King Without A Crown

On our final night of holiday we basked outside in the warm evening air, soaking up the bustling atmosphere of the square and enjoying a cerveza . During the natural lulls of a conversation that ebbed and flowed, I had a chance to survey (read: people-watch) the co-patrons of the small café.

In one corner two friends chatted animatedly in fast-moving Spanish. At the adjacent table a German and an Argentinian, both middle-aged, flirted in accented English. A second romance? A fling with infidelity abroad? Further back a teenage girl sat moodily with her parents, staying at the table only long enough to photograph a garish cocktail for Snapstagram before meandering off into the bustling plaza.

The elderly couple next to them had barely said a word to each other as they nursed their drinks. La cuenta arrived and the gentleman fished into his pocket. He withdrew… coins. A lot of coins. He began counting out the requisite amount, before depositing the remainder back into the pocket from whence they came.

Long live the king 

I smiled whilst observing the old man and his coins, and thought of our own brushes with cash during the vacation. We were armed to the teeth with cards that functioned fee-free abroad. Mrs MedFI hadn’t been keen to bring any physical money, though I had insisted on dusting off the store of travel Euros I keep for just such continental occasions. 

Lo and behold our very first monetary interaction after arrival – the airport bus – required cash. Several groups of disgruntled tourists, who had banked on being able to use their cards, slunk back to the terminal to find either a cash machine or a taxi. One crisp €10 note later I boarded, all the while suppressing a grin and an “I told you so”.

The cash trend would continue for buses, trains and taxis. Paper and metal triumphed over plastic. I thought of the investing cliché and mused that, certainly when travelling abroad, cash remains king. 

Usurped

Yet the regal asset is in sharp decline. The graph of decreasing cash payments tells a story you’ve already heard. When did you last handle banknotes? When did you last pay in coins? The pandemic, and concerns about the hygiene of cash, have accelerated a trend already driven by convenience, cost to retailers and concerns about cash-related criminal activity (see India c.2016).

The decline of cash payments in the UK. Source: UK Finance (June 2021)

I remember my dad routinely withdrawing enough cash for the week and stuffing it into his wallet. Now I only visit the cash machine to pay for my haircuts, as well as keeping a token £1 coin handy for the supermarket trolley. For everything else, there’s a card. 

Smash piggy bank in case of emergency

Although petty cash is dying, cash remains a somewhat viable asset. Little, if anything, surpasses it in terms of liquidity, accessibility and lack of volatility. As such it carves out its portfolio niche predominantly by being Mr. Reliable.

It’s what you turn to when disaster strikes, or even for just short-term purchases. Much like a loyal, albeit rather arthritic, pet dog, cash isn’t going anywhere fast.

Over time, however, the inexorable erosion of cash’s purchasing power by inflation makes it poorly suited for much else. Keeping (non-emergency) cash beyond the short-term represents a significant opportunity cost. Indeed, pitiful interest and rising inflation rates make holding more than the bare minimum in cash an exercise in financial self-flagellation.

Mild salsa

Yet I not infrequently read about people aiming to ‘buy the dip’. Hoping to engage in some egregious market timing, some will build up a cash pile in order to strike while the iron is icy cold, buying up ‘discounted’ assets during a downturn.

You could point to Buffet’s Berkshire Hathaway as an example of this – they have nearly $150bn in cash on their balance sheet. Other S&P 500 giants are similarly laden with cash. Such behemoth companies are poor comparators for the individual investor however.

It’s not all corporations though. Alpha antagonist Ramin Nakisa recently published a ‘Market Crash Shopping List’. Perpetual murmurings of an impending market crash may persuade individuals to stockpile cash ahead of a purported fire sale.

It’s a strategy I don’t personally subscribe to. I think, certainly for the ‘amateur’ investor, such puerile market timing and speculation distracts from more concrete goals: filling your ISA allowance, increasing tax efficiency through pension/SIPP contributions and maintaining a high savings rate.

Constitutional monarchy

Much like the British Monarchy itself, extant banknotes and coins may soon become largely ceremonial. Perhaps only the purview of collectors like myself. They are likely to still be favoured by those of a certain generation, yet will be increasingly shunned by newer iterations of consumer. There’ll be a fair clamour for scrapping such money altogether.

Physical money is becoming extinct. Perhaps the impending ascent of central bank digital currencies will kill off any remaining specimens. In the future there’ll undoubtedly be a society that is, for all intents and purposes, cashless. In my lifetime? Quite possibly.

For the time being I’ll keep ‘foreign currency ± USD’ on the travel packing checklist, as cash has proven its utility abroad time and time agin. Just don’t forget to pack the Afghani’s if you end up in Taliban territory.

TTFN,

Mr. MedFI

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