Tag Archives: cash

Cashless Society, Negative Interest Rates and Hyperinflation – Part 2

Imagine a country in which banks hold virtually no cash at all. A country where if you walk into a bank branch, the clerk will not be able to help you make a deposit into your account. A country where there’s a good chance that if you grabbed a wad of cash and walked into an electronics store or a major nightclub, they wouldn’t be able to assist you in buying a new computer or giving you a drink.

Welcome to Sweden, the land of virtual cashlessness! Although the Swedish Riksbank recently launched a full array of new and very colorful bills featuring celebrities such as famous children's book author Astrid Lindgren and film director Ingmar Bergman, cash usage in Sweden is in absolute free fall, down from SEK 100 billion in 2010 to SEK 70 billion in 2015. Several factors have combined to lead to this development.

  • For many years now, most Swedes above the age of 16 use a VISA, Master or Maestro debit card to settle payments, even for small sums below $10.
  • Sweden is - and has been for many years - at the forefront of both developing and adopting new IT technology and is one of the most mobile phone dense countries in the world, with upwards of 60% of the Swedish population owning a mobile phone as early as 1999. 
  • The Swedes' willingness to adopt new technology is evident from the proliferation of a transfer system called ‘SWISH’. The SWISH app enables any two parties holding a Swedish bank account and a Swedish phone number to transfer money to each other instantly, all with no fees. Even merchants use SWISH to accept payments. There are homeless people selling newspapers in Sweden that accept payment via SWISH. In Stockholm, these homeless sellers have even been accepting credit card payments since as early as 2013 using a smart phone extension known as ‘iZettle’, also invented in Stockholm.  
  • Over the last few years, more than 70% of all bank branches in Sweden have gone cashless, meaning that if you walk into a bank branch in Sweden, there’s about a 70% chance (or higher) that they would not accept any cash you are trying to deposit.
  • In Sweden, there are virtually no payments made by cheques any more as banks stopped issuing cheque books years ago.

Tech loving Swedes

Some of these facts might sound unbelievable and even absurd for someone not living in Sweden: No cash in the bank? Homeless people accepting credit card payments?

But y es, Swedes seem extremely willing to accept new cashless payment technologies, such as credit/debit cards, as well as payment apps, while forgoing old ones, such as cash and cheques. All with little or no suspicion towards these new electronic payment methods.

Other countries have tried the same. Singapore tried, or at least planned to try a new electronic cash system named SELT or ‘Singapore Electronic Legal Tender’. In an OECD report issued in 2002, the Board of Commissioners of Currency (BCCS) - which was the sole currency issuing agency preceding the merger with MAS in 2002 - outlined the envisioned structure of the SELT system where the goal was said to be a reduction of physical cash usage and its handling costs.

As can be seen in the 2002 OECD report, the SELT system was in a very early conceptual stage and only outlined the concept in very broad strokes. But its interesting to note that as early as 1998, BCCS held a strategic planning seminar in which it set out its ‘corporate vision’ for the introduction of SELT within 10 years.

The 2002 report further stated that the SELT system was to be put in place in order to effectivize the cash currency system. The SELT system never came to fruition, and as is apparent  from statistics displayed further down in this article, the amount of cash currency circulating in Singapore has increased immensely since 2002. As have the amount of cash ATM machines, where there were far less than 2000 units at that time. The OECD report also mentions that although cash transaction costs in Singapore are extremely low, the cost to the economy of these ATMs was approximately SGD 656 million in 1998 and was projected to exceed SGD 1 billion by 2006.

BCCS envisioning a system such as SELT 15 years ago shows that they were ahead of their time and that Singapore government institutions are some of the very early adopters in trying to implement new technologies as well as eager to make their government institutions more effective. This is in line with the Smart Nation Objectives that Singapore has outlined. In contrast to Sweden, the Singaporean approach has been to adopt new payment methods such as e.g. card payments, while still being extremely welcoming for older payment modes such as cash or even cheques. Singapore's very safe environment with extremely low violent crime rates makes it a nation that conveniently lends itself to cash payments.

