The currency in circulation outside the U.S. Treasury, Federal Reserve banks and the vaults of depository institution has grown by 13.3 percent in the last two years, while real nominal (not inflation-adjusted) GDP has not grown at all, and real (inflation-adjusted) GDP incomes have fallen by more than 3 percent. With the growth of electronic means of payment and financial service providers, it would be expected that the currency component of GDP would fall, not rise.[From New underground economy – Washington Times]
Now, as I've mentioned before more than once, the US money supply is unlike other countries money supplies because such a large fraction of US notes are outside the US and unlikely to ever return. Rather than serving predominantly as a circulating medium of exchange, hundreds of billions of US bills are stuffed under mattresses in Latin America, Africa and Asia, acting as a massive interest-free loan from the rest of the world to the US. In other places, such as the UK, a much higher proportion of the currency is actually in use. Or at least it was.
According to the Bank of England, the value of notes in circulation has been on the rise, despite the fact that less are being passed around the High Street where cash transactions now account for only 4% of purchases, by value. Compared to two years ago, there are 40 million more £50 notes in circulation, some of which are likely to be stashed in secret hoards around the UK’s homes.[From Britons opt for savings stashed in cash]
The Bank of England (somewhat implausibly, to my mind) think that this reflects a "lack of confidence" in the banking system. But only truly stupid consumers would hold non-interest bearing cash at home instead of in a state-subsidised and 100% underwritten interest-bearing bank accounts at RBS or Northern Rock. No, the explanation is both obvious and prosaic: times are hard, taxes are going up, so the black economy is booming.
Between April and October, the amount the Treasury received in income tax fell by 16 per cent – more than £17 billion – compared with the same period in 2008.[From Pay cut for two million Britons causes collapse in tax revenue – Telegraph]
The economy has fallen by 4% but income tax revenues have fallen by four times as much. Is the treasury right to blame this on workers (outside of the public sector, naturally) accepting lower wages rather than losing their jobs in the recession? That must be partly true, but the figure looks huge to me. Surely it's more likely that some workers have either lost their jobs and moved into less-regulated parts of the economy or have given up highly-taxed and therefore unprofitable jobs and accepted unemployment benefits plus all of the other benefits that go with it — like having your Council Tax paid and that sort of thing — then taken up jobs for cash.
I can't resist pointing out that at a time when governments should be actively reducing the cash in circulation (the Bank of England should stop printing £50 notes immediately) they are pursuing policies guaranteed to increase tax evasion and therefore force up the marginal tax rates even further, which in turn reduces the tax revenues still further. Not so much a black economy, as a black hole for tax revenues. One part of the government is trying hard to increase the tax take, another part of the government is trying to make tax evasion as convenient as possible.
The underground or "black" economy is rapidly rising, and the fault is mainly due to government policies.[From New underground economy – Washington Times]
It's not just about M0. There are a number of policies working together to push people into the black economy, including high taxation, stringent KYC/AML and migration to fill low-wage, low-skill jobs.
The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e. those who do not have bank accounts), and an "estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked" (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services). As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States.[From New underground economy – Washington Times]
These underbanked people face much higher transaction charges than the banked, so this is not a good thing. There's an opportunity for e-payments industry to kill a few birds with the same stone here, and I'll definitely be putting this perspective at the H.M. Treasury workshop on inclusion that I've been invited to in February.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]