Where to Start Faced with Populist Journalism

The Economist’s 1843 magazine recently published an article, ‘The Mystery of the Missing £50 Billion’. It tells the story of a young lady caught at Heathrow with five suitcases containing nearly £2 million in banknotes. The article goes on to say that central bankers don’t try and work out where non-transactional banknotes are, the missing £50 billion, because of the loss of seigniorage if banknotes were not used for criminal activity.

The article suggests the different answers to where the money is by the Bank of England, Federal Reserve and European Central Bank are risible and in reality they just aren’t interested. The author quoted Andrew Bailey, Chief Cashier in 2009, who had suggested the cash paradox could be explained by a loss of confidence in banks during the financial crisis combined with a boom in ATMs requiring bigger cash holdings in the supply chain.

The article then referred to the Federal Reserve saying inflation and interest rates were so low that people were happy to hold cash, and the ECB who said people in and outside of the Euro area wanted euros as a store of value, ‘another way of saying that people want banknotes because people want banknotes’, rather than saying why.

Perhaps since quantitative easing (QE) involves such huge sums, the £50 billion is just small change to a central bank such as the Bank of England.

At this stage the author suggests money laundering is the real driver of cash demand. Without providing a source, the article says, ‘officials who are fighting money-laundering say it’s no great mystery.

By some estimates, perhaps half of all cash in circulation is helping criminals evade governments’ increasing intrusive surveillance of the financial system.’ Britain’s National Crime Agency is said to have concluded ‘that so much cash is leaving the country each year that it must be being moved by trucks.’ A ‘Project Plutus’ is said to be investigating the flow of cash.

The suggestion is to do away with high value denominations. Perhaps the statement, ‘India abolished its two highest-denomination bills in 2016 (albeit with mixed results)’ is not the best investigated sentence.

There is so much which needs challenging in such an article it is hard to know where to start.

Perhaps it is not the central bankers who are being idle.