Carlos Sanchez, 

18th January, 2023

I recently ordered something I don’t need off the internet. I missed the delivery guy so my package was delivered at my local Späti (abbreviation for Spätverkauf, convenience store). Anyway as I was waiting in line to pick up my package I got lured to buy a Kinder Bueno chocolate bar. I could already taste the crunchy wafer and sweet milk chocolate but as I approached the cashier, to my disappointment, I saw a sign that said “No Visa!, No Mastercard!, and no Mobile Payments!, Zahlung nur mit bargeld!” (cash only), of course I had no cash - *sigh*.  

Five years ago I moved from sunny Los Angeles to work in Berlin’s buzzy fintech scene, funnily enough, developing electronic payment solutions. And since then I have developed a feeling of dread every time I leave the house and realize I forgot to bring cash with me. At the same time I have become intrigued as to why one of Europe’s largest economies is so obsessed with cash. 

It’s not that I am absent minded. A certain type of global corporate homogenized lifestyle is possible in central Berlin without cash, occasional jarring contact with the cash only reality that happens when you are forced to interact with the alternate universe (ie my local Späti) or during a weekend trip to visit the lakes in Brandenburg, where asking for the card terminal will be answered with a blank stare.     

When it comes to cash payments Germany seems less like Scandinavia and more like southern and eastern Europe. Since the Euro was launched in 2002, the Deutsche Bundesbank (Germany’s central bank) has issued more paper notes than all the other members’ central banks combined. More than half of the €1.2 trillion of the Euro banknotes have come from the Bundesbank. Georgia Meloni’s pro cash policies would be better received here in Germany than in her native Italy. 

In 2022 a survey by the Bundesbank identified that 70% of the population considers cash ‘important’. On average, Germans carry €100in their wallet at any given time and 30% of their withdrawals come from cash held in the home. Germans see cash as an intuitive way to control their spending without forgoing privacy. When I ask my German friends about their cash habits I get Dostoevsky:

‘Money is coined liberty. If money is jingling in [a man's] pocket, he is half consoled, even if he cannot spend it.’

Max Otte, a German economist, founder of the Save Our Cash Campaign recently made headlines for his nomination as presidential candidate for the AfD (Alternative for Germany), Germany’s main right wing party. In an interview with  Deutsche Welle, he said: 

'Living in a cashless society means giving up total control and complete abandonment of personal data'. 

Die Linke, Germany’s main left wing party, says the same in its manifesto. Shockingly, I think I can relate. In truth, I live in a frictionless bubble where most of my desires are addressed by me tapping my phone against some four cornered plastic device. This action has become so habitual for me that I forget what it means to possess money, or for that matter, to earn a living. Like most people, I work for a living and that work means hours spent doing something at the cost of not doing something else. The absence of physical money has given me ‘opportunity cost amnesia’. 

I have been alienated, to put it in Marxist terms. The second point, about data, reminds me of the slight feeling of intrusiveness I get every month when google so kindly emails me a summary of all the places I visited in the last month. But do I really have to worry about this? How else would I find a cafe and pay for my coffee? 

Germans seem to think I should worry. In 2016 attempts to limit cash in the country were countered with strong resistance. The German finance minister proposed a cap of 5000 euros on cash transactions which resulted in a mass media campaign called “Hands off our cash”, driven by the western world's best selling newspaper, Bild. 

German businesses seem to also display a strong preference for transacting in cash. According to the survey cash acceptance at point of sale stands at 95% versus 70% for electronic payments prior to the 2020 COVID pandemic. However, don't get your hopes up. The acceptance of electronic payments only increased 4 percentage points after the pandemic. This should not be shocking when you consider that until 2016 Aldi, the beloved German discount supermarket and IKEA Germany did not take Visa or Mastercard at all.  

For many Germans the paranoia of being watched is still very fresh. First Nazi and then Stasi secret police monitoring have left some very deep grooves in the German psyche. If you live in Germany today these memories are constantly around you. Just turn on Netflix and you find endless post World War II shows like Deutschland 83, depicting the story of a young Stasi informant during the cold war era. 

