By MoneyMorning.com.au
“Cash is probably the most important instrument for small-retail transactions and for transfers of value between individuals. Anecdotal evidence and experience suggest that cash transactions account for the dominant share of the number of transactions, but a very small share of their value… In 2009, withdrawals from ATMs averaged $12.6 billion a month, which equates to around $575 per person.” – Reserve Bank of Australia (RBA) website
One question we may put to the panellists at the Sydney Gold Symposium next Tuesday (providing our peers don’t tell us it’s a stupid question!) is this: Is high or hyperinflation possible in an economy where cash is not the main method of payment?
Granted, it may be a stupid question. But that hasn’t stopped us asking them before. And there’s a reason we ask it.
Let’s look at the most commonly used examples of high inflation…
The Roman Empire.
Eighteenth century France.
Civil War America.
1920s Germany.
Zimbabwe.
Each experienced a period of inflation (devalued money). Some periods were longer than others. Zimbabwe’s hyperinflation only took a year or so to blast off.
Whereas the debasement of Roman silver coins took over 100 years.
But, there’s an important difference between previous examples of inflation and what we have today.
In the past, consumers could tell the difference between “real” money and devalued money. Simply because both currencies were used at the same time.
When the central bank introduced a new currency or changed the terms of an existing currency (for example, suspending the right to swap it to gold), consumers could see the change…
The coins were smaller… or they contained less gold or silver… or the paper notes no longer had ‘redeemable for gold or silver’ printed on it.
Today, there’s no convertibility to gold or silver.
So there’s no need for the central bank to introduce a new currency. They can just print more of the old one. And no-one can tell the difference. A newly printed note looks the same as a note printed last year.
What’s more, it has the same face value and the same market value. No-one will tell you a 2011 printed $20 note is only worth $19 to them, but that they’ll take a 2009 printed $20 note at face value. That just doesn’t happen.
But here’s the thing. They don’t even need to do that. Not when most money is created and destroyed electronically.
The RBA says in 2009, ATM (automatic teller machine) withdrawals averaged $12.6 billion a month. That’s a lot – about $600 million per business day. But get this…
According to the RBA, “On average, non-cash payments worth around $220 billion are made each business day…”
That number includes everything not involving cash. So it includes credit cards, debit cards, cheques, bank transfers, inter-bank settlements, etc…
In other words, on any given day just 0.27% of financial transactions involve notes and coins! Or to put it another way, for every $10 spent, just 2.7 cents involves cash. The other $9.973 is spent electronically… using “air money” if you like.
The point is, today entire days can go by without a consumer touching a single note or coin. And with new “tap-and-go” technology, many larger retailers are now happy to accept credit or debit cards for small payments… so the need for cash is even less.
With consumers more distant than they’ve ever been from understanding what money is, is it possible consumers will never figure out what central bankers are doing to their wealth?
Maybe that means central banks can just carry on devaluing currencies year after year without the population catching on.
Remember, monetary systems only fall apart when the population gets wind of what’s happening.
They ditch the devalued currency (causing it to devalue further) and pile into the less devalued currency: whether that’s from paper money to gold-backed paper money… or paper money to gold coins… or in the case of Zimbabwe, paper money to another paper money (U.S. dollars).
The outlook looks bleak if we accept that… the central bankers look certain to get away with inflationary money printing for years. But, not so fast…
If you remember back to the global financial meltdown in 2008, when banks were on the verge of collapse, what did consumers do? That’s right, they started withdrawing cash.
You may remember the pictures of U.K. bank customers lining up outside the soon-to-fail Northern Rock bank… waiting for the doors to open so they could grab their cash.
Does that mean consumers still understand cash? And that one day they’ll figure out what central bankers have done to the value of money over the past 40 years… resulting in a rush to hard assets (such as gold and silver)… and the eventual collapse of the paper money system.
Or was it just a knee-jerk reaction until governments brought in guarantees of bank deposits? After all, three years after the banking system nearly collapsed, consumers still haven’t completely given up on electronic “air money” in favour of hard assets.
As we see it, it’s a choice between a Zimbabwe style “explosive” inflation and Roman Empire style “slow-burn” inflation.
Which will it be?
We’re afraid we don’t have the answer yet. But we’ll let you know what the panel of experts have to say on the subject next week.
Cheers.
Kris.