Why do we need cash?
Just in case you thought the world financial system was rational, then in fact you are correct. Rational thought for protection of the world financial system during the next crisis is to eliminate the problem caused by cash. Now this might seem an extreme view of the world, but lets not forget Andy Haldane of the Bank of England proposed elimination of cash just last month.
The financial system is predominantly comprised of digital money. Actual physical Dollars bills and coins only amount to $1.36 trillion. This is only a little over 10% of the $10 trillion sitting in bank accounts. And it’s a tiny fraction of the $20 trillion in stocks, $38 trillion in bonds and $58 trillion in credit instruments floating around the system.
Suffice to say, if a significant percentage of people ever actually moved their money into physical cash, it could very quickly become a systemic problem.
Indeed, this is precisely what caused the 2008 meltdown, when nearly 24% of the assets in Money Market funds were liquidated in the course of four weeks. The ensuing liquidity crush nearly imploded the system.
Of course these are quite extreme views but looking 50 years out say, then this extreme view suggests elimination of cash may not just be a convenience but a necessity to keep the world afloat. The theory goes that with no cash we would eliminate the natural fiscal suffocation that comes with the drive to cash in times of crisis.
I wonder if the opposite is not true and that cash may jest be the thing that keeps pulling us back to the centre and some semblance of stability.