What next from the war on cash?

This morning the BBC has posted an article on a subject I was mulling last Wednesday.  As I walked into an appointment for some treatment for my knee the person before me was paying for his appointment by using his phone and transferring the money directly. I by contrast had put some cash in my pocket so I could pay in that fashion. If we move on from me suddenly feeling rather stone age and he being much more cutting edge there was one work related issue on my mind. What does paying by phone do to the money supply? It reminds us that the money supply also includes the ability to borrow and whilst everyone obsesses about banks also reminds us that it can now come from other sources. Or perhaps I should correct that to their being more potential routes these days.

Paying by phone

Here is an example quoted by the BBC.

Nikki Hesford, 32, is a convert to person-to-person payment (P2P) apps, using PayPal to pay for services and Venmo to pay back friends.

“The only time in the last year I’ve drawn out cash is for the school fete cake stall and to pay my manicurist,” says Ms Hesford, who runs her own marketing support company for small businesses.

“If I go for a meal with friends I can’t be bothered messing about with two, three or four cards,” she says.

“One person will pay on a card and the others will transfer through an app. It takes seconds rather than minutes fussing around with who owes what.”

PayPal has been around for some time but the likes of Venmo seems a real change and I can see the attraction. Who has not been out to eat with a group and been in a situation where the money collected in is short but everyone claims to have paid? For all our thoughts that millennials and Generation Z have it tough they may have stolen a bit of a march on the rest of us here. Venmo will by its very nature record each transfer and provide a type of audit trail.

In terms of scale then the position is building.

Zelle, one of the most popular payment apps in the US backed by 150 banks, launched in June 2017, but has already processed more than 320 million transactions valued at $94bn (£72bn).

A recent report by Zion market research suggested that the global mobile-wallet market in general is expected to top $3bn by 2022, up from nearly $600m in 2016.

The argument in favour is that it is quick and convenient,

Rachna Ahlawat, co-founder of Ondot Systems, a payment services platform, perceives a marked change in consumer behaviour.

“We want transactions to happen in an instant and at the click of a button,” she says. “Consumers not only want to operate in real-time, but they are looking for technology that allows them to play a more active role in how they control their payments, and are finding new ways of managing their financial lives.”

Financial Crime

The official and establishment view is that cash is a curse and the high priest of such thoughts Kenneth Rogoff wants this.

Why not just get rid of paper currency?

His opening argument is that cash is a source of crime.

First, making it more difficult to engage in recurrent, large, and anonymous payments would likely have a significant
impact on discouraging tax evasion and crime; even a relatively modest impact could potentially justify getting rid of most paper currency.

Yet we discover that even the new white heat world of person to person payments has you guessed it found that the criminal fraternity are very inventive.

“Malware injections and reverse engineering attacks can be used by hackers to understand the app’s code and silently trick you, going undetected by the typical security measures.”  ( Pedro Fortuna from JScrambler )

The truth is that whatever financial area we move into we take the criminals with us and sometimes there are already there waiting for us to make a mistake.

“With the increasing number of apps all requiring some form of authentication, it’s all too tempting to reuse passwords across multiple services. This increases the risk of your data being hacked.”  ( Sam Devaney from CGI UK ).

The banks

There is a very inconvenient reality for the likes of Kenneth Rogoff which is that so much financial crime is to be found at the heart of the system “the precious”.

Banks in Denmark, the Netherlands, Latvia and Malta have all been linked to criminal inflows from countries including Russia and North Korea. The EU has moved to centralize banking supervision, but money laundering has remained a national responsibility.

At the moment the European Union seems to be the weakest link in this area although of course it is far from unique. As an example the situation at Danske bank was so bad it even found itself being trolled by Deutsche Bank which claimed it was only accepting one in ten of past Danske bank clients. According to the Wall Street Journal around US $150 billion of transactions are being investigated according to Reuters the bank itself is discovering large problems.

the Financial Times cited the bank’s own investigation as saying the Danish bank handled up to $30 billion of Russian and ex-Soviet money through non-resident accounts via its Estonian branch in 2013 alone.

The European Union seems to be particularly in the firing zone in this area right now and much of it seems centred in the Baltic nations. That reminds me that back on the 19th of February I looked at the issues facing ABLV in Latvia which developed into a situation where the central bank Governor Ilmārs Rimšēvičs has been charged with taking a bribe.

Whilst the European Union is presently in the firing line we know that banking scandals of this sort occur regularly in most places. Yet the establishment ignore the way that the banks are the major source of financial crime in their rush to implicate cash.

Some new notes

A sign that there is indeed counterfeiting happen was provided yesterday by the European Central Bank or ECB although it chose to present it another way.

New €100 and €200 banknotes unveiled!

Sadly the excitement captured only a couple of journalists attention but the press release did hint at “trouble,trouble,trouble.”

The new €100 and €200 banknotes make use of new and innovative security features.

I think we know why! But there was another sign.

In addition to the security features that can be seen with the naked eye, euro banknotes also contain machine-readable security features. On the new €100 and €200 banknotes these features have been enhanced, and new ones have been added to enable the notes to be processed and authenticated swiftly.

It makes me wonder how many counterfeit ones are in existence. This seems likely to get Kenneth Rogoff to add those note to the 500 Euro ones he wants banned.

Comment

This is a situation which has a paradox within it. We see that technology is providing plenty of ways which provide alternatives to cash and in spite of presenting myself as something of a cash luddite earlier I find them convenient too. Yet we want more cash in the UK the £40 billion mark was passed in 2008 and now we have according to the Bank of England.

There are over 3.6 billion Bank of England notes in circulation worth about 70 billion pounds.

