Investment Strategy

No need to panic: cash is here to stay

If your government went rogue, and you had to go into hiding, how long do you think you could evade detection? In a technology laden world the ways that we are tracked are constantly expanding. Transactions that use physical cash are one of the few financial activities that remain private. Will cash be outlawed in future? Does it matter if that happens?

Your writer is currently visiting family in England. Last night, after spending much of the day helping my parents to buy a new car, I thought I’d see what was on local TV. As it turns out, not much. But I was drawn to an unusual sort of game show called “Hunted”.

There are no prizes to be had, just pride at stake. The idea is that volunteer contestants – sometimes alone and sometimes in pairs – try to hide from the authorities for as long as they can.

At some point during a normal day the hunted are told that they are now on the run. Then they have an hour to get their stuff together and start fleeing before their home is raided. The idea is to evade capture for as long as possible.

Pitched against them are the hunters. These are all genuine, professional government types – spies, military, police, hackers and such like. They have access to all the methods and technology used by real government security agencies when they hunt for actual fugitives from the law.

In a way this show is a silly sort of exercise. But in another way it’s an important reminder of how much we are already tracked and monitored by our governments. If your country’s government goes rogue in future then just how long do you think you could escape their tentacles?

In the show the hunters are allowed to break into the contestants’ houses, just as they would do in real life. Once inside they search for documents and electronic equipment, like computers and mobile phones.

They trawl through files and bank statements. They hack into social networks and emails. They look at phone records, and tap the phones of close friends and associates of the hunted. The idea is to build a profile of the people that they are after, and use it to find them.

Out on the street their prey are faced with more immediate problems. Modern British towns and cities are full of cameras that silently monitor the streets throughout the day and night. It’s said that the average Londoner is filmed several hundred times a day, just going about their normal business.

Many of these surveillance cameras are equipped with facial recognition technology. Once a target face is seen then the police are alerted. And it’s not just faces. Car registrations can be read by cameras installed at the roadside, meaning target vehicles can be tracked and intercepted.

If that wasn’t bad enough the hunted also have to pay for things. Food, drink, transport, lodgings: all need money. A watch is placed on the use of payment cards owned by the hunted. Any use immediately brings the security forces sweeping down on the payment location.

But even cash has a catch. You still have to get hold of it before you can use it.

This leaves physical cash as the only way to stay anonymous when making payments. But even cash has a catch. You still have to get hold of it before you can use it.

The trouble is, all the ATM machines have cameras as well. And cash withdrawals are flagged up too. Sure enough, several of the hunted contestants were swiftly caught just after they used cards to make payments, or shortly after taking cash out of the bank.

None of this may seem like a problem in the real world. After all, this is just a game show. This technology exists so that real bad guys can be caught, not volunteer egomaniacs.

But for me it was a reminder of the potential threats to liberty posed by big government. Politically speaking, we should never assume we know what’s around the corner.

Today’s supposedly free democracies could easily become tomorrow’s totalitarian dystopias. Especially given enough economic hardship – the classic environment for fomenting radical political change.

The technology is already in place to track us pretty closely. And it continues to expand, reaching further and further into every aspect of our lives.

For that reason alone we should treasure physical cash as something that allows us a little bit of privacy. It’s a quiet island of confidentiality, far from the super highways of publicly available information. You may not think that matters too much today. But it could matter a lot in future. We just don’t know.

So if you value liberty then you should value physical cash as well. Try to use it regularly where you can. If enough of us keep doing that then it’s less likely to disappear.

That said, physical cash is pretty weird stuff. In dry accounting terms it’s a liability of the central bank that produces it. It’s something owed by them to whoever gets hold of it, by fair means or foul.

But if you look at the actual money bills produced by central banks you can be left a little bemused or confused. For example, British five pound notes are signed by the current governor of the Bank of England. He makes a sober commitment to the bearer of the note, to “promise to pay the bearer on demand the sum of five pounds”.

So the commitment is that if someone turns up with a £5 note then the “Old Lady of Threadneedle Street”, as the bank is known, will willingly exchange it for…another five pounds.

Something for something, or nothing for nothing, depending on your perspective. With much gravity the note states an important sounding, but ultimately meaningless commitment from a man in a suit.

US dollar bills are a little more obscure. There’s no earthly promise to pay, just a heavenly reminder that “In God we trust”. Although which “God” and which “we” is left to the reader’s imagination.

US dollar bills are a little more obscure. There’s no earthly promise to pay, just a heavenly reminder that “In God we trust”. Although which “God” and which “we” is left to the reader’s imagination.

This proclamation pretty much covers the US Federal Reserve’s collective behind. It seems to say “In the event of any problems, don’t blame us, blame your creator. But we’d like to point out that you can’t sue in the metaphysical world for non-delivery in the physical one.”

Euros are even more vague, containing neither sincere promises nor celestial appeals. Just rather dull pictures of the kind approved by multi-national committees of dullards.

Whatever the appeal, or lack thereof, of physical cash notes there are clearly those that would like to see them consigned to history, as highlighted in our recent guest essay by Bill Bonner.

Many people don’t like having to use cash. Central banks don’t like having to print the stuff. Commercial banks don’t like having to count it. Governments don’t like having their power restricted by it.

What do I mean by that last point? Well, in the same way that offshore tax havens constrain government taxation, waste and corruption, so does physical cash.

When tax rates are highest – which is often at the same time as trust in government is deservedly lowest – more and more financial activity opts out of the banking system and into the informal cash economy. In other words, cash provides a check and balance on the power of government.

Push us too far and we’ll stop playing their game. Just look at the huge cash economies that exist under corrupt or incompetent regimes in much of Latin America, Africa and Asia. For example, I once saw a study of Brazil that reckoned the actual economy was 40% bigger than the official, reported economy.

But these issues don’t mean that various pressure groups won’t try to get rid of paper notes from time to time. Yet, even if they do, I’m pretty relaxed about it.

No more Swiss francs? Fine, we’ll use euros. No more US dollars? No problem, Canadian ones are just as good. No more Japanese yen? Chinese renminbi yuan or South Korean won will do nicely.

Does using foreign cash at home sound unlikely? Perhaps. But it already happens in many countries. Across Europe euros are often accepted in stores that are based in non-euro countries. US dollars are accepted in many parts of Latin America, often more readily than local currencies.

Of course, when it comes to cash the big one is still the US dollar. It’s already likely to steadily lose its dominant role as a reserve and trade currency – albeit slowly and over many decades. That process results from, and contributes to, the relative erosion of US power in the world.

So are US authorities likely to speed up the process by stopping the production of dollar bills? They’d be pretty stupid if they did. But in any case, were it to happen it wouldn’t take long for the Chinese renminbi yuan to fill the paper transaction gap.

And even in the highly unlikely event that major governments like China and the USA gang up together, and try to phase out their physical currency at the same time, there will always be alternatives.

Perhaps we’ll go back to using gold and silver coins in the physical world. Plus nowadays we have bitcoins and other cryptocurrencies – electronic money for use over the internet. They’re still new and difficult to use except for the committed. In fact in many ways they’re still experimental.

But effectively the “cryptos” are the online equivalent of physical cash. That’s because they offer privacy and can be transacted without using a bank as intermediary – unlike payments by debit or credit card.

All in all, here at OfWealth, we’re pretty relaxed about efforts to phase out physical cash. We don’t think it will happen anytime soon, and plenty of alternatives exist to any single currency.

There’s no need to panic. Cash is here to stay.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.