Citi Economist Says It Might Be Time to Abolish Cash

It was, but I think "double-talk" is in the mix too.

(OED: meaning 1 is "Deliberately unintelligible speech; speech that is a mixture of real and invented words; gibberish" and meaning 2 is "Verbal expression intended to be, or which may be, construed in more than one sense; deliberately ambiguous or imprecise language; used esp. of political language that is subject to arbitrary national or party interpretation". Meaning 1 is pre-1984, meaning 2 maybe not. Oh, and OED actually knows of "double-speak" too, with the same meaning as "double-talk" #2. I suspect stegosaurus wasn't explicitly intending a 1984 reference when s/he mentioned "doublespeak".)

Bitcoin just feeds into the problem this article's proposal would exacerbate. Bitcoin is designed to be deflationary. There are a limited number of Bitcoins that will ever be produced. So as population and productivity grow, there is less and less currency to utilize for the necessary economic activity, and that economic activity would have to slow down. A Bitcoin-based economy would rapidly drain all capitalist incentive from the market.

I appreciate the sentiment, but a currency that owes its existence to being as complicated as humanly possible can't really be described as "easy".

Gold and silver have the unenviable advantage of being immediately understood by absolutely everyone that has even a rudimentary knowledge of the history of commerce.

Bitcoin still has to be explained.

Europe has already pushed certain interest rates below zero. Let's see how well will it help the EU.

I certainly disagree that negative interest rates are necessary.

The problem with central bank / government policy in the modern world is that they view everything through a thick sheet of plastic (statistics) that distorts what's really happening and removes all detail. Governments see an apparently simple relationship:

spending -> jobs -> votes

... and decide that therefore, more spending is always good. What they don't see is whether the spending and the jobs it leads to are actually useful for society or just convoluted forms of makework.

This was most obvious in the housing bubble. Spain has <a href="http://www.dailymail.co.uk/news/article-2102074/Spain-haunte... "ghost housing estates"</a> where houses were built far in excess of actual non-stimulated demand. Once banks stopped squirting fresh money into the system via mortgage lending the demand for these houses evaporated - people would take them when the houses were effectively free, but if forced to pay for them more directly they weren't interested.

Nonetheless from the perspective of central bankers and politicians between 2001 and 2008 they were doing everything right. There was lots of spending (on houses) that led to lots of jobs (in construction) that hired lots of low paid workers who might otherwise be unemployed (leading to votes). Job done!

If the banking system wasn't constantly tampering with the money supply we might well have a period with less spending, fewer jobs and more unhappy voters. But once the economy got unbent it'd start creating jobs that are more socially and economically useful, and the end result would be better.

The better solution is to encourage a higher baseline level of inflation (a 4% target rather than 2%). Central banks have gotten really good about holding down inflation, but they put themselves into a situation where they have very little power against economic slowdowns when they target a 2% inflation rate (a target which has become a hard cap in many ways).

Of course, the best way to spur some necessary inflation at the moment would be to raise minimum wages, have governments borrow at these essentially zero interest rates and spend it on long-term investments that will allow their economies to grow for the next 70 years like they have for the past 70. But the powers that be pretend that hyperinflation is just around the corner and that government debt is sinful, while at the same time articles like this are published discussing how to facilitate long-term deflation.

I disagree with the entire premise; but that's not why I posted.

I take issue with the deliberate obfuscation employed. Rather than dealing with the elephant in the room (a cashless society is one in which commercial banks have far greater power than they do today), he says things like "resistant to change".

The point is that he is not elucidating the downsides fairly and honestly.

If there is a need for negative nominal interest rates, then the solution is to increase inflation. As the goldbugs are forever reminding us, this can be done by printing money. And this time, distributing it to the public rather than just the finance industry.

In the Swiss case where the rate imbalances are driven by capital inflows, institute capital controls.

Also, what is the effect of negative nominal interest rates on asset prices? Isn't this just another attempt to keep the housing boom going despite all sense?

Their assumption is that if you have negative interest rates, people will withdraw money from banks as cash so that percentage will go up.

Switzerland has recently entered this previously uncharted territory. It's leading to weird problems like banks being unable to process the new rates as the programmers assumed the world would never be so insane, and pension funds planning to withdraw their funds from banks and being outright denied access to their own money. There are persistent rumours about some funds thinking about building their own bunkers and storage areas for gold and cash, as they have an obligation to protect their investors funds and the SNB is now effectively confiscating people's pensions.

> one important property of cash is it is printed debt-free by the state, which can profit from the seigniorage

This is actually not true in current typical monetary systems. There may be exceptions, but the typical setup is that the central bank prints physical money solely as a reaction to demand by banks (who need it to stock their ATMs). From an asset point of view it is an entirely neutral operation that is irrelevant to the state's fiscal position.

