It’s been seven years since the financial crisis blew up. Investors are hoping against hope that ‘normalisation’ is around the corner. Some even still expect the Federal Reserve to raise interest rates this year. Yet, behind the scenes, central bankers are becoming ever more radical.
Last week, Bank of England chief economist Andy Haldane gave a speech in Northern Ireland, in which he suggested a move to abolish cash. Surprised? Shocked? Haldane’s worried that we’re never getting back to ‘normal’ again. Interest rates are unlikely to be back up to pre-2008 levels by the time the next recession hits. So central banks will have little or no room to cut rates when the next downturn comes. That’s a problem.
One reason for cutting rates is to make cash less attractive to hold – so people spend it or invest it, stimulating the economy. But once you hit 0%, that stops working. If you turn rates negative, and charge people to hold money in the bank, they will switch to cash instead, and you can’t influence their spending any more.
The solution? A Bitcoin-style digital currency. Make money entirely digital. That allows you to impose negative interest rates. Knock it down to, say –3%, if you want to shake things up, and everyone’s digital accounts could be automatically docked £3 in every £100. Or we keep paper currency, but put a “sell-by” date on it – so that it has to be traded in regularly for ever-decreasing denominations. If that doesn’t have you reaching for gold bars or itching to swap all your pound notes for a currency managed by a less nutty-sounding bunch of economists, then I don’t know what will.
In a recent interview with Merryn, Ukip MP Douglas Carswell suggested that “the future lies in not creating a single currency in lots of different countries, but having multiple currencies in every country”. Maybe this is how we get there – as individuals rebel against deteriorating digital currencies and use the likes of the Bristol pound instead.
The problem with these monetary experiments is that they make very fundamental changes to our society. Quantitative easing and its more radical incarnations (such as ‘helicopter money’, or crediting money direct to individual bank accounts) are redistributional – they take wealth from one group and give it to another. Creditors are repaid with devalued money. Those with significant cash savings are penalised.
You might think that wealth should be redistributed, or that we should have a grand debt jubilee. But these are decisions to be taken on a society-wide, consensual basis, by democratically elected politicians – not by unelected central bankers. And when we’re at the point where we’re seriously discussing abolishing cash, maybe we should be asking something else too: is there a point at which our pathological fear of recession and deflation leads us to cures that are worse than the disease itself?