An interesting consequence of a crumbling banking system is that it exposes how much we have taken that system for granted. Salaries are paid monthly into our bank account and we assume they will be safe. We set up direct debits and standing orders to pay our bills, we stick a little plastic card into a machine to withdraw cash and we use plastic cards to buy things. In all of this we act on trust. That is one reason why banks can "create" money as I described yesterday, for so long as they are trusted to be safe havens for our cash they can plan their business on the assumption that they never need more than a small percentage of deposits to be sitting in their safe as paper money.
Now trust has been undermined, indeed it has been undermined to such an extent that runs on banks are a real possibility; something I did not believe likely just a few days ago. What I am wondering is what will happen if trust remains weak, what will people do? Someone with modest savings who does not trust his bank to survive might leave his money in place anyway because the first £50,000 is protected come what may. Another might withdraw his money because he does not want to have to make a claim if the bank folds, he wants to keep his funds readily available. What does the person who withdraws his money then do? He could deposit it in another bank and perhaps most would, but some will not. It seems inevitable that a lot of money will be withdrawn from the banking system for good. Some will buy precious metals or gems and others will simply keep far more cash at home than they ever have done before.
Such a withdrawal of cash from the banking system will affect what the banks can do, but it seems to me that it will go much further because it will change the way people deal with normal everyday transactions. In particular it seems likely that many more goods and services will be paid for in cash. Someone who might usually pay for repairs to his car with a cheque or card will pay cash. The garage will always receive some of its income in cash and some by other means. The likelihood is that some of the cash will not go through the books. When a greater proportion of cash is received than before the likelihood is that more will be kept away from the taxman, especially when the economy as a whole is struggling because takings at the garage might well be down in total. Not only does the taxman get less because total income is down, he also gets a smaller proportion of less because a smaller percentage of actual receipts is declared. Add-in every other business which suddenly receives more of its takings in cash and the effect on tax receipts could be quite significant.
There is a further consequence of shifting the balance from cheque/plastic to cash in a declining economy. Customers who have never experienced it before find that paying in cash results in a lower price. A prolonged economic slump could result in a systemic shift to cash in order to squeeze prices lower by excluding the dead weight of the taxman. It might not happen to any huge degree, time will tell.
Now trust has been undermined, indeed it has been undermined to such an extent that runs on banks are a real possibility; something I did not believe likely just a few days ago. What I am wondering is what will happen if trust remains weak, what will people do? Someone with modest savings who does not trust his bank to survive might leave his money in place anyway because the first £50,000 is protected come what may. Another might withdraw his money because he does not want to have to make a claim if the bank folds, he wants to keep his funds readily available. What does the person who withdraws his money then do? He could deposit it in another bank and perhaps most would, but some will not. It seems inevitable that a lot of money will be withdrawn from the banking system for good. Some will buy precious metals or gems and others will simply keep far more cash at home than they ever have done before.
Such a withdrawal of cash from the banking system will affect what the banks can do, but it seems to me that it will go much further because it will change the way people deal with normal everyday transactions. In particular it seems likely that many more goods and services will be paid for in cash. Someone who might usually pay for repairs to his car with a cheque or card will pay cash. The garage will always receive some of its income in cash and some by other means. The likelihood is that some of the cash will not go through the books. When a greater proportion of cash is received than before the likelihood is that more will be kept away from the taxman, especially when the economy as a whole is struggling because takings at the garage might well be down in total. Not only does the taxman get less because total income is down, he also gets a smaller proportion of less because a smaller percentage of actual receipts is declared. Add-in every other business which suddenly receives more of its takings in cash and the effect on tax receipts could be quite significant.
There is a further consequence of shifting the balance from cheque/plastic to cash in a declining economy. Customers who have never experienced it before find that paying in cash results in a lower price. A prolonged economic slump could result in a systemic shift to cash in order to squeeze prices lower by excluding the dead weight of the taxman. It might not happen to any huge degree, time will tell.
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