If you happen to be in Berlin you can even visit the Stasi offices and live the surveillance experience in HD. I can walk two blocks from my apartment and see one of the scary watchtowers of the Berlin Wall, preserved as a warning from the past about the value of liberty. It is an irony of history that the far right and far left, ideological heirs of the Nazis and Stasi, are the loudest voices calling for caution on cash abolition.

Politicians and businesses are not alone in promoting cash. The Bundesbank has also been a strong defender. In the 90s, when Europe was discussing the introduction of a unified currency across its member states, the topic of note denominations became controversial. The Bundesbank requested that the European Central Bank issue a 500 Euro paper note. Others objected, including the then US treasury secretary Larry Summers, who said large denomination notes would encourage money laundering, terrorism financing and tax evasion. (One million in €100 notes weighs 10kg, one million in €500 notes weighs 2kg.) In the end the Bundesbank won and if you are lucky you might see a 500 euro note in circulation. People refer to them as “Bin Ladens” because they spend most of their time in hiding.

The historical link to the Bundesbank's request for large denomination banknotes dates back to 1964 when West Germany started issuing 1,000 Mark notes, which gained popularity as a tool for holding savings generated during the ‘Wirtschaftswunder’, an economic boom that miraculously transformed war torn Germany into a global economic power. The 500 euro note was intended to create a psychological continuity with the 1,000 Mark banknote, which would be retired at an exchange rate of less than 2 Marks to the Euro. This was a trade off to convince the Germans, Europe's strongest economy, to abandon a monetary system that was a symbol of their prosperity and adopt a shared one without fully giving up control. 

A question I find intriguing is this: what makes other rich western countries like the UK and Sweden care less about cash? Both the UK and Sweden have rejected the Euro because of fear of losing autonomy, either for economic or political reasons, yet they seem fine with giving up the secrecy of cash. Travelers to Sweden are advised to bring a debit or credit card to avoid any inconveniences at the growing number of outlets that don’t take cash. The UK is also well on its way to becoming a cashless society, most recently introducing a law that bans card surcharges to remove any hesitation customers may have faced when paying with a credit or debit card. Germany is the other way around. 

Germans use cash to exercise autonomy and privacy, and that doesn't come from nowhere. This past summer I did a cycle trip from Munich to Venice. As you travel the 480 plus kilometres south from southern Germany past the Dolomites and into Italy you notice several things; breakfast is smaller, coffee tastes better, but what really struck me is that Italians share the German’s love for cash. Much of German speaking Europe also shares the history of the Holy Roman Empire with Italy. Reminiscence of this history can be observed in the baroque churches that were built as far north as Dresden and heard in the Operas composed by Mozart. 

The similarities extend beyond aesthetics, You may also notice this legacy in the way they are governed. Unlike other centralized European kingdoms, the Germans went for a decentralized political system, with all the complexity that this brings, putting it closer to Italy. Under the Holy Roman Empire, both German and Italian affairs were managed centrally by the papacy, in Rome. The church’s interference in the individual states often resulted in conflicts leading Emperor Charles IV to enact a decree called the Golden Bull, which ended the central administration and returned power to the individual states, something Germany and Italy have been grappling with ever since, sometimes with awkward and unwieldy results. 

How all of these events explain Germany’s clinging to cash today is not easy to say. Many summarize it as the liberty to exercise autonomy and privacy within larger political and economic constructs. I like to believe it is a reflex from the past. Given the legacy it is reasonable to assume that Germany will take longer to embrace non cash payments, or in Dostoyevsky’s terms we are all happier when we know we have cash in our pockets to spend.

Here’s one of the most common questions I am asked with regards to designing behavioural interventions;

“Won’t you have to design different interventions based on the different cultures in the various regions?” 

The answer I give often surprises them. Where fundamental behavioural traits are concerned, culture doesn’t matter. It’s a non-issue. They sometimes raise their eyebrows as if I hadn’t quite understood the question. 

“But our clients in London are so different compared to those in Rome. There’s no way this can work in both regions.”

Behaviour is about fundamentals 

Behavioural economics is concerned with the fundamentals. That means the core behaviours that are so ingrained that they describe the human condition, regardless of culture. If a behavioural theory has been peer reviewed and tested successfully all over the world, then it’s a safe bet to assume that it applies regardless of local culture.  A great example is Daniel Kahneman’s prospect theory and loss aversion. There are countless other examples of behavioural experiments that apply regardless of where you are. 

