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    really good article...  

    Reports of Cash's Death Are Greatly Exaggerated

    Individuals see paper currency as a store of value and hedge against another financial crisis
    By
    Nicholas Colas

    August 29, 2017, 7:04 AM GMT+10

    Demand for physical cash is growing.
    Photographer: Simon Dawson
    The end is nigh for cash, or so a wide range of academics, fintech venture capitalists, and futurists would have us believe. Soon we will pay for goods and services with some combination of smartphones, biometrics and tiny chips embedded in our bodies. Bitcoin and other crypto-currencies may even replace government-backed forms of money, or so the story goes.

    That may be the future, but it’s not present-day reality, where individuals still see real utility in holding paper currency for both day-to-day transactions and as a store of value and hedge against another financial crisis. Physical cash in circulation in both the U.S. and Europe is growing at a healthy clip, even with all the new technology. This is not solely due to the dramatic increase in $100 bills or high-denomination euro notes over the last decade. There’s been a big increase in workhorse denominations -- $1 through $50 bills and 1 euro to 50 euro coins and notes.

    Take the humble $1 bill. According to Federal Reserve data, there are a record $11.7 billion of such notes in circulation. Compounded annual growth of $1 bills in outstanding since 2010 is 3.2 percent, well above the 0.7 percent annual growth rate of the U.S. population. The dollar bill is so popular that the Federal Reserve is sitting on more than $1 billion of dollar coin inventory -- those gold-colored Sacagawea pieces -- that consumers clearly do not want.

    The same holds true for other denominations, from the rarely seen $2 and $50 bills to the ATM-favorite $20 note. Total “transactional cash” (excluding $100 bills) in circulation was $308 billion at the end of last year, and the compounded annual growth rate since 2010 is 4.5 percent. There’s enough such money in circulation to put $1,000 into the hands of every man, woman and child in America.

    This isn’t only an American phenomenon. Data from the European Central Bank shows the same growth trends in the euro zone, where there are even higher levels of cash in circulation. Total transactional cash (1 euro coins through 50 euro bank notes) in circulation totaled 585 billion euros at the end of 2016, or more than twice the notional amount used in the U.S. The CAGR since 2010 is also higher than in the U.S. at 7.6 percent.

    If you want to see proof of the increasing digitization of commerce in these developed markets, don’t look at the physical cash statistics. It isn’t there.

    The funny thing about cash is that it is cheap to make but expensive to manage. The typical Federal Reserve note costs about 12 cents to produce, but once it leaves the Treasury’s Bureau of Engraving and Printing, it has to be guarded 24/7 until it goes into a wallet or a cash register -- and that gets very expensive.

    The upshot is that neither the Fed nor the ECB nor private banks has any incentive to order or distribute more cash than they need to meet organic demand. If transactional cash in circulation is rising, then this is a function of consumers’ preference to hold and use paper money. As an aside, it also puts to rest the notion that central banks are conspiring with the “deep state” to ban cash.

    The data tells such a different story about cash than the one that captivates futurists and informs common wisdom that it demands a rethink of not only the nature of “money” but also our understanding of the long-term effects of the financial crisis.

    Take the notion of cash as a “store of value.” Simply put, it shouldn’t be. The threat of inflation is supposed to encourage savers to invest their capital and keep it circulating in society. There is little sense shoving $1,000 in cash under a mattress only to see its purchasing power erode to $500 over a generation if inflation runs 3 percent to 4 percent annually.

    Yet the data suggests that there is some level of cash hoarding at play. Cashless transactions are growing, after all, so there is less need for pocketbook consumer cash. Where is all this money going? The financial crisis may have taught consumers that having a few hundred dollars or euros stashed away is a good idea. The low-inflation environment only reinforces the notion that such a strategy is not as costly as thought.

    Another important point relates to the costly nature of cashless transactions. The best example here is the purchase of gasoline in the U.S. Since gas stations work on thin margins and desperately want you to come into the store to buy snacks or drinks, they commonly give enticing discounts for cash. This avoids the 2 percent to 5 percent charge from a payments processor and drives foot traffic. That makes cash a win-win for these retailers.

    The growth in transactional cash holds valuable lessons for all the cashless solutions that aim to replace the humble bank note. The growing interest in bitcoin and other crypto-currencies, for example, speaks directly to the desirability of holding “store-of-value” cash outside the traditional financial system similar to cash under the mattress. But transaction fees are a persistent problem, even in many cutting-edge solutions. Scale will solve this over time.

    Cash continues to thrive because it solves real-world problems in a way that non-cash solutions do not. Technology most often disrupts existing paradigms when it addresses low-end consumer needs better than current solutions. When you see the dollar bills or 1 euro coins in circulation start to decline, that’s when we can finally write the eulogy for cash money. It may not be anytime soon.


    https://www.bloomberg.com/view/articles/2017-08-28/reports-of-cash-s-death-are-greatly-exaggerated
 
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