Tuesday, May 28, 2019

Things To Come: The War On Cash

Claudio Grass

Beyond privacy, there is also widespread concern over the economic impact of a fully cashless system. For one thing, as citizens slowly become exclusively dependent on big banks and card companies the systemic risk to the wider economy spikes. But it goes further than that too. 

Without the option to keep some cash outside the banking system and retain some degree of financial flexibility, banks have the potential to essentially keep their clients hostage. Bail-in scenarios and deposit “haircuts”, allowing distressed banks to directly take funds from their clients’ accounts, a scenario we saw in Cyprus in 2013, are instantly simplified. Good old-fashioned bank runs are all but eliminated as leverage, while policies like NIRP and ZIRP face significantly lower obstacles, as without the option to take cash out of the system, the banks can easily pass down the associated costs to the clients.

Capital controls also become much easier to comprehensively enforce, while their impact is multiplied. These measures were already proven catastrophic in Greece, where citizens had to live for over 3 years with an ATM withdrawal limit of EUR60 a day and draconian restrictions on payments abroad. 

Businesses were put under immense pressure, unable to pay their international suppliers without special permission, while elderly citizens formed endless lines in front of ATMs to receive their pensions in the allowed increments and many struggled to pay for their daily needs. 

And yet, disastrous as the policy was for the public, their predicament would have been infinitely more severe if Greece did not have a solid cash-loving tradition. The small Mediterranean nation holds the second place (tied with Cyprus) among EU members with the highest share of cash transactions, while due to the country’s history, citizens are inclined to keep significant amounts or parts of their savings stored at home, something that helped soften the impact of the capital control measures.

Furthermore, there is another important risk as the war on cash escalates, affecting significant parts of the population, namely the threat of financial exclusion. In most Nordic countries, among the first and most eager to adopt the move from cash to electronic money, pensioners have seriously struggled with the shift, as they do not use the internet or have access to online banking. In Norway, the conversion to cashless bank branches has left many towns without a single bank, the Swedish National Pensioners Organization has stressed that 1 million people in the country are not ready for cashless transactions, while Denmark’s DaneAge Association, representing more than 750,000 senior citizens, has strongly criticized the limits on cash-based payments. Apart from the elderly, those at the lower end of the socio-economic pyramid are also victimized by these policies. The war on cash effectively ensures that those without access to baking services, those living in poverty and the homeless population is banned from participating in the economy and by extension socially marginalized even more.

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