In the first of Sanlam’s Invested in the Future series of virtual events, financial journalist Julia Edwards talked to renowned economist and bestselling author Stephen D. King about the future of money.
In a wide-ranging discussion, Julia Edwards and Stephen D. King explored the meaning of money, our changing relationship with cash, and how the lessons of the past can help us make sense of our evolving economic future. We caught up with Stephen afterwards to find out more about his thoughts on the future of money and the key themes that are set to shape our world.
Julia Edwards: How is technology driving the evolution of money?
Stephen D. King The payment mechanisms that we used 20 or 30 years ago – like cheque books – are increasingly redundant now. That’s largely because of electronic transactions. Today, we can make payments in many different ways, and some go outside the conventional banking system, whether that’s through innovative credit cards or via your smartphone.
Electronic money helps you to see what’s really going on; in a sense, it creates price discovery. That increase in visibility and transparency should help to bring down financial costs for consumers, particularly in areas such as currency exchange.
JE: Do you regard cryptocurrencies as an investable asset class?
SK: Technological innovations have created cryptocurrencies such as Bitcoin, and people have begun to think there might be an alternative to the monetary system that we’ve lived with for so long.
However, just because something is innovative, it isn’t necessarily a good long-term store of value. Cryptocurrencies are just currencies; they don’t generate a reliable income over time, and there’s a speculative aspect that might reverse in future. The extent to which cryptocurrencies have appreciated in value suggests that some people do regard them as a very valuable asset but it’s important to recognise that rapid increases in value can sometimes be highly risky.
“Just because something is innovative, it isn’t necessarily a good long-term store of value”
JE: In an environment of near-zero or even negative rates, what’s the point of cash?
SK: Cash – in the form of notes and coins – is unique because it always has a minimum interest rate of zero. The closer we move to negative rates, the more attractive cash becomes. But central banks don’t necessarily want cash to be an attractive investment, they’d rather encourage investors to switch into other asset classes that might, in time, help boost economic activity.
As we’ve moved closer to the so-called ‘zero bound’, central bank officials have realised that they could run out of policy options unless they have the power to move interest rates into negative territory. If cash prevents that, you can see why central banks might consider abolishing cash – they want greater flexibility to set interest rates at a negative level.
JE: What happens when people’s faith in money breaks down?
SK: I’m a big believer in history, and history shows that there’s always a reason for a loss of faith in money.
In the 1970s, the Bretton Woods exchange rate system collapsed and the link between the US dollar and gold was effectively broken. Because every other currency was linked to the dollar, people became anxious about currencies in general. As currencies fell in value, inflation picked up; at the same time, gold surged in value because people wanted the reassurance of something they felt was secure. Similarly, in Tudor England, people’s loss of faith came from the debasement of the currency: the precious metal content of coins was too often reduced. Money lost its value.
JE: In uncertain times, can people still put their savings to work for them?
SK: It depends partly on whether the individual has the ability to invest in risky assets and can take a long-term view. Periods of inflation generally tend to benefit stock market investments and real assets such as property, rather than nominal assets such as government bonds.
A poor pensioner on a fixed cash income will find that inflation erodes the value of their pension, whereas a wealthy person who’s invested in equities and property could be well placed to benefit from a period of 1970s-style inflation.
Over the last few years, inflation has been very low but central banks have attempted to address that through quantitative easing. Although many people warned that this might lead to higher inflation, asset prices have been pushed up instead.
JE: Do you think society can ever be truly cashless?
SK: Yes and no. How will a truly cashless society cope if its electronic systems break down? From that perspective alone, cash serves a purpose. Monetary systems often break down because of a change in political regime, and there are occasions when cash can become particularly valuable. On the other hand, if cash loses value very quickly – for example, in Weimar Germany in the 1920s – people might move to a barter system as a more efficient way to exchange goods and services.
Of course, some people will always want to undertake transactions that aren’t visible to the authorities. While it’s now possible to achieve this via cryptocurrencies, cash is still useful for those who want to avoid leaving a trail behind them. Above all, cash – and money in general – is not determined by governments alone: people are innovative, and money evolves in response to how they want to use it.
JE: Will rates of change vary around the world?
SK: Some areas of the developing world are progressing more quickly than advanced economies because they’re not weighted down by redundant technology. The most obvious area is telecoms: most developed nations still have fixed-line infrastructure in place, whereas many parts of the developing world have bypassed fixed lines altogether and moved directly to wireless technology.
With money, however, I think it may be slightly different; there’s no reason why a developed country can’t move quickly towards electronic payments. Some countries – particularly in Scandinavia – have already progressed towards becoming cashless societies. Once they’ve become accustomed to exchanging money through electronic means, most people find it very convenient.
“Change won’t be imposed by governments alone; it will be decided by the interactions of billions of people”
JE: Looking ahead, what’s going to be the stand-out theme over the next 20 years?
SK: I think the world will become increasingly fragmented. Technology itself may create disengagement as robotics and artificial intelligence allow companies to bring their operations back onshore.
This is an idea that I explored in my book Grave New World: The End of Globalization, the Return of History*. In the late 20th century, globalisation was all about the movement of capital in search of cheap labour elsewhere in the world. Today, technology is enabling capital to replace that cheap labour – so the view that technology is driving us towards globalisation isn’t quite true. Ultimately, change won’t be imposed by governments alone; it will be decided by the interactions of billions of people.
* Stephen D. King – Grave New World: The End of Globalization, the Return of History (Yale University Press, 2017)