Here's another example. Imagine some very different cultures, thousands of years ago. Let’s say, the Egyptians, the Shang dynasty and the Mayan peoples. There was no interaction between these cultures at all, they existed in bubbles. Yet they all independently arrived at the conclusion that gold was somehow valuable even though gold was yet to have any practical value (the world having not yet invented semiconductors).  It seems that the scarcity bias works regardless of culture. You could do the same with reciprocity, anchoring, confirmation and many others.

Here’s a little experiment that you could try anywhere in the world and I’ll wager you’ll get similar results. Set out an array of toys in front of a 5 year-old and observe which ones he likes to play with. Then select one of the toys that he has not touched and doesn’t seem to be interested in. Pick it up and announce that this toy has to be packed away. Most likely, the 5 year-old will show a keen new interest in the very toy that he had previously ignored. There may even be some tears. I’m guessing that this simple demonstration of the scarcity bias will work as well in Tokyo as it will in Helsinki. The fact that we want more of what we can’t have is fundamental to all humans. So not only have we not changed with regards to the scarcity bias over thousands of years, it applies across all cultures.

So when we overplay the importance of culture It’s almost as if we are collectively looking at the cracks on the wall, rather than the wall itself. So why are we so obsessed with cultural differences? 

Repeat after me: we are all individuals

Perhaps our reluctance to accept that we are all very similar speaks of our need to be individuals. We feel that being different makes us special. Our parents and lovers tell us that we are different and we assume that to be a big part of the reason why they love us. We obsess over the tiny differences, mostly visual, so that we don’t confuse the thousands of people that we meet in our lives. We are even able to distinguish between different moods in the same person, just by looking for miniscule differences in their faces. One might say that the desire to see people as different is so strong it’s almost a bias in itself – let’s call it the Individuality Bias. But in reality, we are far more similar than we like to believe. Disappointingly similar. 

Could you pick out an individual penguin in a colony of thousands? To us they look, sound and behave all the same. But to the penguins, they are able to easily distinguish their partners through sight and sound. Maybe we are all the same to the penguins. Really smart global companies realise this and don’t differentiate their product according to culture. Heinz, Marlboro, and Levi’s make products that are the same all over the world. We listen to the same jokes and tell the same stories all over the world. 

When you first land in Tokyo it might look like a world of difference – but you’d probably be looking at the cracks, not the wall. If you looked a little deeper you would see people commuting to work, sitting in offices, going home eating dinner and then going to bed. With similar stories, arguments, fears and worries playing in their minds all the while. 

If you make a hit reality talent competition show like Strictly or The X Factor over here, it turns out all you have to do is translate it, and it will likely be a hit over there as well. When they sold the X Factor format all over the world, it was uncannily similar. They changed basically nothing about the show, not the rules, not the logo, the system or even the set design. Turns out the thing that made it a success, that many of us are delusional about our talents, and that we enjoy scoffing at those people that are delusional, is the core behaviour that is independent of culture. 

The cult of individuality is the cult of differences

Here’s another little experiment to try. Next time you are at a party and sitting with a dog owner, ask him what his dog is like (they’ll be happy to oblige, I guarantee it). Not what the dog looks like, or what breed he is, but ask about the dog’s personality and character. You can be pretty certain that you will not get a response like this:

 “His behaviour is entirely standard. His chief interests are sniffing lampposts, going for walks, running really fast on the beach, eating very quickly, licking my face and having naps. He is exactly like all other dogs that I have ever known”. 

They’re more likely to say something like this:

“He’s adorable. He’s totally unlike our previous dog. He does this cute thing where… [owner will provide anecdote]. He just has so much personality.”

The point is this: in our eyes, the Individuality Bias means that we require differences for people to have personality. To be standard or generic, in other words, to have no personality, is perhaps one of the unkindest things we could say of another human (or dog!). 

But, but, but….

