Cashing Out

I found an article this morning titled: "Cash will soon be obsolete. Will America be ready?" It started out as fairly bog-standard cheerleading for the Federal Reserve establishing a Central Bank Digital Currency; basically, a version of Bitcoin (or any other cryptocurrency, really), just this time, it's backed by the United States government, and so people could use it to pay their taxes. It's not a new idea... I want to say that I first encountered it a year or two ago. And a Federal Reserve version of Bitcoin is a bad idea on its face. It would come with a decent set of benefits, which, one suspects, is why the concept was floated in the first place. But this particular benefit articulated by the article's author, Eswar Prasad, struck me as perhaps ill-advised.

A central-bank digital currency can also be a useful policy tool. Typically, if the Federal Reserve wants to stimulate consumption and investment, it can cut interest rates and make cheap credit available. But if the economy is cratering and the Fed has already cut the short-term interest rate it controls to near zero, its options are limited. If cash were replaced with a digital dollar, however, the Fed could impose a negative interest rate by gradually shrinking the electronic balances in everyone’s digital currency accounts, creating an incentive for consumers to spend and for companies to invest.

Begging the expert's pardon, but if one of the expected benefits of a Central Bank Digital Currency is that said Central Banks can combat the Paradox of Thrift by adding a "use it or lose it" clause to people's money in order to force, either though spending or taking, a lowering of the aggregate Savings Rate, cash will most certainly not become obsolete, let alone "soon."

There is already a certain segment of the public that understands inflation targets as an unwarranted tax on the value of their cash savings. The steady march of inflation forces people to take risks with their money simply to have it retain its purchasing power, given that standard bank accounts pay less than the rate of inflation in interest. And the idea that the Federal Reserve could simply remove money from one's digital currency account is likely to spark also sorts of conspiratorial thinking. I can almost hear people railing against "the mark of the Beast" already. Of course, that it will set of religious zealots is not a reason to avoid doing something, but how the public will see something might be. And a public that understands that their bank balances can be directly manipulated by the Federal Reserve is likely to trigger a flight to commodities, or some other assets that can't have their value eroded whenever the Federal Reserve concludes that people need to be levered into buying things that they'd rather not. And that doesn't even touch on financially straited people; imagine someone having to go to a landlord or a utility and plead for forbearance because the Federal Reserve has gradually shrunk their electronic balance below what they need to pay their rent, mortgage or electricity bill. In short, the idea that the Central Bank could literally erase people's savings for policy reasons isn't going to be seen as a plus to many people.

But even without that, I suspect that it's too soon to predict the end of cash. Mr. Prasad rightly notes that the ability to trace and audit transactions, removing both anonymity and privacy from transfers of wealth is both a blessing and a curse. On the one hand, underground economies go away. On the other, the government can now see everyone that everyone does business with. One doesn't need to have a conspiratorial mindset to understand how the ability of government to see each and every transaction one makes could result in anxiety. Governments already have a high degree of confidence that no matter what may have been done in the past, the honest have nothing to hide from them. The honest, however, often feel differently. The perception that Big Brother is watching every penny they spend will certainly drive a fairly substantial constituency to maintain some form of anonymous means of purchasing goods and services. And the first leak of information that results in a someone being embarrassed, injured or killed will only accelerate that.

Whether Central Bank Digital Currencies are the wave of the future or not (and I suspect they are), physical currencies will never really go away. They're too useful and governments are not trustworthy enough.