However, as absurd as it might sound, the abolition of cash is slowly unfolding in many countries, with Sweden is probably at the forefront of this trend. Although a majority of stores in Sweden still accept payment in cash, there are an increasing number who don't. Swedish law doesn't require a merchant to accept payment in cash, which is a bit ludicrous considering that cash is still legal tender in Sweden. After all, legal tender normally means that whatever is legal tender should be good for the payment of all debts.

Now, if a merchant doesn't want to accept cash in the form of nationally issued notes, then so be it. But what is shocking is that, as was mentioned at the beginning of this article, about 70-80% of all Swedish bank branches have removed all cash handling. All within just a few years. No, it's not a typo. Walk in to a random Swedish bank branch and try to deposit or withdraw a larger sum of cash and up to 80% of the time you'll get rejected with a polite "sorry, but this branch doesn't handle any cash".

Such branches only provide services such as financial advising, housing loans, credit cards services etc. The real aims of this strategy aimed to get money out of your pocket and into the pockets of the banks. Bank staff are pushed by their management to sell house loans, credit lines,  speculative paper instruments, and more savings accounts. This trend has also been evident in the extreme case of Wells Fargo's recent banking scandal involving the concept of cross-selling accounts with the goal of every Wells Fargo customer holding a minimum of eight Wells Fargo  accounts. Why? Because, in the words of former Wells Fargo's Chairman John Stumpf : 'Eight is great!'.

All this means that if you open an account at a Swedish bank branch, you can only fund your account by either going to a branch that does handle cash, or by transferring money to the new account from an already existing account.

During the last 5-10 years in Sweden, M0, which is an aggregate measuring the amount of physical cash in an economy, has collapsed from over SEK 100 billion down to about SEK 70 billion.

m0 sweden
M0 Money Supply in Sweden

In Singapore, cash money has increased from around SGD 21 billion in 2010 to SGD 33 billion in 2015.

Cash money in Singapore

Furthermore, statistics from the World Bank shows that the number for Automated Teller cash Machines has increased from less than 48 per 100K citizens, to more than 59 per 100k citizens in 2014. And the trend seems to be continually increasing.

ATMs in Singapore
Increasing number for ATMs in Singapore

The above data means that there are now more than 3200 ATMs island wide in Singapore as compared to less than 2000 units in 2004.

Cashless Means Less Crime!

One argument for making an economy totally cashless is that it would cripple crime. Crime syndicates, burglars, drug dealers, petty thieves all rely on an anonymous paper cash system to sell their contraband. If we just eliminated cash paper bills, then drug dealing, robbery, burglary, even tax fraud would almost totally disappear. Right?

One of the most avid proponents of a total cash ban is a famous Swedish musician by the name of Björn Ulvaeus. Ulvaeus, is known as a member and founder of the super group ABBA (that ironically wrote the song "Money, money money"). A few years back, Ulvaeus's son got robbed several times and some of his expensive music equipment was stolen. Ulvaeus' rationalse behind banning cash is that if there was no cash at all, but only electronically traceable payment systems, burglars would not be able to sell the stolen items on the black market, and as such, the theft would have never occurred.

Although slightly confused, Ulvaeus is still onto something. In two opinion articles published in a major Swedish newspapers a few years ago, he mentions barter and its limitations.

However, history shows time and time again that humans have overcome the limitations of barter in numerous ingenious ways. Be it through using precious shells, stones or metals - such as gold and silver - or be it through local and informal credit systems, the challenges of barter have always been vanquished as long as the need and demand for such a system exists.

For instance, cheques issued by the army and used by British soldiers stationed in Hong Kong in the 1950s, started to circulate as a cash currency. The faith and credit in these cheques among local merchants was universal, so why bother with the inconvenience of cashing them in when you could let your supplier do that instead. Anthropologist Keith Hart tells the story of his brother stationed in Hong Kong in the 1950s. Keith's brother was more than a little surprised when he one day he found a cheque signed by him 6 months earlier laying on the counter of a local bar with more than 40 other small signatures on the back stemming from each merchant that had legitimized the validity of the cheque. A game of confidence. A spontaneously arisen form of cash.

