Cashless Denmark?

The human mind is absolutely stunning. We always find a way to patch a rotten system instead of spending the time developing a new healthier one.

I just came across the news that the Danish government is preparing to go cashless starting next year. Well, not exactly cashless, but at least they plan to pave the way for that at a later stage, ban coins and notes and force anyone within the Danish border to use some electronic or digital payment method to purchase goods and services. In the future, the krone will be like the sun: you can see it shining, but you can’t touch it.

But one step at a time! For now the Danish government is just planning to scrap the obligation retailers have to accept cash as payment, and just some of them. Businesses, such as clothing retailers, restaurants, and petrol stations will no longer be legally bound to accept cash payments, starting in January 2016. The government proposes this measure as part of its growth package, which aims at improving productivity for Danish businesses while reducing their costs.

The industry welcomes the measure on the basis that it would dramatically reduce the cost of security and the burden to manage change and coins. At the same time, customers are alleviated of the burden of carrying notes and heavy-weight change in their pockets, as they will be able to pay any amount with just a piece of plastic. Banks would also be happy to earn the extra fees from an increased turnover. And, of course, we should also remember that the less money in circulation, the less reserves they need, so a cashless society is the best they could dream of. I can also imagine Apple’s Tim Cook glaring at his new watch eager to finally try it. The list of benefits is so large… In fact, money transactions with coins and notes impose a cost in terms of time and resources spent, so any step to reduce the use of such means of payment would eventually benefit all… All but burglars and thieves, I guess, who will have to find an alternative way to make a living.

The Danish move is not significant for now, as only a very small fraction of the transactions will be affected by the new rules. But, even if the cash ban was total, we wouldn’t expect a massive change in the way people interact to purchase and sell items. According to data released by Worldpay, 84.2% of Danish transactions were processed using cards in 2012, not real cash. If we additionally look at the information given by the monetary aggregates published by the Danish National Bank, the preference for alternative forms of money other than cash is confirmed. Narrow money, proxied by M1 (which includes notes and coins plus demand deposits) amounts to 979,480.6 million kroner while bank notes and coins amount to just 56,180.3, which represent 5.7%. A move from cash to a cashless society should not be significant, as a large majority of transactions is already made without physical coins and notes.

With so many benefits already stated and no major glitches expected from a total conversion from the current system to the cashless one, the current government will follow the road towards its logical end. No cash means gaining the ability to avoid fraud and to collect 100% of taxes due. Additionally, criminals will find it more difficult to exchange illegal products for a paper-trailed money. Within a cashless society, the government expects these criminals to pack their bags and go elsewhere.

But of course benefits always come with costs. The government will be able to keep a track record for the spending habits for each and every citizen. Eventually, not only the government but also banks and retailers. The right to privacy will be severely impaired. If that seems not be a problem in the U.S., it has been at the top of the European agenda and served as reasoning against Google and the likes of late. The Danish would no longer hold the right to be anonymous. On the contrary, the Danish citizen will see his own photo pop up on the cashier’s computer screen at every retailer from whom he makes a purchase.

All the above are sensible matters to evaluate with care, and will certainly be at the centre of political and social debate in the not so distant future. But what I really fear is the hidden economic agenda that is behind all this. The cash ban (or a partial cash ban) comes at a time the main deposit rate set by the Danish National Bank is -0.75%, while GDP growth and inflation are very low.

The central bank tied its monetary policy to the ECB, and despite the large amount of assets purchased by the ECB, it seems that growth has failed to pick up since the financial crisis. Furthermore, inflation may turn into deflation, raising concerns of a deflationary spiral.

With interest rates lower bounded by a very small negative number, the central bank is running out of ideas. Over the last 30 years yields on government bonds have been decreasing until reaching the current level near 0.7%. For shorter maturities the yields are negative.

As we know, the only reason why a depositor (saver) may accept a negative interest rate on his deposited money (or money invested in a government bond) is because holding money does have costs. But that cost is not infinite. So there must be some rate that, if surpassed by the central bank and reflected through the yield curve and bank rates, would lead to a bank run – that is, people would prefer to keep their money under their own mattress instead of paying banks for the services provided. This means monetary policy has a lower bound, even if not exactly zero. Given the current deposit rate is already -0.75%, I would say there’s not much margin left to spur growth and inflation.

But central banks now have other tricks. The only reason why interest rates cannot be negative is because people can convert deposits into physical money. So let’s ban cash! The Danish are preparing the economy to be more responsive to actual monetary policy. When the conversion to a cashless society is accomplished in full, if the economy lacks growth and inflation, the central bank can set interest rates at -3% or -5%, or, why not -20%? With people unable to pay with cash, there’s no lower bound on interest rates anymore. Then, when the burden to hold cash becomes large, people will spend it instead of hoarding it and monetary policy would become very effective! That’s how economists and central bankers see it.

What I see are people buying as much assets as they can and house prices booming in the process. What I see are banks completely ignoring risks. What I see is credit explosion. Then prices would sometimes drop. But then the central bank can target a -50% interest rate to spur asset price growth again and make bank assets rise to cover a negative equity, and everything is solved instantly. With the advent of negative rates, there’s no limit to asset prices. From financial crisis to financial crisis, always spending more than the wealth available… until the point when there’s nothing left other than dust.

There must be some reason why the Chinese and the Russians are accumulating gold… How much do you think a paper currency without physical existence is really worth?