Home Economics Doing A Modi To Find That Missing £50 Billion In Notes

Doing A Modi To Find That Missing £50 Billion In Notes

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As the Public Accounts Committee noted there’s some cash around that doesn’t seem to be being used. Therefore something or other. As usual when we want to find something being suggested, we look to Richard Murphy. Guru of Modern Monetary Theory, previously holder of no fewer than three simultaneous professorial positions in he British university system, who better to guide us through the complexities or economic arcana?

Well, yes, usually I think of my cancer stricken cat as being better at economics but let’s give the man a try. The suggestions is that we call in all banknotes, only issue again some one third of the new design and make sure that anyone depositing in a bank has to detail where it came from. That is, do a Modi, as that esteemed politician did in India.

Well, OK, but why would we want to do this?

As some will have noted, there were a lot of reports yesterday on the fact that £50 billion of banks notes are missing in the UK economy. This got me thinking. And as a result I have to suggest that finding that £50 billion of cash would not be hard. Here’s how to do it.

As the Public Accounts Committee of the House of Commons has noted, around £50 billion of banknotes in issue have no explained use. In other words, they do not appear to be used for regular cash transactions. What their alternative use might be is not known.

Some could be in the possession of tourists, who have not bothered to exchange them on leaving the country. But the amounts involved would be small.

A bigger sum might be cash savings under the proverbial mattress. This is entirely plausible. It is possible that some of this will be related to benefit fraud: the amount of savings a person has can have a significant impact on their ability to claim a number of benefits.

There is no doubt that a significant part of this money Is used within the shadow economy. That can cover activity where tax is evaded, of course. But it also includes drug dealing and many forms of human trafficking and abuse.

No one is finding it easy to come up with an innocent explanation for the missing money. I cannot.

If we can come up with an innocent explanation then of course we don’t need to go around doing anything about it. So, can we come up with an innocent explanation?

Yes.

Two explanations in fact. Both are true, they are reinforcing not contradictory.

Interest rates have fallen.

V has fallen.

So, interest rates fall and as we’ve pointed out before:

Interest rates – the price of money – have fallen. Back 15 years you could get 5% by exchanging cash for bonds, or savings accounts and the like. So, incentives matter. People would, when they had some spare cash, pop it into some interest bearing investment or hidey hole. Now interest rates are nothing. Lend to the government and they might actually be charging you. Cash now pays a better interest rate – nothing is better than minus – than many of those former hidey holes and absolutely no homes for cash equivalent savings make it worth the while bothering.

So, the hidey hole is now the back of the sofa.

This is just obvious. Change the price of cash as against near cash equivalents and the demand for cash and near cash equivalents changes. Anyone who doesn’t get this shouldn’t be allowed anywhere near the public finances let alone the PAC.

We can also approach this the other way. The money equations, MV = PQ. This is an identity, it is not arguable. The amouont of money times the velocity of its circulation equals prices times quantity. Or that right hand side can also be GDP – and note why this is so. GDP is based upon monetised transactions, by definition money is used in them. So, the number of times and amount people use money must equal the number of times and amount of money used.

What was a useful definition of the problem that quantitative easing cured? That V had fallen. Therefore we needed more M in order not to have a decline in PQ, or as it’s otherwise known a recession shading into a depression.

What is it that the Tre Professori, the PAC, have noted? More money being used to support the same number of transactions. That’s how we get to this excess cash being out there. What has been the major monetary observation of the past 12 or 13 years? That we need more money in order to support the same number of transactions.

This excess demand for cash – if we want to put it that way – is simply the same thing as, not even a result of, the imperative to do QE. V has fallen, we the population desire more money. This is then reinforced by the manner the provision of more lowers interest rates thus lowering the costs of holding cash.

We now have an entirely innocent explanation for the change in the money supply and also of that small portion of it, the cash supply. It’s also one that accords with theory, observation and reality. Of course, that this then meets the tre prova tells us that the tre professore will reject the idea out of hand is true but that tells us more about Murphy than reality.

We can even make this simpler again. The Bank of England has, deliberately and with malice aforethought, increased the money supply in recent years. That people now hold more money is not a problem that needs a solution.

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5 COMMENTS

  1. Where are the reserves of Bank of England cash?
    You only have to go to
    https://tradingeconomics.com/china/foreign-exchange-reserves
    and click on the 25 year option
    or do the same for the USA and then Japan, and you’ve pretty much covered half the world economy.
    Then consider the private individuals, the local authorities (I believe Chinese regions can hold their own separate reserves) and corporations, and you are pretty much there to explaining where the cash reserves are.
    Some of the off-grid cash activity is in prostitution and recreational drugs. So legalise them as the Bank of England once recommended in an article Snippa once agreed with until he got to the conclusion and the cash from those activities will enter the on-grid. And Bitcoin will take a dive..

    • Child abuse by drug addicts is not unknown. In fact it is the default. Why on earth are you in favour of child abuse?

      • I guess Michael that you or a close relative have had a bad experience of child abuse which might have shaped your views. I wish that had not happened.
        There’s quite a difference though between disapproval of drugs, and disapproval of them being made illegal and the activities that spring up to support the illegal market.
        I disapprove of child porn being made, but I disapprove even more of it being made illegal by government to privately make cartoon child porn. I suppose people have a hierarchy of judgementalism and I’m more likely to think someone to be evil if they have power, give you expectations of being good, and then make things no better and sometimes worse by passing laws to ban stuff.

    • I usually pay cash for the best of all reasons; I’ve always done it that way.

      But I’ll agree, they’re always trying to push me into using cards.

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