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The Future of Cash

| October 06, 2016

An interesting debate has been reignited by global central bank policy. The European Central Bank and the Bank of Japan have pushed interest rates slightly below zero in an effort to combat deflation and stimulate their economies. However, many economists argue that they may have reached their theoretical limit as pushing interest rates further into negative territory may incentivize savers to hoard cash rather than put their money into a bank or the bond market where rates are below zero. The answer to this challenge may be to do away with cash, which would allow central banks to push rates as far into negative territory as they want.

The call to eliminate cash is not new. Historically it has centered on reducing illegal activity and the size of the black market, which most often transacts in cash. This is the first time the argument has been made from a central bank policy standpoint.

The debate is interesting in that it has a real impact on central bank policy going forward. If cash currency is available, then central banks may have nearly exhausted their policy options. If cash is eliminated, it will give  them banks more options but could infringe on economic freedom and privacy.