In jails, alcohol, sticks of cigarettes and more recently ramen noodles, are being used as currency. These goods arise spontaneously as the universally most sought after and can thereby be used as currency or money to buy anything else. No government, army, police or bank was needed to give these goods the status of money. They emerged spontaneously in the market place just as gold and silver have done so many times throughout history.

Today's banking system is therefore showing itself for what it really is: A pyramid scheme where your money is used to speculate in questionable asset classes whose value is propped up only by the very investors (banks) that are buying into these asset classes with the help of money emanating from an endless pool of credit fueled by central banks' artificially low or even negative interest rates.

Negative Interest Rates and Cashless Society: A Precursor to Hyperinflation?

When the negative interest rates of central banks spread to the commercial banks, a lot of people will naturally want to withdraw their money. As long as cash is readily available, this is not an issue. At least not as long as not everyone decides to withdraw their money all at once. But if cash use is highly limited, as per the example of Sweden, withdrawing your money will be hard or impossible. The resulting cashless or 'cash strapped' society is effectively hindering a bank run to happen, as this in reality gives the banks a debt cancellation or at least a massive debt forgiveness, because remember, the balance on your account is the banks debt owed to you. If there's no cash, then how can the bank pay its debt to you?

More on this in Part 3 of this series....


Debt: The First 5000 Years - David Graeber

The future of Cash: Iceland vs Sweden

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate. 

The poster child of a cashless society is Sweden. There are all sorts of anecdotes about beggars accepting cards, churches passing around mobile payments devices instead of collection plates, and banks no longer providing customers with cash. It is no wonder then that Sweden is the only country in the world to show a decline in banknotes and coins in circulation, the quantity of cash outstanding having fallen from 109 billion SEK in 2006 to 56 billion SEK in 2018. If you want to read more, I wrote about the Swedish miracle on my Moneyness blog here.

The death of cash scenario portended by Sweden is contradicted by another Nordic nation, Iceland. If Sweden is close to the forefront of the cashless revolution, Iceland is not only ahead of it but at the very front of the pack. No country does more point-of sale payments per capita than Iceland, clocking in at 426.9 in 2016. Whereas Sweden has an incredibly low cash-to-GDP ratio  of around 1.75% , Iceland was already all the way down to an impressive 1.2% by the early 2000s! (The cash-to-GDP ratio is the number of banknotes and coins outstanding at the end of the year divided by yearly GDP. I get these numbers here).

One would probably be safe in assuming that, like Sweden, Iceland is characterized by a steady decline in banknotes and coins outstanding. But this isn't the case, as the chart shows below.

Since the 2008 credit crisis, Iceland has seen a tremendous resurgence in the demand for cash. Not only is the rate of growth in króna notes and coins in circulation far exceeding that of Sweden, but as the chart below illustrates, it is also far ahead of euro cash growth. As for Iceland's cash-to-GDP, it has doubled to around 2.4% since the crisis, which means that the island nation is now more cash intensive than Sweden.

Demand for cash in Sweden, Iceland, and Europe

What is happening? It may be useful here to borrow from a recent Bank for International Settlements (BIS) paper Payments are a-changin’ but cash still rules and differentiate between means-of-payment and store-of-value demand for coins and banknotes. It is unlikely that the resurgence of Icelandic cash demand is due to payments needs. Rather, I'm going to show that it is probably due to the latter type of demand, store-of-value. This sort of demand occurs when people indefinitely lock away a few extra bills in a safe as opposed to putting them in their wallets for tomorrow's grocery run.

The easiest way to try and determine when cash is being held as a store-of-value or a means of payment is to observe the denomination structure of coins and banknotes. In theory, larger-denomination notes, which are less cumbersome, are mostly held as a store of value whereas smaller ones will tend to be used in payments. Below I've charted the evolution of Iceland's denomination structure over time.