Some of you reading this will be adamant that I’m wrong – cultural differences are vital to successful communication with consumers. Ask yourself if you are perhaps a victim of the Individuality Bias? Or perhaps your job depends on you not understanding that cultural differences are not what drives preferences and motivations? You may even believe that segmentation is the only way. 

Perhaps your professional status hinges on your deep understanding of cultural differences? Perhaps you can think of products that were tailored to the local culture “with great success”.  But honestly, how do they compare to those giants such as Apple, BMW, MacDonald’s etc., that fundamentally have the same offering in every culture? 

First the bad news and then some good news

Behavioural science has some bad news and some good news for you. The bad news is that we’re disappointingly similar. This is great news if you work in communications or just want to develop a narrative for a product or service that speaks to the core fundamentals of human motivations. 

If your behavioural change programme, communications strategy or intervention is leaning on a cultural norm, it's likely so weak that it’s going to fail anyway. Look deeper, find the applicable fundamentals and design interventions and communications that apply to the human condition. It’s our need for social proof, peer approval and emotional rewards that underpin the motivations that drive our behaviours. 

Everyone is talking about inflation. It has become the story of our age, much like the war on terror became the story of the decade on in 2001. And the vast majority of people understand inflation to mean ‘rising prices’ and not much more. So the general answer to the question in the headline is likely going to be; ‘Prices will rise by 9% this year’.

A corollary is that your savings will decrease in ‘purchasing power’ by a corresponding amount. Many intuitively understand this secondary effect, because it follows logically from the first. So far, so good. 

But quite often, you’ll hear people using ‘common sense’ to fight back against this conclusion. Sceptic Sam will say things like;

“If I start the year with £1,000 in my bank account and don’t spend it, I’ll still have £1,000 at the end of the year, so your theory that I have lost 9% of that money is nonsense. Inflation doesn’t change how much money I actually have.”

“The price rises you hear about only apply to some goods, like imported goods or high end stuff – I’ve switched to buying cheaper things, so inflation doesn’t actually affect me at all”.

“This inflation is just temporary, I’m basically not buying anything until inflation goes right down again. I’m actually increasing how much I save. So it doesn’t affect me”.

That’s the power of ‘nominal’ numbers (what it says on the banknote), as opposed to ‘real’ numbers (adjusted for inflation). Sceptic Sam is basically saying that he doesn’t understand inflation but he does understand nominal numbers, so he’s going to reject the very idea of inflation because ‘it's just a theory’. What’s real to him is the numbers on the banknotes and the balance in his account. £1,000 is £1,000. 

If you’re familiar with even the basic principles of economics, it may sound difficult to imagine following that course of reasoning. But the primacy of nominal seems to be everywhere. Consider how many times this month you have heard news reports about workers going on strike because they are demanding a ‘pay rise’ of 4%. In an economy of 9% inflation they are actually striking for a real pay decrease of 5%, as opposed to the 9% real decrease they would be getting in the absence of any nominal increase in their wages. But when did you last read or see a news item that framed their demands in this way? 

But there’s a third effect of inflation that’s even less understood by the general population, and that’s the effect it has on debt and assets and especially assets financed by debt. To round off the question in the header, try and guess the effect of 9% inflation on a debt of £296,000 over 10 years. And then try and guess what the value of a £290,000 asset will be after 10 years of 9% increases due to inflation. 

To make it easier, we’ll hold all other factors constant, so that the value of the asset rises in tandem with the inflation rate (and only that, i.e. there are no exogenous factors, the property market remains perfectly flat in real terms) and the value of the debt decreases in tandem with the inflation rate (i.e.. we’re assuming that you’re not paying off any of the principle of the loan, just the interest). 

After ten years;

Your debt of £290,000 will still be £290,000 in nominal terms in December 2032, but it will only be worth £122,499 in 2022 money. Your asset will be worth £798,194 in 2032 money. That can be quite difficult to visualise, because we are mixing December 2022 money with December 2032 money. But whichever way you look at it, it's a fantastic deal. The value of your debt will have eroded by -59% but the value of your asset will have gone up by +175%. Your debt will have shrunk by more than half, and the value of the asset will have more than doubled. 

That’s how inflation benefits leveraged asset holders, aka homeowners. When we think about the wealth of boomers, it has a lot to do with them being the first generation to have normalised home ownership. 

