Savings must come first – cash is a mere diversion


Emile Woolf, Going Postal
MATHIAS, M HLicence CC BY 2.0

I am typing this in the SAA Business Lounge of Durban airport, awaiting a call to board a flight to Johannesburg, where we are due to take the last flight to London before all international travel is stopped. But in this dystopic nouveau monde, captivated by Covid-D 19 advice and warnings, we can be sure of nothing. Indeed, anything I write on that subject will be overtaken by new developments before the proverbial ink has dried.

 In such surreal circumstances I shall try to focus instead on the anchor of transcendent economic principles, and put together a few observations that might, for a time, distract me and my readers with something different.

Cash money or digit money?

Eliminating the use of cash in society, for example. You can see it happening of course, but not necessarily what lies behind it. There is no need for money in any of its familiar physical forms when people are able to load their i-phones with digital symbols and pay for real goods and services by touching plastic against plastic or by entering a code. This is the entry to an alien world in which the gratification of real needs is increasingly divorced from people’s actual finances.

We have inadvertently become complicit supporters of the Treasury’s grand model of a cashless society that has no need to hold anything tangible. Government sets the example: if the Treasury can resort to the simple device of printing money to pay for fantasy projects that no private entrepreneur would touch, why should citizens not do likewise with a piece of magic plastic?

The Bank of England supports the cash-averse syndrome by shrinking the size of successive issues of new notes, coincidentally reflecting their shrinking purchasing power. The latest edition of a £20 note is similar in size and colour to the older £5 note – they get closer to postage stamps with each issue! And although we refer to this stuff as “paper” money, paper it is not. The notes are made of an indestructible synthetic see-through material you can bend but not fold, and they adhere to each other as if magnetised.

Saving? That’s important

The Treasury’s determination to create a cashless society in a digital age enables banks and large businesses to reduce the costs of administering, recording and accounting for complex payments systems, while avoiding the obvious security risks associated with holding virus-prone media like cash and cheques.

But this transformation in attitudes to money has a price. The fundamental discipline of saving was until recently instilled in junior family members from an early age, and many can remember the satisfaction of feeling the piggy-bank’s growing weight as cash saved reached the point when it could be used to buy something to be treasured.

That experience reflects one of the most important principles of economics: nothing new can be acquired, or created, without something saved from past production.  The word we use for those savings is capital – the initial investment without which there can be no new production. You can start a new factory with borrowed money, of course, but where did that come from? Still savings, albeit someone else’s.

Here we learn the very essence of capitalism. Capital, together with the factors of land and labour, is the source of everything produced – which is why it is so dangerous to conceal the role of savings from the younger generation – and implanting, by default, the illusion that money simply “pre-exists” as a means to gratification. This “disconnect” between an object bought and the factors that created it is the source of the fatal notion that demand, on its own, is the spur that will get production going.

But look around. Look at the world’s poorest nations. Do you see any lack of demand? What they miss is the means of satisfying that demand: private savings, labour and land availability – plus an entrepreneur to orchestrate them into production. No wonder that each generation must discover, the hard way, that all the “rights” and “entitlements” promised by left-inclined politicians amount to nothing other than an obscene diversion from the hard truth that, to quote John Cowperthwaite, Hong Kong’s erstwhile Financial Secretary, “in this hard world we have to earn before we spend”.

Fudging the figures

From government’s point of view, the chief advantage of insulating the communal psyche from Treasury-led subterfuge is that it enables state-appointed statisticians to fudge the inflation figures they feed to the gullible financial press on a daily basis. The “baskets” of products and services that make up the Retail Prices Index and the Consumer Prices Index (and their overseas counterparts) are continually “adjusted” with a view to arriving as closely as possible to “the figure they first thought of”– namely, the 2 per cent mandated by the Treasury as their “target” rate of inflation.

Even though that rate would cause prices to double every thirty years it has the advantage of “sounding” quite low, and can therefore serve as a bulwark against deflation – which, for every Keynesian macro-economist, implies a fall in demand and therefore represents the very devil.

Question: But might citizens not actually benefit from lower prices? That consideration simply has no place in the Treasury’s Keynesian modelling.

Question: But what if the detested fall in prices is actually a consequence of improved productivity that quite naturally leads to higher demand? The laws of supply and demand are far too entrepreneurial for a socialist workbook in which only state-controlled demand management can revive a sluggish economy.

You can’t fool all the people all the time

The greater the effort to delude the public with contrived inflation figures, the less are they believed by anyone living in the real world. People have far greater trust in their own “gut-index” of living costs and know that the true level of price inflation is closer to 10 per cent, incidentally confirmed by the independent Chapwood index, as Alasdair Macleod regularly reminds us.

The situation soon reaches a point where no official figures can mask the effect of unbridled inflation of the money supply, inflicted by central banks everywhere in complete ignorance of the difference between cause and effect. The fact that they are now compelled by government decree to create money by buying newly printed government bonds – with the best of motives, such as the emergency funding of virus-related handouts – will not lessen the economic consequences.

The Treasury and the Bank may pretend that the fiat-flood they have created is money, but as the printing frenzy gathers pace you can’t ignore its real effect on prices.

© Emile Woolf March 2020 (website)

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