We are far from alone as for example in 2017 the growth rate was 7% for the US and Canada and 4% for the Euro area and Japan. Yet the Bank of England confirms that the medium of exchange case has indeed weakened over time.

Cash accounted for 40% of all payments in 2016, compared to 62% in 2006

The Bank will have something of an itchy collar as it notes that the increased demand for cash will be as a store of value and the rise accompanies its era of QE and low interest-rates. Kenneth Rogoff is much more transparent though.

Although in principle, phasing out cash and invoking negative interest rates are topics that can be studied separately, in reality the two issues are deeply linked. To be precise, it is virtually impossible to think about drastically phasing out currency without recognizing that it opens a door to unrestricted negative rates that central
banks may someday be tempted to walk through.

As Turkish points out in the film Snatch “Who da thunk it?”

 

 

The pensions dilemma for millennials and UK Retail Sales

The credit crunch era has been essentially one where central banks have tried to borrow spending and resources from the future. In essence this is a Keynesian idea although their actual methods have had Friedmanite style themes. We were supposed to recover economically meaning that the future would be bright and we would not even notice that poor battered can on the side of the road as we cruised past it. Some measures have achieved this.

Indeed some central banks are involved in directly buying stock markets as these quotes from the Bank of Japan this morning indicate.

BOJ’s Kuroda: ETF buys are aimed at risk premiums, not stock prices. Overall ETF holdnig small proportion of overall equity ( DailyFX).

Some think it has had an impact.

Nikkei avg receiving an agg boost of c.1,700 points after curr ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016 ( @moved_average )

Such moves were supposed to bring wealth effects and in a link to the retail sales numbers higher consumption. This would be added to by the surge in bond markets which is the flip side of the low and in many cases negative yields we have and indeed still are seeing. This is why central bankers follow financial markets these days so that they can keep in touch with something they claim is a strong economic boost. In reality it is one of the few things they can point to that have been affected and on that list we can add in house prices.

Millennials

I am using that word broadly to consider younger people in general and they have much to mull. After all they are unlikely to own a house – unless the bank of mum and dad is in play – so do not benefit here. In fact the situation is exactly the reverse as prices must look even more unaffordable of which one sign this week has been the news that more mortgages are now of a 35 year term as opposed to 25 years.

They also face a rather troubling picture on the pension front. From the Financial Times.

 

People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday. According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country. Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.

To my mind the shock is not in the number which is not far off what it has always been. Rather it comes from finding that after student loan repayments and perhaps saving for a house which comes after feeding yourself, getting some shelter ( rent presumably) and so on. Of course some will feel that their taxes are financing the triple-lock for the basic state pension which is something which for them is getting ever further away. From the BBC.

UK state pension age increase from 67 to 68 to be brought forward by seven years to 2037, government says.

There were two clear issues with this. The first is the irony that this came out as the same time as a report suggested that gains in lifespan are fading. The other is the theme of a good day to bury bad news as the summer lull and the revelations about BBC pay combined.

Oh and tucked away in the Financial Times report was something that will require a “look away now” for central bankers.

A combination of low investment returns

You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?

UK Retail Sales

This has not been one of the areas which has disappointed in the credit crunch era. If we look at today’s release we see that in 2010.11 and 12 not much happened as they were 98-99% of 2013’s numbers. Then something of a lift-off occurred as they went 104% (2014), 108.5% (2015), and 113.8% (2016). This fits neatly with my views on the Bank of England Funding for Lending Scheme as we see that a boost to the housing market and house prices yet again feeds into consumer demand. Actually to my mind that overplays the economic effect of FLS as it may have provided a kick-start but the low inflation levels as 2015 moved into 2016 provided the main boost via higher real wages in my opinion.

What happened next?

The first quarter of 2017 saw the weakest period for UK retail sales for a while with several drivers. One was the nudge higher in inflation provided by the lower value for the UK Pound £. Another was that the numbers could not keep rising like they were forever! Let us now look at today’s release.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

As to what caused this well as summer last time I checked happens every year it seems the weather has been looked at favourably for once.

Feedback from retailers suggests that warmer weather in addition to the introduction of summer clothing helped boost clothing sales.

If you recall last autumn we got a boost from ladies and women purchasing more clothes, is their demand inexhaustible and do we own them another vote of thanks?

Also I note that better numbers have yet again coincided with weaker inflation data.

Average store prices (including petrol stations) increased by 2.7% on the year following a rise of 3.2% in May 2017; the fall is a consequence of slowing fuel prices.

Or to be more specific less high inflation.

Comment

If we look at the retail sales data we have Dr. Who style returned to the end of 2016.

The growth for Quarter 2 (Apr to June) 2017 follows a decline of 1.4% in Quarter 1 (Jan Mar) 2017, meaning we are broadly at the same level as at the start of 2017.

Unlike many other sectors it has seen a recovery and growth in the credit crunch era. In addition to the factors already discussed no doubt the rise in unsecured credit has also been at play. For the moment we see that it will provide a boost to the GDP numbers in the second quarter as opposed to a contraction in the first.

But there are issues here as we look ahead. With economic growth being slow we look for any sort of silver lining. But of course the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.

Also from the perspective of millennials there is the question of what they will be able to consume with all the burdens bearing down on them? Mankind has seen plenty of period where economic growth has stagnated as for example the Dark Ages were not only called that because of the weather. But we have come to expect ever more growth which currently looks like quite a hangover for them. They need the equivalent of what is called “something wonderful” in the film 2001 A Space Odyssey like cold nuclear fusion or an enormous jump in battery technology. Otherwise they seem set to turn on the central bankers and all their promises.