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July 9, 2015

When the Going Gets Tough, the Feds Take Your Money

LONDON, England – “Cash is king.”

So sayeth the Wall Street Journal, reporting on the situation in Greece.

The use of cash for everyday transactions has increased 44% in the last two months.

A brief update: The Greeks spoke on Sunday. “No,” they said. “We don’t want the government-spending cuts our creditors are demanding.”

Then the finance minister resigned, riding off on a motorcycle.

The Financial Times reports that the Greeks are to be given one “last chance to avoid crashing out of single currency.”

Greek output is plunging. The banks are running out of money. And Greeks are lining up at ATMs. The government won’t let them take out more than a lousy €60 ($65) a day.

That’s what happens: When the going gets tough, the feds take your money.

That’s why cash is king.

An Important Breakthrough

A fascinating article recently described how ride-sharing app Uber had “solved the major problem of capitalism.”

What is the problem?

“Trust.”

There are millions of cars on the road. Most of them have four seats, but only one of the seats is usually occupied. And many of these private drivers would be happy to take you where you want to go, for less than what a taxi would charge.

But you don’t get into those cars. You were told as a child never to get into a stranger’s car. You don’t know which of them you can trust to take you where you want to go.

London’s black cabs solve the trust problem with a distinctive design and regulation. Drivers must pass the city’s legendary training course, “The Knowledge,” to get their license.

When you get into a London cab, you have a high level of confidence that you will get where you are going in a professional manner.

Uber solves the problem of trust in a different way – with an Internet-based rating system. Riders rate drivers out of five stars. Drivers rate passengers the same way. Both avoid folks with poor ratings.

But capitalism made a much bigger breakthrough on the trust front thousands of years ago: It invented cash.

Before modern money, transactions weren’t based on barter, as most people believe. Instead, they were based on a system of rudimentary credit.

Without cash, you could trade only in a small group. And you had to rely on memory to recall who owed what to whom.

With the advent of coinage you could trade with people you didn’t know. You gave up something. You got something – cash – in return. You could then use this cash to trade for something else later.

This invention – money, usually based on gold or silver – was such a breakthrough, it made today’s elaborate market economies possible.

Trust Is Disappearing

But it’s only cash if you can put your hands on it.

As the Greeks have just discovered, money in the bank is not cash.

Cash is what you need when trust breaks down. With cash, you get optionality, as The Black Swan author Nassim Taleb puts it. With cash in your pocket, you can buy a gallon of gasoline or a share in a public company. It’s yours. You can do what you want with it.

But cash in the bank?

You don’t know. You have to trust that the system works… that the bank is solvent… and that it will give you back your money when you want it.

Trust is rapidly disappearing in Greece. The Germans don’t trust the Greeks. The Greeks don’t trust the banks. Almost nobody trusts the government.

What a great show! And very instructive.

Cash is king in China, too. Chinese stocks paused yesterday after a three-week crash. (For more on this important story, scroll down to today’s Market Insight…)

The government is doing all it can, say the state-run newspapers. But investors are wondering: Can they trust the Chinese feds to stem the bleeding?

A Hong Kong-based fund manager is quoted as saying: “I believe the Communist party still has the final say over the stock market, even nowadays.”

But wait, if government could stop market corrections, why do we ever have them?

We don’t know. But there are times to trust… and times to distrust. There are times to own financial assets. And there is a time to own cash.

This seems like a good time for cash…

Courtesy Bill Bonner, Bonner & Partners 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle


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