Riksbank--Cash Must Be a Protected Legal Right for Good Reason

 This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/currenciesforex/riksbank-cash-must-be-a-protected-legal-right-for-good-reason?post=94939&uid=4798

Sweden's Riksbank says that cash must be a protected legal right. The central bank of Sweden fears that people will be locked out of the banking system, something I have warned could happen. It is nice to hear it from a central bank, though. A discussion of the shadow economy follows at the end of this article. I am sure that the contribution to GDP by the shadow economy, both legal and illegal, is massive. I am sure that this fact is not lost on central bankers.

Now I can point to the Riksbank, as my friends and relatives scoff, and say, see, I told you so. I have been telling them that the existence of cash is important and the talk of banishing it is dangerous and cannot be ignored!

And I have been speaking to the subject of privacy, as all transactions will be tracked in a cashless society. Apparently that is a concern of the Riksbank as well.

Considering that the central bank of Sweden is at the forefront of negative interest on bank reserves, pushing inflation higher for the last three months in a row, it is astounding to me that it wants to protect cash. Most bankers who advocate negative interest on reserves also advocate a cashless society, fearing bank runs. And that could happen if the plunge into negativity is deep enough to be passed on to consumers, and if those consumers believe that those costs are harder to bear than the loss of convenience in maintaining the account.

So, this is a significant political statement on the part of the Riksbank, to seek protection for cash. The bank pointed out that there are parts of the country and situations that require cash. Now, it appears that the bank looks at this as a temporary situation as the development of alternative means of payment become widespread:

This development is positive in itself, but needs to take place at a rate that does not create problems for certain groups or exclude anyone from the payment market, If the banks continue to set the pace, there is a high risk that the possibility of using cash will disappear before alternative means of payment have become widespread and generally accepted. To restrain this development, the Riksdag (the Swedish parliament) should introduce a clear obligation for the banks to provide basic functions that meet customers’ needs.

Obviously, one "situation" that would have to be addressed is the donation of cash to individuals. I am not the only one who gives a small amount to people hurting in this US economy. They are on the street corners of Las Vegas and other cities. If they had a smart phone to transact payments, I am wondering what credibility would that display that they are really that poor? And how would they afford the smart phone in the first place?

The PaymentEye speaks to this issue, while saying regular charities are moving to contactless, or electronic payments:

Last year, a futurologist told PaymentEye that a good way to gauge the convenience/penetration of a payment method was to run a quick thought test: how easy would it be to give a pound to a homeless man on the street using that method? Naturally, giving a £1 coin is the quickest and easiest way. Anything more modern like cards or any form-factor based on the card rails (mobile, wearables) is nigh on impossible.
Obviously, this is by no means a standard test, but it is still quite useful because it reminds us that whilst newer payment methods are incredibly convenient for things like food shopping and travel, a lot of organisations, and more importantly people, rely on cash.
It is interesting that the same futurologist is confident that cash will remain popular, in the UK, as there are record ATM withdrawels, a surprising development with the increase in electronic means of payment!

I live in Nevada. If I go into a casino and watch people putting dollars into the machines, I ask myself would that casino survive if cash was no longer allowed? It is one thing to have the convenience of a paper receipt instead of carrying around a bucket full of change, but people still like to put real cash into the machines they play.

I don't personally care about an individual casino surviving. But the economy of Nevada depends on cash. Digital cash may meet stiff resistance when it comes to gaming.

And of course, in a shadow economy, where transactions are done under the table, so to speak, banning cash would stop that economy in its tracks. But remember, people who make money in the shadow economy spend that money in the real economy. Cut the income of too many people and you cut the GDP.

I am pretty certain that many startup companies and small businesses are in the shadows these days. These could be the "situations" that were mentioned by the Riksbank as a reason to perpetuate cash. While the US government would view this shadow economy negatively, it actually keeps money flowing in the real world, on mainstreet, which has been forgotten by many policy makers. Here is an example of the thinking behind underground economy:  

There are many, many “home grown” businesses popping up, with advertisements on websites like Craigslist, and in local classifieds like Ad Sack, and Pennysaver. They run the gamut from tree trimmers, to gun smiths, to plumbers….. I’ve seen many ads for seamstresses, day care, mechanics, handymen, or virtually anything else you can think of. Even for many proffessional craftsmen and service people, there is an “after hours” price…….. That’s the beauty of free markets, and a free society. When something isn’t working any more, crafty folks will come up with new solutions.

While I would not rely on his views as an economist, nor agree with much of his politics, the Survival blogger makes a case for the freedom to survive.  And think about this. Without cash, there will not exist the freedom to survive if you need to just survive. There are smart, clever people, who survive by moonlighting in a shadow economy.

So, the shadow economy has serious economic benefits. Even the IMF admits this:

Theoretical and empirical studies do not conclusively explain how an increase in the shadow economy or informal sector affects economic growth. According to some, the shadow economy depresses the growth of GDP. They contend that shrinking the shadow economy will increase tax revenues, stimulating a rise in public spending, especially on infrastructure and services that support production expansion, leading to a rise in the overall economic growth rate.
The contrary view is that the informal sector is more competitive and efficient than the formal sector, and thus that an increase in the shadow economy will stimulate overall economic growth.
Certainly empirical studies have shown that at least two thirds of the income earned in the shadow economy is quickly spent in the official economy. And in Germany and Austria, two thirds of the value added produced in the shadow economy would not be produced at all if the shadow economy did not exist. In the United Kingdom during 1960–84, earnings in the hidden economy significantly raised consumer spending, especially on durable goods and services. The positive effects of such expenditures on economic growth and on revenues from indirect taxes certainly bear keeping in mind.
 The IMF says in the above article that even in developed nations, 10 to 30 percent of GDP is represented by the shadow economy and much of that is spent in the official economy:

The growth of the shadow economy can set off a destructive cycle. Transactions in the shadow economy escape taxation, thus keeping tax revenues lower than they otherwise would be. If the tax base or tax compliance is eroded, governments may respond by raising tax rates—encouraging a further flight into the shadow economy that further worsens the budget constraints on the public sector. (On the other hand, at least two-thirds of the income earned in the shadow economy is immediately spent on the official economy, resulting in a considerable positive stimulus effect on the official economy.)
The IMF accepts the existence of the shadow economy although it offers solutions for keeping it from growing at the expense of government revenue. But by accepting its existence, the IMF must also accept the existence of cash for all nations. Cash must be a protected legal right for good reason.

The article cited by the IMF is an old one, 2002. Other, newer publications by the IMF seem to promote cashlessness. That bank would do well to remember what conclusions it came to in this article. Since then, madmen have been writing papers for the IMF.

The madmen advocate the Miles Kimball view of forcing the poor to pay interest on cash by receiving a diminished amount of cash from the bank. So, those who need money the most, who are in survival mode, often in the shadow economy, will be the ones expected to fork over the additional cost of maintaining cash according to this insane idea. And, of course, fewer and fewer people will want to have cash in such a system, and the shadow economy will diminish, along with GDP. Honest work will diminish, not just drug dealing.

When times are tough, clever people will have no longer have recourse to rely on their secondary skills. That is a bad idea.

Isn't diminished GDP the opposite result bankers are hoping for by eliminating cash? We talk about how bad it is for Russia losing 5 percent of GDP. Many nations stand to lose a much higher level of GDP if cash is abolished. I can't see that a little negative rate stimulus would make up for that policy.



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