That’s what 9% inflation for over a decade looks like, all other things being equal. This simple illustration goes a long way towards explaining both the popularity of homeownership as the poor man’s hedge against inflation and the continuing ‘popularity’ of inflation as a policy by governments. It decimates the value of debts and increases the value of assets. You know who else has debts, other than home owners? Governments. 

Notes: I chose £290,000 as an illustrative asset value because as at December 2022, this is the average house price in the UK. Yes, I’m aware that most people don’t get 100% mortgages. And also aware that banks aren’t granting interest only mortgages any more. I’m also assuming a 9% flat rate of inflation over the next ten years, with no variance. I haven’t included the net present value of the negative income stream of the interest payments that you would need to make on the £290,000 mortgage. The illustration is a simplification to highlight what the power of a decade of 9% inflation does to the values of a debt leveraged asset and its associated debt. Current inflation for the UK is stated to be 10.6% by the Bank of England as at December 2022. 

Rate hikes. All of the mainstream news outlets are talking about the interest rate hikes and the associated effects on the stock market, the debt markets and the economy in general. Either they're talking about rate hikes, or the ones that might be coming down the pipeline, or they're analysing every word coming out of the various central banks, looking for hidden 'forward guidance'. 

But given that we're in an inflation environment of -10.5%, why is nobody talking about 'real' interest rates?  Because the fact of the matter is that real interest rates haven't been this low for ages. Why is no one talking about that? If nominal interest rates are at +3.5% in the UK, and inflation is at -10.5%, real interest rates are currently sitting at -7.5%. How come none of the commentators are talking about the declining real rates of interest? Because, in all honesty, it's only real that matters. Nominal is for the birds. 

Maybe a decade without any inflation to write home about has loosened our grip on reality, in both senses of the word. 'Real' interest rates (which is simply the nominal interest rate adjusted for inflation) are not that remarkable when both interest and inflation are on the floor. But we've suddenly pivoted into a world where real rates have diverged sharply from nominals. But commentary seems to be lagging behind. 

Perhaps there's something about the artificial 'lower bound' of zero that has something to do with it. When central bank base rates were hovering around zero (and dipping slightly below in the EU), it really became an experiment in the public perception of this 'special number' of zero, as Dan Ariely might call it. There were plenty of people that believed that it was 'impossible' for the price of money to go negative.  None of the banks were prepared for it, and had to scramble to upgrade their computer systems to accommodate minus numbers. Some banks had to write out to disappointed customers that were on tracker rates to tell them that no, they wouldn't end up being paid (in nominal terms) for having a mortgage.

As soon as the interest rates started to go positive these 'Zero Bounders' felt better that the world was returning to normal. But as pointed out before, the real price of money is now  more deeply negative (when nominal base rates are +3.5%)  that it was before (when nominal base rates were +0.1%). When inflation was at -2% and interest rates were at +0.1%, the real interest rate was obviously -1.9%. That real rate of interest, the cost of money, has since declined to -7.5%, and the BBC, the Economist and the Financial Times are all still talking about 'rate rises'.  

Notes

For this post, I've experimented with the idea of using +/- signs for inflation and interest rates. I  think it goes some way to help drive home the meaning of inflation when you see it written as -10.5%. It makes it much easier to see how inflation rates interact with interest rates. Now that we have crossed the Rubicon of being able to have positive or negative interest rates, we really ought to be stating inflation with a sign. I'd love if the idea caught on, and we would routinely see -10.5%  as a way of describing inflation. It would make it much easier to understand what is happening to our money. If we can wrap our heads around the concept of being able to have positive and negative rates of interest, then the next step would be for us all to realise that we can have positive and negative rates of inflation. We could then get rid of the word 'deflation'. Consumers would then be able to work out the return on the bank balances by adding the interest (positive or negative) to the inflation figures (positive or negative).

Links

https://web.mit.edu/ariely/www/MIT/Papers/zero.pdf

Shampanier, Kristina, Nina Mazar, and Dan Ariely. "Zero as a special price: The true value of free products." Marketing science 26.6 (2007): 742-757. 

https://www.yourdictionary.com/for-realsies