Iceland's coin and note denomination structure since 2001

You can see that growth in low-denomination banknotes and coin slightly exceeded growth in higher denomination notes until the 2008 financial crisis, at which point the demand for high denomination banknotes exploded. In 2013 the Central Bank of Iceland even introduced a new note, the 10,000 krónur (currently worth around US$96), to meet Icelander's growing store-of-value requirements.

According to the BIS paper, one factor that drives the demand for notes as a store of value is the level of interest rates. If you choose to hold cash, you're losing out on interest, but the lower the interest rate the smaller your loss and the more attractive a large-denomination banknote gets. Indeed, the BIS report finds that lower interest rates all across the world explain a large part of the post-crisis global thirst to hold high denomination banknotes like the €500 note, 1000 Swiss franc, ¥10,000, or US$100, as illustrated in the chart below. This may be the case in Iceland too, since rates have fallen quite a bit since 2008.

From the BIS report "Payments are a-changin’ but cash still rules"

Iceland is somewhat unique because of the terrific damage sustained by its banks during the credit crisis. All three--Kaupthing, Glitnir, and Landsbanki--went bankrupt. Prior to the crisis Landsbanki had established a banking presence in the UK and Netherlands. Iceland's government refused to meet its deposit insurance commitments for these foreign customers while protecting Icelanders. The crisis revealed that the safety of both Iceland's banks and its deposit guarantee scheme were less assured than most had previously thought. This may explain some of the explosion in hoarding of Icelandic banknotes. Notes, after all, are a direct promise of the government and are free from the sort of default risk that bedevils a private deposit.

In addition to having a financial incentive to hold more banknotes, Icelanders also have emotional reasons for doing so. They are resentful of bankers, who are rightly viewed as the ones most responsible for placing Iceland in such a precarious position on the eve of the '08 financial crisis. Some 26 bankers have received sentences of up to five years, which makes Iceland the only nation to have imprisoned bankers for their role in the crisis. The country has even flirted with the idea of sovereign money, a monetary system in which private banks can no longer issue money, abdicating that role to the the state.

Iceland Magazine, 2015 (source)

In this context, it is no wonder that demand for high denomination banknotes is growing. Angry Icelanders can register their protest votes against the banking system by storing five 10,000 kronur notes under their mattress for a rainy day instead of holding 50,000 krónur in a low-yielding savings account.

To sum up, Iceland and Sweden are both leading the world in digital payments. Yet while Sweden hints at a world in which digital payments lead to cash's demise, Iceland tells us something different. Even in a world where everybody pays with a card or an app, people may still want access to old-fashioned cash. First, banknotes and coins are still useful in a number of payments situations, say when payments systems have gone down or in coin-operated laundry machines. In Iceland's case, this is confirmed by continued growth in small-denomination banknotes and coins outstanding, which are keeping up with GDP growth.

The 10,000 krónur note, introduced in 2013

But even more importantly, Iceland shows that banknotes--in particular large denomination ones--are a universally available ultra-safe investment. It took a crisis for this to be evident, since when times are normal people are quite content to hold riskier bank-issued claims on banknotes. Other government instruments like t-bills and bonds also provide the same degree of safety as a banknote. But these require a degree of financial sophistication to purchase, and are thus less accessible than cash, which is widely available and easy to buy.

As policy makers navigate the future of cash, in particular that of high denomination banknotes, the Swedish model has become a much discussed benchmark. But it would be irresponsible of policy makers if they failed to consider its fellow Nordic nation, Iceland, as an equally informative model.

Saving in Gold vs. Investing in Gold

There are differing views on choosing the optimal percentage of gold to hold in an asset portfolio.

These different viewpoints depend on how one views gold. Those looking for a return on their money in currency terms perceive gold as an investment which they can sell at a currency price higher than what they bought it for.

We would however argue that the idea of trading your fiat paper currency for gold today, hoping to trade the gold for even more fiat currency in the future, defeats the purpose of owning gold in the first place. Saving in gold is an insurance against the failure of fiat currency, not a means of accumulating more of it.

