Cash Is No Longer King

Cash has become something of a Covid-19 casualty this year. On the day-to-day level, people have been encouraged to pay with cards, because handling notes and coins is a way of transmitting the virus. The pressure on people to go cashless is facing a backlash though: When you use a card it is easy for governments and others to track your every move, whereas cash protects our privacy.

Ray Dalio, founder of investment firm Bridgewater Associates, has taken a look at cash from the investor’s perspective and warns us that it isn’t safe. In an interview with CCN, he said the high level of spending in America means the US dollar is no longer a safe investment. He isn’t the only one who believes cash is no longer a safe haven asset, and that it will perform badly compared with other asset classes, including gold, which has surged, he says, “because the market no longer believes in cash.” He also says that the Fed’s more relaxed view of inflation is another nail in Cash’s coffin.

Dalio told CNBC that cash, “ lulls investors into a false sense of security, based on the U.S. dollar’s historical role as a reserve asset.” Furthermore, according to Dalio, the Federal Reserve’s  spending spree since March has seriously weakened the value of cash.

In his view, “holding cash is equivalent to accepting a 2% annual stealth tax, as a result of inflation.” This may get worse as the Fed targets an average inflation rate of 2%. The ‘average’ Dalio says is important, because what it really means is “it will tolerate an actual rate well above 2% for considerable lengths of time.”

As a result, Dalio recommends a more diversified approach to investing: “Cash is a poor asset class … It’s a quietly bad asset class. Diversification is much better than cash.”

The market appears to agree with this, and there has been a move to other fiat currencies instead of the USD. The Euro, the Japanese yen, Chinese renminbi, and Australian dollar have all risen against the dollar, although this tide is slowly turning back in favour of USD. Plus it would appear that many investors prefer equities to cash.

One last word though. Dalio has an interest in talking down cash. His firm wants investors to pump their growing cash reserves into his fund. Even so, perhaps he does have a point, and cash will come under other pressures in the near future, such as the increased use of digital payments and cryptocurrencies, which have made substantial gains this year.

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