Deflation and the Demise of Cash

Is your crypto digital key the new $100 bill?

One of the consequences of the pandemic has been that is accelerating trends that were already in force. The prime example is online shopping but the close corollary of that is, of course, the demise of cash. It now seems that many developed economies are hurtling down the road to a cashless society. This will have profound implications.

Physical cash (notes and coins) of the sovereign currency in the country which you live has traditionally been the ultimate hedge against deflation. When debt is deflating, and the amount of money in an economy is declining, holders of said money will benefit. That money could be held in physical cash or in bank deposits. Naturally, on a corporate level, bank deposits are clearly more sensible than having a massive Bank-of-England-style vault filled with physical cash. So, what’s going to happen when physical cash dies out?

All personal and corporate cash in banks sounds fine to the majority of people, but the potential of negative interest rates then becomes a terrifying scenario. Being forced to accept charges (paying interest) to keep your money with the bank, rather than the other way around, is anathema to everyone, except those evil, controlling central bankers (Enough! Ed.)

The seemingly exponential interest in crypto currencies at this juncture has a number of reasonings, one of the central cases being a hedge against the hyper-inflationary policies of central bank money printing. But is it also linked with the demise of cash?

For many decades now, cash has been viewed with suspicion by governments and central banks. Cash transactions are outside the tax system unless declared, and “cold, hard cash” (well, maybe not so hard these days) has been the lifeblood of criminal activity for centuries. The vast majority of law-abiding citizens will have held cash in the past because of its safety value more than anything else, stashed under the mattress or elsewhere. The ability to do that, though, is disappearing and perhaps that’s why people are seeing Bitcoin et al as the new “outside-the-system” money that cash was (is, sorry, getting ahead of myself there!)

The point is that perhaps crypto is being viewed not just as a hedge against INflation, but also a hedge against DEflation given that it might be the only way to hold “physical” (virtual physical?) cash in the future. People might be viewing it the same as buying physical gold and, rather than hold it at home, have it stored in a custodial vault.

I am old enough to remember the battle between VHS and Betamax when video tapes came along. VHS emerged as the video tape of choice and it is likely that only one or two cryptos will emerge as the “new cash” of choice. What seems clear, though, is that babies born this year in developed economies will probably only read about cash, as we know it, in history books.

Chart: Cash transactions in the U.K. have been decimated over the past 30-years, whilst cash hoarding has increased slightly, especially during the financial crisis of 2008/09

210226 - MG