In some countries (including the US), coins are minted by the treasury and then sold to the central bank for distribution. In those countries, the state does profit from seignorage - but only of coins, so it tends to be irrelevant in practice (modulo the occasional amusing trillion dollar platinum coin debate).

Well, another fundamental property of cash is that it is anonymous, and this can be seen as wrong on many levels.

If money is either 'debt money' or 'non debt money' then a relative decrease in one would imply a relative increase in the other.

The linked article is full of apples and oranges.

'debt free cash' from the article's seeming definition is M0. While 'non debt free cash' appears to imply M2 (or M4). They're not opposites, but products of each other. Cash simply passes around the economy much faster, instead of sitting under the mattress or in the draw of the accountant for the best part of a week before wages are paid, it sits in an ATM, efficiently on-demand for who needs it when they need it. The velocity of money (how fast it moves from one person's hand to another) has simply increased, substantially, due to technological improvements.

Money * Velocity of Money = Read Economic Production * Inflation Rate

The above is always true (which is why money supply is a good predictor of nominal growth (and on the assumption economic growth changes slowly, inflation, which can vary more, but that takes a qualitative judgment), as it is more accurately and in a more timely manner.

'Debt money', or M2, is more better compared to M2L, the corresponding side of the monetary balance sheet (balance sheets also being an identity: Assets = Liabilities + Capital). And M2 is a much more realistic of the concept of 'money' as it includes deposits and other short term bank liabilities. So compare that to M2L, not M0 to M2, apples to oranges, as M2 is a product of M0 and M0 velocity.

Edit: The referenced article mentioned sterling. For similar definitions of money for the Euro or Dollar substitute M2 for M1, and M4 for M3.

Charging to hold your own money makes all the sense if an institution actually holds your money. E.g. you pay a certain amount to store a brick of gold in a safe.

The problem is that current banks are not banks in the 18th century sense, that is, not institutions that just hold your money safe, ready to return it on your demand.

Instead, they invest this money, giving it to other people in the form of loans. This is the problem with "fractional reserve banking" and "bank runs": the banks don't have your money, they've given it to other people for some interest.

For some time, this scheme worked relatively nicely, and you could get some interest accruing on your savings account. But obviously the system is not very stable: if a major investment crisis happens, your savings may be lost (what savings? they were investments!).

Not all people are quite comfortable with this, but we have little choice.

They received loans, which they have paid back.

https://projects.propublica.org/bailout/

If you destroy cash the idea is to motivate people to invest their cash to get the economy moving. Punish the cash hoarders.

Quantitative easing has not resulted in increasing credit, and therefore the velocity of cash in the economy. If you make it painful to keep cash in one place they hope it is like a game of hot potato and the economy will move again.

The countering strategy is that there is nothing to invest in so it is better to create alternates to cash to preserve value

Because it would push people to spend money and not hold on to it, therefore it would increase consumption which induce economic growth?

The theory is that negative (real or nominal) interest rates serve as a continuation of the general purpose of lowering interest rates. That is, they encourage borrowing and spending, both increasing the size of the money supply and especially its velocity. The net effect is supposed to be increased economic activity and higher nominal prices for goods and services. The essential premise is that negative deposit rates encourage people to spend money by in effect confiscating it if they do not. It's not obvious that negative nominal rates are any more effective at this than the negative real rates that have been imposed in much of the world for the last 7 years. Perhaps someone could point us at research on that particular topic, if any has been done.

There are a number of problems with this. Some of them have been mentioned in passing in other comments, and most of them boil down to the disconnect between economic models of humans and real humans. Among other discrepancies, real humans have finite life spans and therefore a limited tolerance for variance; as such, under less than total economic security they generally refuse to dispense with saving if it's an option for them, even if the expected value of spending their savings is greater than not. So the real effect of progressively lower interest rates on monetary velocity diminishes as rates decline. A similar effect limits the ability of lower rates to increase the size of the money supply; people convinced that capital cannot be usefully employed in the present economic environment are unlikely to borrow regardless of how low rates are. A stagnant, highly unequal distribution of capital also limits the effects of lower rates, since the only people likely to be able to take advantage of them already have plenty of capital available to invest. Of course, the money supply side of this is somewhat less relevant, since no one is (yet) proposing negative lending rates, only negative deposit rates. However, negative deposit rates can actually shrink the supply of money, because the "confiscated" money ends up at the central bank where it would simply add to an already-gigantic pool of reserves that could be lent, but haven't been for the above reasons. That is, the money would essentially be removed from circulation and destroyed, potentially offsetting or even dominating any increase in velocity.

You can learn more about the relationships among these quantities by looking up "modern central banking theory" and basic macroeconomic theory in general.