By Izabella Kaminska for Finantial Times,
UBS’s Paul Donovan offered some thoughts earlier this week on the unintended consequences of negative rate regimes, which — whilst interesting — stimulated a different thought in us related to data.
Here’s the comment, see if you think you know what we’re getting at…
Moving rates negative for some depositors and to zero for other depositors may create some real world distortions. If there is a greater incentive to hold money in physical form rather than electronic form, then the composition of narrow money (i.e. cash and cash substitutes) may alter. Rather than relying on electronic money, physical money will be used for everyday transactions. This is not entirely costless, as there is a security risk in storing cash under the mattress (historically the security risk was one of the key reasons for the creation of bank accounts in the first place).
Basically, Donovan chimes in on an idea that’s been percolating through our heads for a while: Data is the new money, and data — like money before it — is only valuable if it’s being shared and rehypothecated through the wider network.
Furthermore, we put our data into the safekeeping of cloud custodians for precisely the same reasons we put our money into the charge of banks: security, liquidity and utility maximisation. The data custodians in turn rehypothecate our data for yield creation purposes — albeit, at this point in time, without the inclination to share those earnings back with us, perhaps because there’s no real profit to be shared?
For now, at best, we receive the promise of “par data value” protection.
Which ties in with why banks are much better sharing economy platforms than tech firms could ever hope to be. When functioning properly they assign spare capital into the formation of even more productive capital. They are able to do this because of the privileged upcoming consumption information they obtain from us depositing fungible social redemption coupons (money) in their care, and our access requirements to them (i.e. whether we want current account, time-deposit or investment terms).
Technology conglomerates (from Tesco to Google) on the other hand tend to use the information they collect to subjectively interpret or presume our consumption patterns on qualitative grounds so as to stretch existing output amongst more people, rather than to encourage its growth. This in turn leads to the popularisation of cross-subsidisation models in the market, the loss of price signals and the unintended support of uneconomic ventures on the hope that one day, perhaps — by driving out all “at cost” competition — they’ll be the last man standing, with rights to monopoly rents.
Hence the Gosplan 2.0. thesis: we are reverting to a world where a technocratic elite makes economic planning and allocation decisions based on their subjective interpretations of personal behaviours, status and privilege, who it’s fair to overprice and who it’s fair to subsidise, rather than clearcut at cost price signals from the market.
Now consider that negative rates only encourage a transfer of fungible cash claims into dark inventory stashes where they can’t be shared as easily with the market — meaning less reinvestment into productive ventures and even fewer market signals — and you see the potential for the descaling of the economy rather than its stimulation.
Of course, many think the solution to the zero bound on negative rates lies in eradicating the physical cash option altogether. They say this will force the cash-rich to invest rather than hoard, whilst reducing the ability of fraudsters to make illegitimate claims on the productive economy we have left. To be fair, we oncethought so too.
Now we think it might encourage a greater assignment of capital to cross-subsidisation businesses or those which aren’t expected to create profits anytime soon. If that’s the case it might also lead to a greater bifurcation of the dark and light economies not less, and greater tensions between banked “data sharers” and unbanked “data hiders” not fewer.
Furthermore, with banks already under pressure to follow tech firms into personal-data monetisation strategies (a euphemism for cross-subsidisation, and economic stretching), we could see more obfuscation of price signals not less. Notably, more entities watching and trying to predict consumption patterns so as to align existing factors of production with current needs (or advertising moulded needs) rather than letting real price signals determine which factors of production should be being invested in for the future.
Now consider that the richest and most privileged sectors of society will always find ways to entice banks, data companies and sovereign jurisdictions to keep their data privileged, segregated, encrypted, off-grid or un-networked…
To wit, here’s Kevin Spacey in Davos promoting his new investment in a Bulgari watch that secures his data in the cloud cryptographically:
… and you realise, whether you ban cash or not, there will always be a significant chunk of society (from actors to criminals) whose behaviours won’t be easy to predict by the economic planning technocratic elite. So, whether it’s hoarded paper cash, electronic cash or obscured personal data, if the underlying information isn’t shared or reinvested productively it makes zero to little difference what we do.
Moreover, since a cashless society is predicated on financial exclusion, there’s the added risk those booted out or penalised by the system resort to violence for access to consumption goods instead. Counterintuitively, this might encourage the formation of parallel value transfer networks, which are more adept at allocating value to productive investment and growing the pie.
Some of this counterintuitive behaviour is already beginning to show up in the economy. For example UBS’s Donovan says, negative rates are already encouraging large companies to delay customers’ invoice payments ensuring a build up in inter-company credit leading to a boom in consumable inventories. Not only would this trend be exacerbated by a cash-ban, it would unwind the “just-in-time” benefits of data sharing in the first place, whilst exposing such corporates to the additional cost of having to secure and protect the inventory.
If you’re spending more on security, item tracking and general surveillance than the value you’re creating… the model simply doesn’t work.
In short, banning cash solves nothing. What might solve things? The breakup of the mini command economies which are the cross-subsidising conglomerates in our system.
The article first appeared in FT.com