In the wake of the crisis, monetary authorities have flooded markets with liquidity, generating a range of problems which Rogoff believes need addressing.
The monetary situation that has developed since the collapse of Lehman Brothers on 15 September 2008 has produced two effects. The first effect is that central bankers have discovered weapons in their armouries which they did not believe existed: nearzero and even negative interest rates, virtually unlimited monetary stimuli and the ability of words to soothe investor turbulence. These are all tools that have been used, and occasionally abused, since 2008 in order to restore the semblance of business as usual that existed prior to the subprime mortgage crisis. The second effect, however, is the more insidious of the two. The world is now drowning in a sea of cash.
In The Curse of Cash, economist Kenneth Rogoff explains in great detail what is happening in the United States right now. According to Federal Reserve calculations, there are approximately 1.4 trillion US dollars (€1.25tn) in circulation, that is to say cash. “More or less $4,200 for each American, mostly in $100 bills”, Rogoff points out. This is the result of the non-conventional monetary policy adopted over the course of the last decade, which in order to stimulate economic growth and bring the inflation rate back into familiar territory has been injecting cash on top of cash. The liquidity taps have been opened and, with the exception of a few steps towards normalisation, will stay open for quite some time.
The problem, according to Rogoff, is that this vast amount of cash is already creating unbalances at a global level, and these in turn are boosting social and economic inequalities. The prevalence of cash fuels tax evasion, supports corruption and bolsters terrorism while also feeding drug cartels, making human trafficking easier and generally seeping into all of the other watering holes of the black economy. This is the case in America and throughout the world, anywhere the power of money can trump ethics and the kind of moral code which is supposed to undergird advanced economies.
Rogoff argues that we have a choice: we can continue to ignore the sea of cash that keeps the rafts of illegality afloat, allowing them to constantly move from place to place at great speed, or we can decide to start reducing the flow of cash. How? By draining liquidity, even if it causes many agents who are currently unviable in the market to fold. A battle waged against wallets in order to reign in illegality? That is more or less Rogoff’s idea. But in the age of the internet, how difficult is it to create hidden oases where illicit deals can prosper?
Not very difficult at all, as is proven by the geopolitics of international terrorism, with IS and al-Qaeda leading the way. These and similar groups have already more or less abandoned cash in favour of alternative currencies such as Bitcoin. In spite of the fact that the illegal economy can turn to monetary channels that function as alternatives to cash, Rogoff’s book touches on a very significant issue. It should be viewed as the beginning of a discussion, particularly where policymaking is concerned, rather than a solution that could do away with crime and terrorism. The book is very practical because it wants to provide an example.
But Rogoff also helps us to reconsider all of the mistakes that have been made by central banks and major investment funds over the last ten years. These mistakes may not have been obvious at the time, but will certainly appear obvious soon unless remedial, albeit unpopular, action is taken as soon as possible.
The Curse of Cash, by Kenneth S. Rogoff, 296 pages, Princeton University Press.