International Forecaster Weekly

Winds Of Digital Change

Something that bears close inspection however is that the speed of our innovation has not just doubled or tripled in the last hundred years, it has gone parabolic. There's another technological innovation that we're living through that is going to affect all of our lives in a way that we just don't fully understand yet. The complete transition to a cash-less society.

Bob Rinear | April 13, 2013

Sometimes it is hard for me to keep my head buried in the place it is supposed to be, that being this thing we call economics and the financial structure. Why? Because each moment that passes is a new milestone for us. In other words, today we know more than we did yesterday. Tomorrow we will know more than we did today. Each day that goes on brings us new intelligence, new questions, new experiences. Sometimes the changes that are brought by these new events leads us to tremendous investing opportunities.  Who wouldn't have wanted to be on the ground floor when Polaroid camera debuted its new technology? Who wouldn't have wanted to be an "Angel" investor in Johnson and Johnson back in 1885 when they were creating the first "ready to use" bandages? Who wouldn't have wanted to be the first investors in this new upstart called "MicroSoft" so many years ago?

Something that bears close inspection however is that the speed of our innovation has not just doubled or tripled in the last hundred years, it has gone parabolic. Consider this deeply for a moment. For virtually thousands of years folks lived almost "the same". They had a little house with a fire-pit, maybe some form of window, they got their water from a creek or a cistern well, they walked or rode a horse/carriage, etc., etc. Then from about 1890 to today, the world "exploded" with invention and innovation. My Great Great Grandmother was alive until I was about 20 years old. Here was a woman that lived in Central New Jersey and went from living in a wood shack with a horse and buggy and no plumbing... to seeing men land on the moon in one lifetime!  Jet airliners, the beginning of computers, specialized medicines, the birth of the telephone, the birth of television, instant photography, electric lights, auto's etc., etc. The rapidity of the amount and the various types of discoveries was breathtaking. She lived to see it all.
Well, it still is breathtaking. Each day we hear of a new "App" for our smart phones that allows us to do amazing things. We see "miracles" in the medical community almost daily. Can you imagine a renowned surgeon sitting in Boston, doing intricate invasive surgery on a patient in Dallas via robots and the Internet? Who could have even dreamed of such a thing just ONE lifetime passed? Not many. Yet here it is, in full bloom and growing daily.  Every day we take for granted the "stuff" in a local Best Buy, that just 100 years ago would have been absolutely unimaginable for folks to comprehend.

But as is the case with all things, there's two sides to the coin. Sometimes the things they dream up are not good and do more harm. Consider nuclear for a moment. Because we aren't technologically evolved enough to know all the answers of how to use it properly, we have done just what exactly? On one hand we've made the most destructive bombs ever seen on the planet. On the other hand we've created power with it, but with a huge cost... tons and tons of toxic waste that we really have no "good way" to dispose of. So, some innovation sure comes with a price.

There's another technological innovation that we're living through that is going to affect all of our lives in a way that we just don't fully understand yet. The complete transition to a cash-less society.  Yes folks, there's absolutely no doubt that at some point in the future, they are going to abandon the idea of "cash" and all transactions will be done with a swipe. So, let's reflect on something I said last week....

Consider "money" for a while. It has been around in one form or another for thousands of years. When the first coinage was used to "buy" goods instead of using the barter system, there's no doubt that several things happened. One is that it became stupendously easier to get what you wanted or needed. But by association it creates a massive boom in "business". For instance let us suppose you were the farmer and you had hundreds of cows and steer. Well you might want to get a pair of pants or some boots. But the shoemaker didn't want a milk cow or a steer. So you guys couldn't do a lot of business and your feet still hurt. Once the concept of using coins (lets just say currency) really took hold, you could buy your pants and boots from the Shoe maker, and the house builder could "buy" your cows and meats. The velocity of business increased exponentially.  Expanding that, all forms of increasing  "good" took place. People could "buy" books and pay tuition to schools. They could easily pay for musicians to play for their parties, etc. Education exploded, the arts became more widely accepted. Money was a darned good thing.

Then of course there came a time when they figured out that carrying gold around was a bit of a pain, and the first concepts of "currency based on gold" was issued. This was the first good stabs at "currency". The idea being you'd use a slip of paper with a number on it as your vehicle to buy something. The paper "note" would correspond to an amount of gold you could exchange the note for if you wished.  While many credit the Europeans for coming up with this and to some extent they were very important as to it's ultimate adoption, the Chinese began the practice 2000 years ago. The Song Dynasty in China was the first to issue paper money, called "jiaozi", around the 10th century AD. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. Then, the successive Yuan Dynasty tried again and was the first dynasty in China to use paper currency as the predominant circulating medium. The founder of the Yuan Dynasty, Kublai Khan, issued paper money known as Chao in his reign. The original notes during the Yuan Dynasty were restricted in both area and duration as in the Song Dynasty. (notice that even today most will call the Chinese currency the "yuan" instead of the Renminbi which is its actual official name).

