The Case for Cash

Asad Dossani

Our government wants us to stop using cash. It wants a cashless society. One where payments are made with plastic instead of paper. By now, you've probably heard enough about the advantages of electronic payments. But there is a dark side.

As individuals use less cash, they switch to credit cards. Unlike cash, credit cards allow you to spend more than what you have. If you're sensible with money, this probably won't matter. But not everyone is.

In the US, cash accounts for a minority of transactions. A full one-third of transactions are made with a credit card. The US is a far more cashless society than India. But is that a good thing?

The average American household has approximately US$7,500 in credit card debt. Indian households have much less debt, largely because most people don't have access to credit in the first place. These numbers are reflected in savings rates. The US savings rate is just over 5%. For India, this figure is nearly six times higher, at 31%! And for your reference, the average American income is nine times the average Indian income.

How is it that Americans save one-sixth of what Indians save, yet earn nine times more? The numbers alone just don't make sense. But once we account for cash, the story emerges.

Cash, it turns out, gives you a stronger incentive to save money. First, it is impossible to spend more than what you have. Second, it is far easier to keep track of what you've spent. You are much more conscious when you do spend. Your wallet gets lighter every time you make a transaction.

Credit cards are the exact opposite. Swipe, sign, and you're good to go. Doesn't matter how much is in your bank account. When people have access to credit, they borrow money. Even if they shouldn't. Debt goes up, and savings go down.

This has profound implications for the economy. If indeed we transition to a more cashless society, expect to see debt levels go up. And savings rates go down. Instead of growth fueled by savings and investment, we'll have growth fueled by consumer debt. And we know how that story ends.

How will this impact markets? As traders, we must be aware of the big trends. This is what creates trading opportunities. And we use our trading systems to take advantage of them.

The biggest impact will be on interest rates. As debt goes up, interest rates become more important. The pressure to keep interest rates low intensifies. There is a big reason developed economy central banks are so slow to raise interest rates. With so much debt around, there is considerable resistance to high interest rates.

The RBI isn't there yet. Most individual in India are savers, not borrowers. They like higher interest rates. But as we move from cash to credit cards, this balance will shift.

We're told to believe that getting rid of cash is a good thing. But keep the American experience in mind. The US became a rich country during the second half of the twentieth century. During that period, they had high growth rates and high savings rates. And of course, they conducted most transactions in cash.

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11 Responses to "The Case for Cash"
31 Dec, 2016
In India, as of August '16, according to RBI, there are 26.38 M credit cards vs. there are 712.46 M debit cards. So India is different where people and the banks have been cautious about credit cards. This trend is expected to continue. On the other hand, the amount spent with credit cards (257.5 B rupees), even with such a fractional base is much higher than debit cards (183.7 B). So people do spend much bigger amounts on credit cards and this was before demonetization. Govts want to reduce (stop?, no) using cash so that they can collect better taxes. Cash economy goes below tax net and it is huge in India. Traditionally, most of the Equity Master, Bill Bonner's views have been against printing curency at will by the central banks removing the gold standard, which stokes inflaction, fiscal profligacy and so on. Now, for a difference, the govt is doing something different in terms of reducing the cash in circulation and reducing the printing of it. The currency is not done away with altogether. Shouldn't inflation come down? Shouldn't fiscal profligacy be addressed better? Over a decade or so from 1999 till 2013, the statistics reveal that currency in supply increased from 9% to almost 13% of GDP. That indicates printing presses working over time and have brought its ill effects. Now it is time for correction. America is a consumption driven economy with much higher per capita income. That is obviously known. Like (1)
Zephry DSouza
30 Dec, 2016
You have made a valid point and a very important one. While the average Indian has a propensity to save , it is the younger generation, numbering upwards of 300 million, that concerns me. They have too many attractions around them , which the older generation did not have. They are too much a part of the " instant gratification" generation! They do earn much more than the older generation, they are prone to fall to the slick advertising and marketing of companies especially FMCG goods, very often giving in to peer pressure! Another reason that governments want to do away cash,if my limited knowledge of economics is correct, is that they do not have the Gold standard to adhere to anymore, so they can merrily keep expanding the fiscal deficit as they do not have to guarantee the repayment of cash to anyone in gold now. So the less cash circulating in the economy , the less is their liability to repay .The example of the USA is relevant, where the debt of the country as a whole is so large it runs in trillions of dollars.It reflects basically the debt of the people of the country,where also as a result of the Sub prime crisis, thousands of people lost their homes , as they could not repay their debt. the PIGS countries are also a relevant example for us where we see Greece still struggling to overcome their crisis. The borrower is slave to the lender!!! If you have the funds in your account, there is no problem using a credit card, If not beware!!!!Like 
Deepak Kansal
25 Dec, 2016
Hello Asad, Our government does not want to "stop using cash". No one mentioned "No cash". If this would have been the case, no rupee notes would have been printed. Rather they mean to use less cash and make more electronic transactions. My strong opinion is that your kind of educated people should not misguide general public. They should help in promoting the idea of using less cash and making more transactions using other means of money transactions like NEFT, RTGS, cheques, mobile wallets etc. Why do you think that any one who will use less cash will switch to credit card only, why not debit card? This will not impact their financial health and also help in making the economy better since the traders will be compelled to pay taxes on the money earned which is not happening currently in India.Like 
Jaganmohan Challa
25 Dec, 2016
People who are afraid of spending more money and run into debt can opt for debit card and prepaide cards to control their expenditure. There are many options if there is attitude to change for better.Like 
24 Dec, 2016
you have got it wrong. The emphasis is on digital transactions,better trail an integration of cash economy into formal economy. credit card is only one aspect.this will also enlarge tax base.Like 
Pawan Sharma
24 Dec, 2016
Well written, Asad. I have another opinion to offer. If you are with the idea of a cashless or less-cash society, going by the potential benefits, may be you could present a case for debit cards and banking apps linked to saving accounts. Between cash and credit, I would choose cash, for the exact reason that you mention - you know your limits of spending. The same would be true if direct bank debits were utilized. US experience comes with lessons. People were offered credit cards without any tangible sources of present income or income in near future, for example, to students. Loans at sub-prime rates and the famous NINJA loans for homes were disbursed. The lesson there is that credit must be offered only to the credit-worthy. Else, use the available money using cashless means. Credit in itself is not bad, and, the small Indian businessmen use it all the time. The banks which use a realistic and conservative yardstick in offering credit as loans, have a healthier NPA sheet than the ones which were probably indiscreet, and, used even brand names as collaterals. Best Regards, PawanLike 
24 Dec, 2016
Your contentious are absolutely correct. It is good to run with the changing time but it should not be at the cost of our basic strength of Saving Economy. .Spending economy definitely drrag in to the eel at this point of time..Path conversation must be as a long term process. It must not be imposed like NOTBANTHI kind of ugly actions. Like (1)
DC Gupta
23 Dec, 2016
Can you please share status on the issue for other major nations?Like 
Muthuswamy N
23 Dec, 2016
The Indian mindset is not to spend more than what one has. They have a strong instinct to provide for future particulalry for children. In this respect America is not comparable to India will fare much better than America, Like 
Dipakkumar Chakraborty
23 Dec, 2016
YYour article is appreciated! Can you give the example of English men of UK. Regards!Like (1)
23 Dec, 2016
Plastic money does not means only Credit Cards. You may use Debit Cards also whereby you can make payments only if you have funds. This will not push society to indebtness. Also, you may use other options like online payment etc.Like 
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