Money, banking & insurance

Digital Money

The comforting sound of coins jangling in your pocket is on the way out. We still make two thirds of purchases with cash, but notes and coins account for only 3% of “all money”. This year, for the first time, debit card spending will overtake cash spending in value. It looks as though we are moving towards “contactless payments”, where cards or phones are waved across a reader for instant payment.

Already in Japan and Korea, there are 40 million phones equipped this ability - called Near Field Communication (NFC) - and one in six people make payments this way. South Korea has introduced preferential treatment via goods and services tax to encourage customers to change to cashless payments. These Asian countries are already ahead in technological terms and may have more cultural buy-in as a result. The Germans, for example, are still wary of using their credit cards online and some prefer to pay COD.

It is in the credit card companies’ interest to pursue cashless payments. They claim that card handling is no more expensive than cash handling (1.3% of the purchase price) and less risky than cash (no need for security vans). Currently in the UK, 1 pound in every 2.5 pounds is spent on cards, but Visa believes this ratio will be reversed in 2015. Meanwhile, contactless payments do not need to be made in a card-shaped form, it could be put into watches, hats, or badges. But phones that are NFC-enabled are the obvious choice because they are interactive and the screen allows people to track their transactions. So it appears credit cards are also on their way out. Much depends on how quickly manufacturers make NFC-enabled phones, and whether banks believe that customers will use this new form of payment. Certainly, people took to internet payments very quickly, but customers will need to be convinced of security measures first before they adopt contactless payments.

There is something consoling in being able to touch money, and see its colours, in your wallet. However, this is just one more step towards making an essential and familiar area of life non-physical. The digital generation are likely to respond to it more favourably than the older generation. There also seems to be a difference in behaviour in the virtual compared to the physical space. For example, who reads their virtual bank statement as thoroughly (if at all) as the posted physical one? People are also more impulsive with digital cash. Once again, while the technology makes payments more efficient, it may separate us from the task at hand in more subtle ways.

Why GDP doesn’t measure much

Gross domestic product (or GDP) appears to be the grandfather of all economic statistics. Other statistics, such as budget deficit or healthcare spending, are frequently based on % of GDP. But does it reflect current reality when it refers only to production? We’ve moved on from making things, to providing services, such as creating and distributing information. Moreover, we want a measure of wellbeing to see how much it improves the quality of our lives.

GDP is a measure created after WW1 because there were few statistics available to guide war production. In 1932, Simon Kuznets was hired to spend what turned out to be 14 years creating a system of national accounts. It took until 1942 before he created measures of output, just in time for WW2 (often described as “an economist’s war”). Unfortunately, the value of what is produced says nothing about the quality of the economy or our lives.

Every act in the construction of a house contributes to GDP, whether it is laying tiles, buying bricks, or shipping glass for the windows. However, if it sits empty, all it does is bankrupt the owner. It represents nothing more than a waste of GDP. If a wood were cut down to build the house, that would show up as a boost to GDP, rather than a blight on the environment. When a mother goes out to work part time to support her young family, it enhances GDP, even if she did it because her husband lost his full-time job (her children will go into daycare and boost GDP too even if they miss mum).

There has been much discussion of happiness recently. It makes sense at least to see whether production has any influence on the wellbeing of citizens. A wellbeing index might use “shadow pricing” (giving a $ value to, say, neighbourliness), weightings (deciding neighbourliness is 5%), or it might simply ask people how they feel (highly subjective). Each of these methods is open to bias. No wonder the OECD is having trouble creating a new set of metrics that more accurately reflects life well after the war and, more important, life in the world of internet and mobile phones, when so much of our output and experience is becoming virtual.

Virtues of the third world

We used to think that, “when the rich world sneezes, developing countries get swine flu”, according to the Economist. This is beginning to look like arrogance. During 2009, the largest emerging country stockmarkets made up for all their 2008 losses. The largest monthly contribution to emerging-market bond funds came in October 2009. In fact, net private capital flows to these countries will more than double in 2010 to $US672 billion. So it seems investors have faith, as long as it doesn’t become a bubble (see story above).