Of course you all know that here in the states President Nixon closed the "gold window" which basically severed our currency from any backing what so ever. We became "fiat" meaning that our currency was only backed by Uncle Sam saying it has value. It couldn't be exchanged at the banks for gold any more. Since that time, we've seen all manner of things happen, just as they have in the past. They PRINTED ever more gobs of the stuff. Well guess what? We've seen all that before. All of it. The Romans printed money, the Greeks, the Argentineans, the Germans, you name it. All through history they have printed more money than they had "metal" (gold or silver) to back it and it always ended badly. It has only been in the past 45 years that we've embarked on what amounts to a completely "fiat" global situation. No one's money is backed by anything any more. This is new.

We have to ask the question, what happens when they push us into a completely digital cash-less society? We know that when we went from barter to "money" our societies saw a massive increase in activity. We know that when we went to a "currency backed by money" system the entire world experienced the biggest growth spurt the planet had ever seen. But in the last 40 years we've gone to a "currency backed by nothing" system and we're seeing that groan and creak because of the abuses of printing too much of it. Not to mention the downsides of theft, extortion, illegal activity, etc. It is a failure, and they know it. The system will be revamped. So consider this. At "some" point, even if the so-called currency of the future is indeed backed by some percentage of gold, there will be NO PAPER MONEY. Every transaction will be a card swipe, a smart phone pass, etc.

So there it is folks. At some point in our not too distant future, the idea of "cash" will be tossed in the garbage bin. Everything you do will be recorded digitally. Now we have to try and figure out just how that affects us. For some the effects will be quite large. Consider the drug dealer. He plies his trade in the dark and uses cash. Well if there's no cash in our system, how does he get paid? Consider all the "under the table" folks. You know, the guy that cuts ten of his neighbors lawns each weekend for 30 bucks cash. How does he get paid now? If it is all digital, there's a trail, a completely unbroken trail. He can't hide that from the IRS any more.

Consider anything you buy.  Did you think you'd be slick when you were cheating on your spouse by buying him/her gifts with cash? No longer, now the wife would be able to find those "charges". In fact, if Uncle Sam is dead set on knowing every single thing about you, then a cash less society is his orgasmic fantasy. But what I want to know is this... what is the resultant effect on the economy? Will sales rise because you can swipe faster than you can trade cash and wait for change? Will jobs be created because it will no longer benefit someone to hire someone else "under the table", or will the percentage of poor explode because those folks will not be utilized anymore?

As much as a cash society is flush with the ability for abuse, how does one measure the "good" that hidden transactions represent? I have found no logical way to explore it to be honest with you. But I know that there have been times in my life where I've "lent" some money to someone, where it bailed them out of a tough jam, and it would have been disaster if they had to let others know they "needed" the funding. There's been other times where just handing my table waitress an extra tip, brought us service above and beyond the normal. What is the ancillary effect of moving cash around that isn't attached to a digital string? How does one give their kids an allowance, or pay the neighbor kid for shoveling your driveway? How many businesses were built in America by someone with dogged determination starting out by going door to door selling cookies or shoveling snow? Would all those kids be forever pushed out of the budding entrepreneurial pool?

How big is the Bureaucracy going to be that tries to watch over all that digital snow? Who's the Government troll that will dissect all the digital payments you make? Is not Government intervention in our lives at a level we already see as abusive? Then we have the security side of it all. What happens when there's the "glitch" like we've seen lately, where you log in and your bank account shows "0" in it? You can't even buy a gallon of milk until you get that account fixed, how long does that take?  Then consider the implications for "them" to completely stop you in your tracks. If cash is not accepted for any good or service, the Government can absolutely crush you simply by shutting off your "digital account". Think about it deeply folks because the implications for abuse boggle the mind.

I have thought a lot about this over the past few months as I see more and more digital card readers pop up in every area of our lives. You see commercials for readers you pop onto your phone so you can swipe cards wherever you are. You saw the beginning of it when years ago McDonalds put card readers in their outlets. Now it's Starbucks and virtually every convenience store. The march towards a completely digital world is marching forward and picking up steam. Just 40 years ago the concept would have been science fiction. Today it is not only reality, it is roaring forward. From where I sit, it is my opinion that right now all of this digital money is being seen as a benefit. That is because it "supplements" the status quo, it "adds" to your ability to do business. But, once the hammer falls and it is "law", I see a much different picture. I see disruptions in so many areas, that the "net net" of it all is very negative.  It is the ultimate "big brother" eye in the sky. With that in mind, it "has" to stifle economic activity.

Let me leave you with this thought. Imagine a major drug dealer in say Miami. While selling drugs is clearly illegal, and many people are hurt by it (the drug user, turf wars, etc.) the fact is that the millions made by the dealer and his gang is spent. Homes are built, cars are sold, pools installed, travel booked, etc. Despite the creation of the cash being illegal, the resultant spending of the cash is "good" for the economy. A digital society could put the dealer out of business, which is good. But the businesses that would have benefitted from that dealer spending his illegal gains is hurt, which is bad. Which one will end up having more societal impact? It is a troubling question.

Governments are broke and they're on a wild hunt for tax income and tracing money is their game. Digital money makes it easy. Just this week we see news that the IRS is allowed to read personal emails. We saw news stating that they inspect Facebook and twitter for hints that you might have more money than you're stating. Digital dollars is their golden goose and thus it will be implemented. We all have to understand that, and decide what it means to each of us. I can't tell you the day, but there's no doubt in my mind that it will happen in the next ten years. A long time you say? Nope, just the blink of an eye, ask my great grand mom, she'll tell you.