The Bankwatch

Tracking the consumer evolution of financial services

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.

How and Why Banks Will Seize Deposits During the Next Crisis

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.

Written by Colin Henderson

October 6, 2015 at 21:29

Posted in Uncategorized

3 Responses

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  1. The centralized banking system is obsolete. 1) They expose all our personal information to governments and criminals, domestic and foreign alike. 2) They offer negative real rates of return on demand accounts. 3) They charge fees for automated services. 4) They can legally confiscate all our money, aka fruits of our labor via bail ins to cover their own financial market gambling debts.

    Bone Fish

    October 6, 2015 at 22:02

  2. @Bone Fish
    I disagree with 1. but 2. 3. and 4. are dead on.

    2. is interesting because it assumes growth in value as the norm. When a generation is say 30 years, that assumption really depends on when you live.

    4. is a big problem exemplified by Greece when the Central Bank and banks froze bank accounts. That one is real.

    Colin Henderson

    October 6, 2015 at 22:07

  3. Looks like I nailed three outta four on my first pass. Please explain why government and criminals should have any opportunity to passively access (your) personally identifying information and account activity?

    Bone Fish

    October 6, 2015 at 23:55

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