Money, that's all I want...

I will shortly start work on an assignment for a large clearing bank.  It's probably the biggest challenge of my career - without wanting to be a hyperbolic, it's a question of the organisation's survival over the next four to five years.  We're charged with finding billions in cost savings.  The days when banks, or any other large firm, could just issue edicts telling all its teams to shave 5% off their cost base have long gone.  The easy pickings aren't there any more, so we'll be looking at the fundamentals on which the firm is based and organised.  The small team I'm part of will do its best of course over the next three months, but I'm pessimistic for the future of our client - long term low interest rates, loan defaults caused by Covid, zealous regulators, new fintech entrants in things like payments, and public expectations around service levels and free banking are not a happy cocktail.  And just on that latter point - the public's view around banking in general and branch services in particular is fantastically out of kilter with the economics of running a bank.

So what?  Well, there's another thing I haven't mentioned, and that's the whole principle of fiat money, by which I mean government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.  The point of this blog is to make a prediction, and it's this: confidence in the world's system of fiat money is going to take a massive hit over the next few years, with equally massive implications for banks, how to pay for things, how we store our wealth, and the possibly the control the state has over us.

Several things are going to combine to undermine the confidence in money. I don't know the precise combination, but it'll probably involve some or all of the following:

• The massive rise in governmental debt around the world as a result of Covid in itself will spook markets.  Hard to say when, and it'll probably start in one country, but there'll be contagion
• A likely policy response will be to allow inflation to drift upwards - I'm predicting governments like the UK's will be OK with it going to 5-6% for a prolonged period
• Interest rates and productivity improvements will both remain low, meaning that both people who rely on cash and low risk investments in their retirement, and salaried/wage earning people with few capital assets, will find themselves notably poorer in real terms
• Interest rates could even turn negative in some places; and this will be coupled will bank closures to prevent bank runs
• Wealth taxes - some governments will find it politically irresistible to snaffle 1% of the capital value of your pension or ISA (over say £100k or local currency equivalent) on the basis that "those with the broadest shoulders can take a larger load" 
• The eurozone will break up, with the larger, more powerful countries (of which there'll be few) retaining the €, and the bulk of the smaller ones scrabbling around for a replacement.  We all know it's going to happen, unless political union overcomes national resistances, which is of course what the EU wants to happen. But I don't think they'll prevail
• Physical cash will be less prevalent and less accepted.  Some countries might even simply withdraw whole denominations, as India did in 2016.

So if my prediction around the confidence in fiat money systems is right, what are the possible complications?

• Banks will suffer.  They may lose their place at the heart of most developed countries economies and financial systems.  Their shares will be worth very little, as they will effectively all be arms of the state - see next point
• The possible advent of Central Bank Digital Currencies.  This has the potential to be horrific - central banks (or their agents) issuing and administering their own form of money.  Sounds harmless when you put it like that, but the reality is the state could have total control over the value of your wealth and what you spend it on.  It pretty much happens in China already, and the crazy people at the WEF (World Economic Forum - they of the "haven't cities been great as a result of lockdown" tweet at the weekend) would love it to happen.  We absolutely must resist
• People will look for traditional stores of value....like gold, silver and other commodities...
• ...and not so traditional ones.  Wine, art, classic cars have all seen large increases in value since 2008-9 when quantitative easing was introduced, and it's hard to see the trend reversing.  If my money is going to decrease in value in real terms, why not put in things I can enjoy now?
• However, crypto-currencies might come into their own.  Many people have heard of Bitcoin, but there are many others out there.  Blockchain technology generally is, in my view, a bit like the internet in the early 1990s - everyone can see it's got massive potential, but we just don't quite know yet how it's going to manifest itself.  It might be a bubble, a gold rush - but it's not one i'm planning on missing out on
• The return of barter and exchange - I'm not saying this will sweep the world economy (there was a reason money came into existence of course, namely as a method of exchange when you didn't want my dozen eggs in return for your leg of lamb), but the internet makes finding people to do local swaps and exchanges much easier than 20 years ago -"I'll do your accounts for 10 free yoga classes", or whatever
• Back to banking - the biggest brands will become the biggest payment vehicles.  Facebook Pay is already here, and it's just the start. Banks' old payment platforms won't be able to compete with the huge investment the tech giants can make.

One last thing.  If you've not got money to invest right now, but are at least earning a decent salary, what should you do?  Buy a house and get a mortgage as soon as possible is the first thing. Capital values may go down, though not by much, but so will the real value of your debt - see my point on inflation above - as long as you lock in to a fixed rate deal in the 2-3% range.  Buy some gold, even just a little bit, and keep it safe; there's a reason it's been a store of value as long as it has (namely the combination of its attractiveness and limited supply; did you know all the gold ever mined could be contained in a cube with its sides each the length of a tennis court?). Never move to a CBDC.  Pay cash when you can so that the authorities can't point to its dwindling use as a means to get rid of it.  And get wise to the possibilities of crypto-currencies.

There we are. A bit of a dry subject possibly to a lot of people, but one with the potential to change a key part of how we've lived our lives for centuries.  In the meantime, I'll embark on what quite possibly will be an ultimately futile exercise of trying to preserve a UK bank for a few years longer.