Over the past few years, there has been a lot of talk about eliminating cash. As we have more and more flexible electronic payment methods, the possibility of going without banknotes and coins is increasingly possible.
Cash is being seen as a conduit for illegal activity such as money laundering and tax evasion. It is a facilitator of organised crime. Governments in many countries have been reducing large denomination notes for some time. In Europe, we have seen the demise of the Euro 500 note. In China, the largest note is RMB 100 (US$ 15) Canada has withdrawn all its larger size notes. Since the start of the Covid-19 pandemic, people have been reluctant to either pay with cash or accept it. There is no doubt that cashless payments are here to stay and will keep growing significantly year-on-year. But what about the big leap, what about going completely cashless?
Sweden plans to be the first cashless country by 2023 — complete elimination of physical money and a 100% conversion to electronic payment methods. How many other countries are likely to follow suit in the next 10 to 20 years and what is the implication for the financial markets?
When we take a look at long-term government bonds, we see historically low rates (in some cases negative rates). I have often asked myself who is buying these bonds and why? Why would you buy a long-term bond that yields zero? The standard answer is that it is pension funds that need to buy AAA-rated assets for pension investors. i.e. that these funds have no choice but to keep buying them.
However, it could be that buying these bonds is not as crazy as it first looks. Switzerland has imposed negative rates on deposits since 2015. Since that time global rates have only moved lower, yet the Swiss National Bank (SNB) has stuck to the same rate of -0.75%. Why? The answer in my opinion is simple — Cash. If the SNB continued to lower rates further, people would seriously think about storing cash in a vault, rather than leaving it in the bank.
In the past two weeks, everyone in the financial markets has been getting excited about the ire of inflation and the rise of long term rates. Yet Dan Ivanscyn of Pimco (one of the most powerful US bond managers) has warned of an inflation “head fake” — that we will have short-term inflation as we come out lockdown, but that long-term inflation will remain low. He believes the effects of technology and non-unionised labour will continue to put downward pressure on prices for the long-term. If he is right and we are just at the start of seeing what technology can bring in terms of unlocking spare capacity and lowering costs, rates will certainly be lower for longer.
But think about this — If you couple the general lowering of costs (deflation) with the elimination of cash, central banks will be able to set rates as low as they like. Imagine negative rates of 3%pa or even 5%pa, what will be the impact on the economy and asset prices? Maybe the pension funds are not that crazy after all.
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