Saturday, December 23, 2017

Why you should refuse to give up cash

Many people I know rarely carry cash. It's easy for the most part these days as it's rare to find a place that doesn't take plastic or a digital currency. I recently read about a coffee shop that was refusing to take cash at all.  But what if there is a downside?

Have you heard of negative interest? If cash was done away with completely, banks could not only charge interest on money you borrow but also on money you save.

Here is an excerpt from a World Magazine article:

Cash and freedom

In 2015, the Bank of England’s chief economist, Andy Haldane, gave a controversial speech in which he suggested switching from cash to an entirely digital currency. Haldane sees this as a way for central banks like his to impose negative interest rates, a radical fiscal policy that is not easily feasible when cash exists. The Cato Institute’s Daniel Mitchell, like other free-market economists, has decried the “war on cash” as an effort from central governments to have greater control over people.

When central bankers set the interest rate below zero, investors generally pay for money in a deposit, rather than earning money on a deposit. The idea is to push people to spend money instead of holding it in a bank account. Cash allows people a way to escape a negative rate, which is why negative rates are rare. Central banks in Sweden and Denmark recently resorted to negative interest rates, but they are among the few.

“In a system without cash, we can basically set negative interest rates without any problems at all,” said the Swedish central bank Riksbank in a 2015 report. But the report acknowledged that it didn’t know how to get rid of cash.

For now, talk of negative interest rates is mostly theoretical. As Haldane admitted, economists like him face a “significant behavioral constraint,” meaning regular people don’t want to get rid of cash. The places that have experimented with it, like Sweden, are seeing some concerning results. The danger for consumers in Sweden is that, as they begin to experience the effect of negative interest rates, they might take on more debt. So a bank might pay a mortgage holder interest on a mortgage. When rates rise, consumers might find that debt difficult to repay. Sweden now has one of the highest ratios of debt to disposable income in the world. —E.B.

Here is the complete article:
Is cash an endangered species?

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