Cash Rules Everything Around Me

Investment Analysis Clubs Macro Economic Trends and Risks
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Dollar, dollar bill y’all.

Interesting article regarding shadow cash money. Too many macroeconomic impacts to list…but here are a few bigguns:

  • Distorts economic indicators used to make policy decisions
  • Lowers tax revenues
  • Increases inflationary pressure

“There is thus not one question but two: why are so many more banknotes being printed, when ordinary people are using less cash? And why are most of those banknotes of the largest denominations, when ordinary people only use the smallest ones?”

"I’m not going to pretend I understood everything that Janet Hua Jiang and Enchuan Shao wrote in their paper for the Bank of Canada in 2014. The bulk of its 38 pages features mathematical symbols I couldn’t even pronounce, let alone use. But their core insight is the key to the puzzle. When central banks say that the use of cash in the economy is declining, what they really mean is that the use of cash is declining in the bit of the economy they monitor, which is a very different thing. This paper separates out money’s function as a medium of exchange in the “cash-credit economy”, which is the bit where banknotes are being outcompeted by Venmo, Visa cards, Apple Pay, Revolut, Wise and all the rest of the technological innovations that have transformed how we pay for things, and its function in the “cash-only sector”, which is where banknotes remain dominant.

Central banks don’t see it because those transactions bypass the institutions they oversee, but the obvious implication is that if the value of banknotes in circulation is booming, the cash-only economy — the one where criminals are laundering money on an epic scale — must be booming too."

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Tell me they didn’t use historical cash heavy trends and data to offset the gaps in their new digital record keeping systems. It appears their whole paper is unnecessary complexification systems of logic used to replace the traditional data collection systems of historical record.

We are more and more digitally transacting. It would stand to reason that the best data for the CASH economy (percentages, ratios, fraud, hidden transactions and all manner of illicit activities) should have historical ranges which can be used as a proxy for today’s conditions.

What am I missing? I can’t see the actual paper and the author glosses over it for lack of… math skills.

Instead, we get more recycled historical anecdotes and comments.

As long ago as 1976 a McKinsey consultant named James Henry noticed how odd it was that — in an age when more and more people were using cheques — cash demand remained so healthy. “There are only two kinds of activity in the US which depend almost exclusively upon large, untraceable, non-credit transactions,” he wrote in Washington Monthly. “The first is profit-motivated crime: illegal gambling, drugs, prostitution, loan sharking, protection, etc. The second is tax evasion.”

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Here you go - get yo math on!

“More generally, our study shows the importance of modelling in greater detail how cash circulates in the economy: compared with models with a more standard set-up, our model has very different implications about how credit affects allocation, cash demand and the velocity of cash. In view of this, we suggest a few directions for future research. First, our model suggests that the overall velocity of cash should decrease as cash plays a diminishing role in transactions. To test this implication, we need to gather time-series data on the velocity of cash, measured, for example, by the lifespan of bank notes. Second, we need to deepen our understanding about the cash-intensive sector such as the underground economy. Who are the participants? How do their cash management practices evolve over time? How do buyers in the sector acquire cash? What are the connections with less-cash-intensive sectors? Third, if we interpret some of the sellers in the cash-credit sector as firms, then our model predicts that as credit expands beyond a certain level, firms’ cash demand will increase. Existing studies focus more on the consumer side: for example, many central banks have conducted consumer payment choice surveys. Useful (albeit imperfect) aggregate time-series data have also been constructed to monitor consumers’ cash demand. However, studies on merchants’ cash demand are very limited. Rigorous empirical studies in this area would be valuable.”

Common sense would lead us to think that as credit use increases in transactions, the amount of cash in our economy would decrease. The paper from Jiang and Shao shows that this is NOT the case. They stop short of providing clear explanations as to why.

Others have explained that while cash may be declining in transactions, it is still considered a safe haven / store of value. Still others think something sketchy is going down.

"In this paper, I argue that we should look for the solution to the paradox in a surging demand for cash from an increasingly sophisticated parallel financial system used by globalised criminal groups to move value around the world. Cash is used to finance transactions within jurisdictions, which are then settled internationally by the movement of goods.

