Hoarding Cash

Other discussions not related to the Permanent Portfolio

Moderator: Global Moderator

User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Hoarding Cash

Post by BearBones » Tue Mar 01, 2016 9:08 pm

TennPaGa wrote: Dualstow posted this in a thread on the Cash board:
WSJ: Everything You Need to Know About Negative Rates
Not a subscriber. What's the conclusion?
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Hoarding Cash

Post by BearBones » Tue Mar 01, 2016 9:15 pm

WildAboutHarry wrote: I am going to put my tinfoil hat on and say that if you are truly worried about the demise of paper cash, holding paper cash makes no sense.
I, for one, am not really as concerned about the demise of cash. More wondering what happens if their is a shortage of it when/if lots of people come to convert their digital money into paper because it is more likely to retain value. This would occur in a deflationary environment. Demise of cash (currency) altogether would seem to be more probable in a hyper inflationary environment.
tennpaga
Global Moderator
Global Moderator
Posts: 3126
Joined: Tue May 17, 2011 1:44 pm

Re: Hoarding Cash

Post by tennpaga » Tue Mar 01, 2016 9:35 pm

BearBones wrote:
TennPaGa wrote: Dualstow posted this in a thread on the Cash board:
WSJ: Everything You Need to Know About Negative Rates
Not a subscriber. What's the conclusion?
It doesn't really talk about hoarding cash, but is more or less a FAQ about negative rates, though written more from a bank's perspective.  So maybe not all that actionable.

FWIW, I'm not a subscriber either.  However, with WSJ articles, you can get past the paywall if you search for the article's title via Google (i.e. select the title and then right-click and choose Search Google for "xxx").  It might take a couple tries, though.
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
User avatar
WildAboutHarry
Executive Member
Executive Member
Posts: 1090
Joined: Wed May 04, 2011 9:35 am

Re: Hoarding Cash

Post by WildAboutHarry » Wed Mar 02, 2016 10:23 am

[quote=BearBones]I, for one, am not really as concerned about the demise of cash. More wondering what happens if their is a shortage of it when/if lots of people come to convert their digital money into paper because it is more likely to retain value. This would occur in a deflationary environment. Demise of cash (currency) altogether would seem to be more probable in a hyper inflationary environment.[/quote]

During the Great Depression scrip was issued by a variety of entities to substitute for cash shortages (bank holiday, general lack of cash, hoarding of cash, etc.).  Atticus Finch was paid with hickory nuts in To Kill A Mockingbird.

I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
User avatar
dualstow
Executive Member
Executive Member
Posts: 10917
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: Hoarding Cash

Post by dualstow » Wed Mar 02, 2016 6:31 pm

WildAboutHarry wrote: I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
It's amazing how you can buy a $2 coffee with a credit card these days without making the clerks groan. Some places still have a $10 minimum for cards, but many don't.
ethnic: "pagan, heathen," Greek ethnikos ".. national," from ethnos "band of people living together, nation, people, tribe, caste,"..Earlier in English as a noun, "a heathen, pagan, one who is not a Christian or Jew" (c. 1400)
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Hoarding Cash

Post by BearBones » Wed Mar 02, 2016 7:14 pm

WildAboutHarry wrote: I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?
User avatar
MediumTex
Administrator
Administrator
Posts: 9078
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Hoarding Cash

Post by MediumTex » Wed Mar 02, 2016 7:54 pm

I'm ready for negative loan rates.

Buy a car for $20k.  60 months at -1%, and your total payments come out to around $19,000.
Only strength can cooperate. Weakness can only beg.
-Dwight Eisenhower
User avatar
WildAboutHarry
Executive Member
Executive Member
Posts: 1090
Joined: Wed May 04, 2011 9:35 am

Re: Hoarding Cash

Post by WildAboutHarry » Wed Mar 02, 2016 8:51 pm

[quote='BearBones']Not talking about cash going away. Just that stored in deposit accounts. [/quote]

Ok, I see the distinction.  In a negative-interest-rate world, leaving "cash" in deposit accounts paying negative interest makes no sense, and could result in a run on such deposit accounts, and a shortage of physical cash (notes and coins).

