Replace cash with Bitcoins, says Bank’s chief economist

Rate setter Andy Haldane suggests ‘radical’ options such as abolishing cash

CASH may have to be scrapped to help protect Britain against the next economic crisis, the Bank of England’s chief economist has claimed.

Andy Haldane said he had been inspired by the digital currency Bitcoin, which shows “real potential”. He also suggested that the Bank should aim for an inflation rate of 4 per cent, double the current target of 2 per cent.

He warned that the country faced many risks over the next two years, and that if a fresh crisis hit, the Bank of England might have to cut interest rates further than the 0.5 per cent rate that has been in place for more than six years. In a further blow to savers, Mr Haldane suggested rates might even have to go negative “to support UK growth”.

This would mean savers would have to pay banks to hold their money rather than receiving interest on their deposits. But he said that the existence of bank notes and coins would be a problem as people would prefer to remove their cash and store it at home.

In order to tackle this, Mr Haldane suggested that the UK might have to abolish cash entirely in “its own great technological leap forward”.

By replacing hard cash with electronic forms of money, the Bank of England could cut interest rates as far as it wanted.

THE Bank of England may need to push its interest rates into negative territory to fight off the next recession, its chief economist has said.

Andy Haldane, one of the Bank’s nine interest rate setters, made the case for the “radical” option of supporting the economy with negative interest rates, and even suggested that cash could have to be abolished.

He said that “the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside”.

As a result, “there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target”.

Speaking at the Portadown Chamber of Commerce in Northern Ireland, Mr Haldane’s support for a possible cut in rates came as the Bank as a whole signalled that the next move in rates would be up. But recent volatility in financial markets and a decision by the US Federal Reserve to delay rate hikes have pushed back expectations of the Bank’s first rate rise to November 2016.

Traditionally, policymakers have resisted cutting rates below zero because when the returns on savings fall into negative territory, it encourages people to take their savings out of the bank and hoard them in cash.

This could slow, rather than boost, the economy. It would be possible to get around the problem of hoarding by abolishing cash, Mr Haldane said, adding that “the payment technology embodied in [digital currency] Bitcoin has real potential””

His remarks came as he made the case for raising the UK’s inflation target to 4pc. Mr Haldane said that a trend towards low interest rates across the globe has made it increasingly difficult to fight off recessions.

In the past, central banks have helped stimulate economies by slashing interest rates. But with rates at rock bottom in most of the world, many have found their ammunition depleted.

“Among the large advanced economies, official interest rates are effectively at zero,” Mr Haldane said. In the UK, the Bank’s interest rate has been stuck at 0.5pc for more than six years.

One way to supply the Bank with more firepower would “be to revise upwards inflation targets”. The UK’s inflation target is currently 2pc, but this dates from when interest rates were closer to 6pc. It might be necessary to double that target, Mr Haldane argued.

Bank research has determined that slowing growth, ageing populations, weaker investment, rising inequality and a savings glut in emerging markets have all contributed to a generational decline in interest rates.

Mr Haldane said: “These factors are not will-o’-the-wisp. None is likely to reverse quickly. That would mean there is materially less monetary policy room for manoeuvre than was the case a generation ago.” However, a hike in the inflation target to 4pc would provide extra “wiggle room”.

Mr Haldane did admit that a policy change to raise the inflation target was likely to be unpopular.

“When the public are asked directly about the inflation target they suggest, on average, that it may, if anything, be a little too high,” he said.

Slowly but surely, the economic orthodoxy of the past 40 years is crumbling. There was, of course, much that was wrong with the old way of thinking: the past few decades were characterised by a series of massive booms and busts, financial crises, intense macroeconomic volatility and huge global economic distortions and misallocation of resources, among many other ailments. Productivity has ground to a halt, median wages haven’t performed well in the West and the economy has been beset by a plethora of microeconomic problems.

But for all the many flaws in the received wisdom, it wasn’t all bad. Far from it, in fact: the world is immensely richer than it was and billions of people have been lifted out of poverty. Reasons for this include our wonderful embrace of globalisation and free trade, the privatisation and partial deregulation programmes of the 1980s and 1990s, cuts to marginal tax rates and the pursuit of sound money. The consensus wasn’t all right – but wasn’t all wrong either. We should be trying to rescue the good bits while jettisoning the bad bits. Tragically, we appear intent on doing the exact opposite.

Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates, if needed. I don’t want to over-simplify Haldane’s lengthy speech: he is a complex and brilliant thinker, albeit one with whom I often disagree. But the bottom line is that he wants higher inflation now as a cushion against future deflation: he is concerned by the possibility of a massive shock to global demand at some point soon, and wants to reduce the risk of prices plunging too far into deflation. Crucially, Haldane’s assumption is that the authorities would be stuck: they would not be able to respond to this looming shock in an appropriate way.

Conventional theory – and the lesson that was learnt in the Thirties, and again after 2008 – is that central banks must make sure the money supply doesn’t collapse during a downturn. That means QE at the right time and in the right amount.

But Haldane believes that this time the scale of the QE that would be required, and the way it would have to be conducted, would be politically impossible. Hence why he believes in higher inflation now, and why, in the long run, he wants to abolish cash, force everybody to hold all their money digitally and give the Bank the tools to impose negative interest rates. This, he believes, would be the only practical way for central banks to loosen monetary policy in a world of very low rates and useless QE.

Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. Why Haldane believes this would be more politically acceptable than extreme QE is a mystery; all spending would become subject to the surveillance state, dramatically eroding individual liberty. Many would start using rival currencies such as the dollar or euro, or resort to barter; sterling’s monopoly over the UK would soon end.

Money is already too loose – turning on the taps would merely further fuel bubbles. In any case, I don’t buy the idea that QE is now ineffective (though Corbyn-style government spending monetisation would be a disaster). And we haven’t even tried Milton Friedman’s helicopter money idea.

Haldane downplays the costs of higher inflation, especially for the poor and those on fixed incomes, and forgets that price rises have a nasty habit of becoming self-fulfilling. Calling for higher inflation also implies that the state is not serious about maintaining the integrity of the currency, which undermines property rights and the rule of law and guarantees random, extra-legal redistributions of wealth. Haldane is right to be thinking the unthinkable – but his solutions could hardly be any more wrong.

‘Money is too loose – turning on the taps would merely fuel bubbles’