negative rates are the only recourse in what could be a futile attempt to save economies.

Governments will have to wage a mighty propaganda, regulatory and technology campaign to sell and impose upon a financially embattled populace a savings experience that fundamentally distorts reality in such a way that the laws of nature do not apply – being penalised for saving. And it represents new opportunities for financial technology to create the means for a cashless society that makes negative interest rates work effectively on a global scale.

Negative interest rates can only work in a cashless environment where governments possess the means to control spending and saving

As the international monetary system struggles with stalled aggregate demand, capital flight, declining trade and collapsing markets, the ultimate form of capital control – an authoritarian cashless economy – is the regulators’ only way in order to enforce a negative interest rate policy.

The Bank of Japan surprised markets by adopting negative interest rates in January, the European Central Bank cut rates again on March 10, charging banks 0.4 per cent to hold their cash overnight. At the same time, it offered a premium to banks that borrow in order to extend more loans. Janet Yellen, the US Federal Reserve chairwoman, said in November that a change in economic circumstances could put negative rates “on the table” in the United States.

Government planners around the world are considering how they will roll out the regulations and technology for a cashless economy. The greatest and most immediate financial technology challenge is not blockchain, but how to realise the dominance of digital currency. Vanquishing cash will gain pace as financial industry policies begin to favour faster development of digital currency platforms on mobile platforms to replace it.

The world’s preference for cash has only slowly surrendered despite the advance of electronic means. According to available figures from the Bank for International Settlements, outstanding cash in circulation was 7.9 per cent of gross domestic product in the largest 19 economies in 2014 compared with 8.4 per cent in 2010.

Two years ago, bitcoin and other types of digital currency were roundly derided by regulators and bankers as being too unsecure and immature to substitute for government-issued and -controlled currency. Numerous booms and busts and criminal activity in the murky bitcoin market left its reputation in tatters.

Now, it may inspire a new creation to serve monetary authorities. Negative interest rates can only work in a cashless environment where governments possess the means to control spending and saving.

During that last Davos conference, Morgan Stanley’s head of EMEA equity research, Huw van Steenis, said, “One of the most surprising comments this year came from a closed session on fintech, where I sat next to someone in policy circles who argued that we could introduce negative rates well below 1 per cent – as they were concerned that Larry Summers’ secular stagnation was indeed playing out and we would be stuck with negative rates for a decade in Europe. They felt below [1.5 per cent] depositors would start to hoard notes, leading to yet further complexities for monetary policy.”

John Cryan, co-head of Deutsche Bank, who spoke on a Davos financial technology panel, predicted that in a decade cash probably would not exist. “There is no need for it,” Cryan declared. “It is terribly inefficient and expensive.”

A recession in the current low-rate cycle will be instigated by households and businesses who choose to hoard cash instead of spending it. The only way to reverse a recession is to force cash savers to spend their money. The combination of strong financial regulations and proven mobile payment systems could very well deliver the world into digital serfdom.

One unintended outcome of quantitative easing is that it has reduced incentives for people to keep bank deposits. They have been penalised for not investing in equity markets. As low interest rates and weak economies persist, these previously unsavoury proposals gain more support from economists and authorities. Inevitably, this will prompt official acceptance and support for more electronic finance systems.

Peter Guy is a financial writer and former international banker