- By Bill Bonner
Cash is King.
So sayeth the Wall Street Journal, reporting on the situation in Greece. The use of cash for everyday transactions has increased 44% in the last 2 months.
A brief update: the Greeks spoke on Sunday. "No" they said. "We don't want to pay our debts to the Germans." Then, the president resigned, riding off on a motorcycle. Today, the Financial Times reports that the Greeks are to be given one "last chance to avoid crashing out of single currency."
Greek output is plunging. The banks are running out of money. And Greeks line up at ATM machines to get a lousy 60 euros per day. That's what happens; when the going gets tough the feds take your money.
That's why cash is king.
A fascinating article recently described how Uber had "solved the major problem of capitalism."
What is the problem? "Trust." There are millions of cars on the road. Most of them have 4 seats; but only one of the seats is usually occupied. And many of these private drivers would be happy to take you where you want to go, for less than what a taxi would charge.
But you don't get into those cars. Because you were told as a child never to get into a stranger's car. You don't know which of them you can trust to take you where you want to go.
London's black cabs solve the trust problem with a distinctive design and a driver regulation. Drivers must learn "the knowledge" to qualify. When you get into a London cab, you have a high level of confidence that you will get where you are going in a professional manner.
Uber solves the problem of trust in a different way -- with an internet-based system of ratings. Riders rate drivers. Drivers rate passengers. You get to see the whole thing.
But capitalism made a much bigger breakthrough on the trust front thousands of years ago. It invented cash. Until then, transactions were based on credit. Without cash, you could trade in a small group and rely on memory to recall who owed what to whom. Then, with the advent of modern money you could trade with people you didn't know. You gave up something. You got something - cash - which could be traded for something else later.
This invention - money, usually based on gold or silver - was such a breakthrough it made today's elaborate market economies possible.
But it's only cash if you can put your hands on it. And as the Greeks have just discovered, money in the bank is not cash.
Cash is what you need when trust breaks down. With cash, you get optionality, as Nassim Taleb puts it. Cash in your pocket, you can buy a gallon of gasoline or a share in a public company. It's yours. You can do what you want with it. But cash in the bank? You don't know. You have to trust that the system works...that the bank is solvent...and that it will give you back your money when you want it.
Trust is rapidly disappearing in Greece. The Germans don't trust the Greeks. The Greeks don't trust the banks. Almost nobody trusts the government.
What a great show! And very instructive.
Meanwhile, cash is king in China too. Chinese stocks paused yesterday after a three-week crash. The government is doing all it can, say the papers, but investors are wondering: can they trust the Chinese feds to stop a correction?
A Hong Kong fund manager is quoted as saying: "I believe the Communist party still has the final say over the stock market, even nowadays."
But wait, if government could stop market corrections, why do we ever have them?
We don't know. But there are times to trust...and times to distrust. There are times to own financial assets. And there is a time to own cash.
This seems like a good time for cash.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.