Got cash? - The Centre for Independent Studies
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Got cash?

technology money cash techRecent technological advancements point to a looming cashless society, with a recent survey indicating that most Australians expect to break free from notes and coins by 2022. Soon, payment with a digital wallet on your mobile device will be the norm.

Ubiquitous electronic payments have the potential to be safer, more convenient and less cumbersome than handling physical cash.

However, recent calls to expedite the cashless transition seem to be dismissive of valid privacy and cybersecurity concerns. And more worryingly, they are driven by the wrong reason, i.e. the need to remove the natural bounds of central banking’s negative rate floor.

The argument is that in order to stimulate investment and consumption, central banks reduce the economy’s cash rate; yet there is a limit to how low the rate can go, as people could always withdraw cash from the bank system and hoard it under the mattress. Therefore, if physical cash is no longer a policy hurdle, the sky is the (negative) limit to set the cash rate.

Not long ago, a zero-lower bound was the classic textbook rule. Nonetheless, lately central banks in important markets — including Japan, Euro Area and Switzerland — are starting to explore negative territory for deposit rates, although knowing that a negative lower bound threshold is unknown but certain to exist.

So will a precipitous cashless conversion cumulated with negative interest rates solve the ailing global economy?

Not quite. Instead it would certainly generate pernicious disincentives for efficient allocation of capital, with artificial asset price inflation as an unwanted side effect. Besides, a fledging market for electronic money platforms (such as Bitcoin) might establish itself as a safe haven against government’s misuses of monetary policy.

We should welcome a cashless economy in due course — but not rush it in for the wrong top-down motives.

This is an extract from an opinion piece published by Business Spectator. Read the full piece here.