The recession did not hurt China, India or Indonesia much – growth just slowed. Stimulus packages in wealthy countries and monetary loosening helped boost emerging market exports and assets. Some countries were able to build up foreign exchange reserves. Economic resilience of this nature also benefits the citizens. In spite of the GFC, there was little instability in emerging countries, nothing like the violence in Indonesia or the debt seen in Argentina, after the Asian crisis. Second, popular opinion remained positive, with little railing against capitalism or free markets (except in the whining West). In China, India and Indonesia, more than 40% told PEW they are satisfied with their lives, compared to below 30% in France, Japan and Britain (more whinging). Half of Americans now want their “country to mind its own business internationally”, a reaction similar to that after the Depression.

Stimulus spending in emerging markets was larger as a % of GDP than in rich markets. They also protected their social spending to protect their poorest people. A study by Oxfam found parents did not take their children out of school, even if they had to cut down on food; the most common reaction was to cut hours and wages, rather than cut jobs. However, emerging markets have been more protectionist; Russia, China and Indonesia have each introduced measures that damage trade.

It seems that the rich have been hurt more by the GFC than the third world. The debt-to-GDP ratio of the 20 largest emergents is only half of the top 20 rich. It appears to be a reward for wise management of money. In fact, the third world appears almost virtuous. Perhaps it is worth remembering that emerging countries can learn from the mistakes of developed countries as well as their achievements. Rather than chastise ourselves for naughty behaviour, perhaps we should be grateful we still enjoy the benefits of being rich, and we don’t have to suffer poverty on a grand scale.

Burst my bubble slowly

The rise of China to become a new superpower is well-established, especially in America, which has borrowed huge sums of money from the Chinese. But what happens if the Chinese have created a bubble, which must inevitably burst? There are fears that any sudden moves in China will set off a chain of events more destabilising than the recent GFC. Hyman Minsky, an American economist, said bubbles start with a “displacement” (shock to the financial system, such as the GFC), a “narrative” (rationale for investors that this time will be different) and rapid growth in credit. At the peak, investors keep on buying (euphoria) and suddenly there is “revulsion”. When investors borrow money to buy assets, they push the price of those assets higher. Therefore, symptoms of a bubble are rapid growth in private-sector credit, overpriced assets, and over-enthusiasm for certain assets.

The Economist warns there are signs of bubbles everywhere, but not in developed markets. In the West, there is no sign of public sector credit growth and share valuations are nowhere near their 2000 peak. House prices in America are back to fair value (though 30-50% above averages in Britain and Australia) and small businesses still find it hard to get a bank loan.Emerging markets may be more subject to bubbles. In China, spending per head on real estate went up by a quarter each year in the past decade. It has also adjusted the reserves that banks are required to hold. There is a parallel with Japan twenty years ago. Broad money growth in the 12 months to November was almost 30% (1.2% in the last six months in America!). House prices in Hong Kong are more than 50% over fair value. However, recent figures from China show the trade surplus is narrowing, the currency is being allowed to appreciate, retail property sales have dropped, while share prices have been more subdued. It appears China may be able to deflate its bubble slowly.

Reason to love a recession

Some people think that war is good thing because it sorts out our priorities. Recent research suggests that recessions may well have a similar chastening effect. When times are good, according to a Stanford University study, we tend to be much more indulgent: drinking and smoking more, putting on weight, and more likely to neglect our families. We work longer hours, eat out more, and are less likely to do things that are “good” for us. Bring on the recession! A professor at University of North Carolina found that, for every 1% increase in unemployment rates, there was a 0.5% reduction in the death rate (maybe work kills you after all!). The number of suicides rose 2% and cancer deaths by 23%, during recessions but there were fewer deaths from car crashes or heart disease. It appears we eat better food and drive less often during a recession. Another American study found heavy smoking declined by 5% in the 1990s recession.

Other positive signs of recession are increasing use of libraries, fall in the quantity of household rubbish, and (for buyers) falling house prices. So the question is – should we have a recession more often? The National Office of Statistics says contentment levels, at 87%, have been the same for ten years but are lower than the 1970s recession. It makes me wonder if contentment has anything at all to do with the economy, but is related to individual, genetic settings. Perhaps we can be contented, no matter what the economists tell us. Now that’s a blessing.