Although some of this wealth is not necessarily of illicit origin – indeed, much of it appears to be money evading Chinese capital controls, which may well be legitimate – it is moved outside of the formal financial system, is therefore not identified by traditional monitoring tools, and thus helps support a money laundering mechanism essential for cartels, kleptocrats and other extra-large criminal enterprises.

As such, by continuing to issue banknotes elastically, in whichever volumes are requested, western countries’ central banks are providing criminal groups with the tools they use to circumvent the money laundering regulations imposed by those same countries’ governments. Officials urgently need to consider banknote issuance alongside their anti-money laundering policies, and to examine ways to prevent their physical currency from facilitating the global epidemic of financial crime."

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But, while it still remains the most common form of payment, the share of transactions (as a percent of all transactions) is declining and is now down to 14%.

Somewhat interesting, crypto ownership is actually declining since 2022.

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What a superbly interesting at least and likely quite valuable thread.

Thanks all.

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I didn’t read the whole thread but I have my personal experience. Governments hate cash because they can’t control cash like they can and do control online transactions.

I was a bit late renewing my German passport. A wire transfer from the US to my local bank account was returned, no explanations, not from the US nor from the local bank. After much to-do it turned out that the local bank had blocked my account. Had it not been for the cash I always keep I would have been in serious difficulties. We are all prisoners in our online financial jails.

And with cameras galore and AI it’s just getting worse.

On the business side, Tesla is an interesting example of how lots of people don’t understand the extraordinary utility of cash. The Investing Bible, a.k.a. Security Analysis by Benjamin Graham and David Dodd, first published in 1934, is a foundational text that outlines a disciplined approach to investing based on fundamental analysis, intrinsic value, and safety of principal. BUT NO MENTION OF CASH THAT I CAN RECALL after reading it multiple times. Elon/Tesla does understand.

The Tesla threads here are mostly about peripheral issues not about how to grow from EVs to AI to AT (Autonomous Transportation) to HR (Humanoid Robots) to etc. to etc. to etc. You need cash to go from stage to stage while demonstrating their economic benefits.

BTW: You can’t go broke while you can pay your bills.

BTW2: Warren Buffett does understand with his reliance on lots of cash on hand and using book value to assess his returns.

BTW3: My switching from traditional investing relying on the increasing value of stocks to selling covered calls is also a recognition of the value/utility of cash now instead of future value that might or not materialize (a bird in hand…).

The Captain

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Thank you for your input.

I know you’re a busy guy, but you should read it. I think it’s less about control, and more about the ability to track stuff. Legitimate cash business can still be tracked through reported sales and whatnot. It’s the illegitimate cash transactions that can be problematic.

We’re talking about cold hard cash here, not money that can be invested without taking on margin. Paper money.

The point of this thread relates to how elastic central bank policies could be adding more cash (paper money) into circulation to the benefit of criminal organizations…and the macroeconomic effects of said elasticity.

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Same thing, the road to hell is paved with good intentions.

The road to hell is paved with good intentions.

The solution is to limit governments to the bare minimum necessary. Maximum freedom for citizens.

Look at war. Armies that incentives freedom of action down the ranks, to boots on the ground, perform better than armies run strictly from the top down. Same for business that incentivise initiative. What is needed is not control per se but morality to control action. The need to adopt the right “ism.”

The Captain

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So then what do governments do when there are emergencies beyond the bare minimum?

Hurricane Katrina cost $125 billion. The “bare minimum” entire budget of FEMA, 20 years later, is $32 billion.

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He sees selfishness as a virtue and is quite proud to be rather virtuous in that respect.

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I dunno, I think it depends on who’s in control. One thing’s for sure, amoral control freaks running the show is proving to be suboptimal.

Heck, maybe we don’t even need government. Living in a Mad Max hellscape could be cool; imagine all the freedom we’d have!

The current state of affairs seems to have taken a page from for-profit healthcare…deny, delay, defend.

Let’s get back on track - cash money and criminals? We’re living in confusing times where the US government is loosening requirements on corporations that limit money laundering, while at the same time they’re seizing money from individuals. Bonkers.

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