Even in that scenario I could see currency controls in the form of electronic payment systems.  Again, most of this is already in place.  All that is required is some control (like the bank holiday of old, only permanent) on cash withdrawals from deposit accounts.

Although, in the case of a physical cash shortage, wouldn't notes and coins then command a premium?
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
barrett
Executive Member
Executive Member
Posts: 1533
Joined: Sat Jan 04, 2014 2:54 pm

Re: Hoarding Cash

Post by barrett » Thu Mar 03, 2016 6:51 am

BearBones wrote: Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?
I'd be curious even with the fractional system in place, how much banks actually lend out when economic activity is still kinda slow as it is now. But my guess is that large-scale cash hoarding (as in greenbacks under the mattress) would be deflationary because it would tend to slow down economic activity. Looks like there are roughly 1.2 trillion actual dollars in circulation which translates into each American holding maybe $4,000 in deposits (pulled these figures from the Internet so trust them at will). So my guess is that hoarding would be deflationary.
WildAboutHarry wrote: Although, in the case of a physical cash shortage, wouldn't notes and coins then command a premium?
Could be, but this complicates my simple analysis! ;) Although each dollar being worth more is deflationary.

Someone please slow me down!
tennpaga
Global Moderator
Global Moderator
Posts: 3126
Joined: Tue May 17, 2011 1:44 pm

Re: Hoarding Cash

Post by tennpaga » Thu Mar 03, 2016 7:46 am

BearBones wrote:
WildAboutHarry wrote: I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?
As I understand it, the money multiplier is a myth.  In the U.S., a bank's decision to lend to consumers depends on the demand for loans (and the credit-worthiness of the demanders), and has nothing to do with how much reserves they have.  True, banks must maintain some level of reserves as a regulatory requirement.  But, in practice, they can borrow reserves from other banks, or the Fed, to meet this requirement. 

So, yes, if people exchange their electronic bank deposits for vault cash (which are considered to be reserves), a bank's reserves decrease.  But reserves are also electronic deposits that banks have with the Fed, and so if they need more reserves, they would simply borrow them from other banks or from the Fed.
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
barrett
Executive Member
Executive Member
Posts: 1533
Joined: Sat Jan 04, 2014 2:54 pm

Re: Hoarding Cash

Post by barrett » Thu Mar 03, 2016 8:26 am

Tenn,

At a certain point though, hoarding of actual cash would have an economic impact, right? I think Bear Bones is just trying to explore what that might be. Por ejemplo, if everyone in the US had $2,000 in cash under a mattress, what would the effect be? I know we are talking about an extremely unlikely scenario but the question is interesting at least in a theoretical sense.
tennpaga
Global Moderator
Global Moderator
Posts: 3126
Joined: Tue May 17, 2011 1:44 pm

Re: Hoarding Cash

Post by tennpaga » Thu Mar 03, 2016 8:53 am

barrett wrote: Tenn,

At a certain point though, hoarding of actual cash would have an economic impact, right? I think Bear Bones is just trying to explore what that might be. Por ejemplo, if everyone in the US had $2,000 in cash under a mattress, what would the effect be? I know we are talking about an extremely unlikely scenario but the question is interesting at least in a theoretical sense.
If by hoarding, you mean "not spending", then yes, this has an impact.  But if I'm "not spending", it doesn't really matter if the unspent money is sitting as bits in my checking account or cash under the mattress.

I don't think the interest rate has a very direct effect on people's spending decisions, though.  I do think it can affect how people choose to allocate their savings, though (which is what we've seen with QE -- lowering interest rates has prompted a search for higher returns and transferring money to riskier assets like stocks).
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
Post Reply