Category Archives: Money and monetary policy

Our present monetary condition: continuing repression

Keynes’ principal insight into the functioning of the economy was about the problem of effective demand. The problem of the “classical” view of the economy that supply would always create its own demand (“Say’s Law of markets” pace J. S. Mill) is that cybernetic problems can create market failures.

As Axel Leijonhufvud is wont to tell us, there are basically two such situations that arise in the General Theory. First, a fresh act of saving is not an effective demand for future goods. Second, the wishes of the unemployed for consumer goods do not constitute an effective demand. But he also tells us that there is a third effective demand failure that can be very important. This is when the financial system is in a state where for most entrepreneurs it is not possible to exert an effective demand for today’s factors of production by offering future goods. That is, it is not possible to make a deal by saying: ‘I have this investment project that will pay off in the future and I want to trade that prospect for the factors of production today necessary to produce those future goods’. And that’s where we end up if the financial system is totally clogged up with bad loans.

There are basically three reasons: (1) Deregulation, especially the repeal of Glass-Steagall (2) the incorporation of investment banks and limiting the liability of the directors (3) Central Bank CPI targeting whilst the banking system went around the back of authorities to leverage on long-term assets, which were securitised to give them a false quality of liquidity, whose prices were not under the control of the authorities. Since the failure of these investments, there has been little change in monetary policy, except to institute unprecedented financial repression, crushing small savers and allowing banks a dream positive-carry free ride, whose serious distributional consequences Leijonhufvud points out, but which also feeds into funding the increasing government debt used to finance what ends up being a carousel.



Bundesbank defends cash

The world’s governments, central banks, fintech firms, banks, credit card companies, telecommunication behemoths, financial institutions, large retailers, all are behind a drive to get rid of cash.

The idea supposedly is to combat crime and terrorism. But widespread public ignorance, apathy, and disinterest is allowing this drive to a 100% electronic world to take place. This would endanger basic freedoms and attack the ability of the poor and the uncreditworthy to manage their lives.

But Carl-Ludwig Thiele, Bundesbank board member in charge of cash issues, said in a speech last week that “I have my doubts that introducing a cash limit or getting rid of bigger denominations can really prevent terrorists or criminals from engaging in illegal activities. We also should ask ourselves: what sort of an understanding of government forms the basis of these proposals? Citizens should not be put under general suspicion.” Clearly there is a commitment to democracy here.

In fact, the promoters of the cashless society are in error when they argue that people don’t want to use cash. In its own study prominently featured on its homepage, the Bundesbank found that despite all the media hype over the demise of cash, physical currencies still remain the principal means of payments across many advanced economies.

In the study, more than 18,500 consumers in Australia, Austria, Canada, France, Germany, the Netherlands, and the United States were asked to keep a written record of what payment methods they used. It turns out that consumers still frequently opt for cash at the point of sale, although in some countries there is a greater preference than in others.

In terms of volume, cash accounted for more than 50% of payment transactions in all of these countries, with the exception of the US. In Germany (DE) and Austria (AT) over 80% of cash transactions were made using cash. In both countries, cash payments also dominated in value. A separate study by the Association of German Banks found that even among millennials, two-thirds prefer paying in cash to electronic means.

What is crucial isn’t so much the numbers but the very fact that the Bundesbank publishes this type of report so prominently, and in English, so that everyone can read it. It’s an obvious part of its campaign to keep cash-in-fist alive as a choice. And in Germany and Austria, the EU’s plans to suppress cash have already provoked a backlash.

Germany’s big tabloid The Bild published a scathing open letter titled, “Hands Off Our Cash,” while a broad spectrum of political parties condemned the proposed measures as an attack on data protection and privacy.

The fact that Europe’s most powerful national central bank is now firmly aligned with the defenders of physical cash could be a vital game changer in the war against cash.