The healthiest and most natural way of looking at gold is to view gold as savings or as a form of wealth preservation.

Saving in Gold

Gold is, and for thousands of years has been, the focal point for many prominent savers of wealth. The European aristocrats, the Middle East oil barons, the ultra-rich, and even the central banks, all save in gold to preserve generational wealth. They save in gold without thinking about the return in currency terms because they understand the fundamental principle of gold as a generational and long-term store of value. They understand that gold is not an investment but that its a form of money that cannot be printed or controlled by central bankers.

As the world's financial and monetary systems become increasing fragile, saving in gold is the ultimate safe haven for protecting you against a systemic collapse. In the inevitable transition that will follow such a collapse, holding gold as wealth is the ultimate strategy for survival.

Prudent savers understand that gold cements wealth over time which is why you do not need to care much about the ‘gold price’ as denominated in fiat currencies.

If you do not want to bear the high risk associated with chasing returns on the currency markets, you should save in physical gold because gold is the safest form of liquid money. Staying liquid is the same as keeping your wealth in gold. There is nothing wrong with investing, but buying physical gold is not an investment in the real sense – it is a timeless wealth-preserving asset.

When fiat currencies crash, your gold will become a truly priceless asset that will empower you through the transition.

A 100 trillion dollar note can't buy you any bullion. By saving in gold you can sleep at night.

Gold as Wealth

If you are trapped in relentlessly chasing paper profits while worrying about your positions, it is time to consider a shift of mind-set. To become a saver, you have to shift your focus from profit-seeking to sustainability, from chasing egoistic personal highs to becoming a family provider for generational wealth.

With a mind-set of viewing gold as a savings asset, you will not only solidify your own wealth but have the power to pass on your wealth to the next generation. This has been the case for many European aristocrats who were able to pass on wealth from generation to generation.

As we can appreciate from history, cash is not king when the cash is not backed by anything. In fact, the world’s fiat paper currencies have all lost 99% or more of their value in the last century.

Gold is the safest and most stable store of value known to man. No other asset class comes close to gold in terms of stability over history. Gold is not an investment per se. Gold is money. Gold is savings. Gold is wealth.

If you have the mind-set of a saver and want to minimise your risk, it is actually natural to keep most of your savings in gold. If you are unable to determine a favourable risk-reward ratio for any of your potential investments, you might even consider keeping close to 100% of your savings in gold. It is certainly better to keep 100% of one’s savings in gold than keeping one’s savings in the form of constantly depreciating fiat currencies. Ask yourself, are you buying gold as a means of generating fiat currency returns or are you acquiring currency as a means to buy gold (as wealth). We much recommend the latter.

Work and invest to acquire currency but hold your wealth in gold. This is the fool-proof strategy that has worked for thousands of years.

Saving in gold frees your mind. With gold, you can sleep well at night and do not need to worry about inflation, financial markets and currency risks. By saving in gold you can stand strong and avoid the flawed western mentality of chasing paper money returns.

Investing in Gold

If gold is viewed from a western investment portfolio perspective, studies have shown that the gold price is inversely correlated with the prices of most other financial assets. Adding gold into an existing investment portfolio can therefore lower portfolio risk. This use of gold as a risk-reducing strategic asset class has been empirically validated by numerous studies (such as studies by the World Gold Council), and from the perspectives of different classes of portfolios, different investor backgrounds, and varying base currencies. Optimal allocations of gold in multi-asset portfolios by these empirical studies are usually found to be in the 5 - 20% range.

The reason that there is a negative correlation between the gold price and other asset prices is due to the gold price not being as dependent on economic and business cycles as most other financial asset or commodity prices. Therefore, the gold price does not react to events in the same way as the prices of most other asset prices react.

However, we advice you to view gold as savings/wealth rather than as an investment. Gold has the power to change your life for the better. It can give you peace of mind like nothing else if you just let it sit there without worrying about it.