Cash is King

Andy Singleton
5 min readMar 15, 2023

Last week showed us that cash is exciting. It’s no longer the most boring entry in your balance sheet. Who has it? Where is it? Can I get it back on short notice? How much interest is it earning? How many trillions of dollars will we move if we don’t like the answers?

Photo by Josh Appel on Unsplash

Cash is profitable

Cash management is the biggest trend in finance right now. Cash management is the art of placing cash so that you have the cash you need for payments in a liquid account, and the rest is earning interest. Banks can offer this as an automated service called a “sweep account.” This wasn’t useful when interest rates were zero. With interest rates at 5%, it is important.

$4T moving into 5% instruments creates a $200B per year industry, where most of the $200B is profit to savers. This is a huge new industry created in just one year. Now we are into a fight for market share.

The interest money is coming from governments, and from businesses that are finally being forced to pay. A high cost of money is a drag on investment, and it slows down capital intensive projects like energy transition. A reasonable cost of money is a driver for efficiency. Historically, 4% and above has been a reasonable cost for money. As an entrepreneur, I would be embarrassed if I couldn’t deliver at least 4% return to lenders.

The machinery of finance has mobilized to sweep and move cash. This is driving changes across capital markets, banking, and crypto.

Cash is on the move

Now savers are moving their cash. They are seeking safety, fungibility, and yield

Let’s start with yield. Banks are paying 1%. The US government is paying 5%. This puts trillions of dollars in motion from bank accounts, to something that passes through yield more effectively.

Then consider safety and fungibility. The clear and present danger to the banking system is that savers have an incentive to move their money to big banks, which the government supports and regulates as “too big to fail.” This starves the smaller banks that make local loans. Savers do not get paid anything for taking the small extra risk that comes from staying with a smaller bank.

Governments support local banks with deposit insurance, because they want to keep loans flowing to local borrowers. US regulators have stepped up this week with a pledge of extra support. However the government push to retain community deposits is doomed over the long term. The combined attraction of safety and fungibility will pull money into the big money center banks that are “too big to fail”, and from there to treasuries and de-facto CBDCs. Then the government gets money, and local businesse don’t. That’s why Sweep has a long term goal of creating mechanisms to recycle the money back into the economy.

Savers are moving crypto dollars to Tether, the largest supplier of stablecoins. There is no evidence that Tether is safer, because it is un-audited. There is no evidence that governenments will support it, and a lot of evidence that governments hate it. However Tether coins are widely accepted and more “fungible” than competing coins. Buyers see safety in numbers and liquidity.

All of this is happening at the scale of several trillion dollars.

The Internet broke cash

The Internet broke the barriers that keep cash in banks

Cash is now volatile

This weekend, traders played the exciting “stablecoin” asset class for big gains. Trading in the bigger USD bank market, they made bids for SVB deposits at 70 cents on the dollar.

We see these dislocations during a bank run. A bank run puts a bank in the impossible situation of running out of money and stopping redemptions, or just stopping redemptions. The short term value of money in these cases oscillates between 1.00 and 0. I’ll write in a different article about how a transparent DeFi system can damp down these runs.

There are days when everyone in the world wants their money back at the same time. They lose confidence that they money they have lent out will be repaid, and they try to pull it into the least risky mattress they can find. This black swan event HAPPENS A LOT, about once every 20 years or so. The technical term for this is “rising liquidity preference,” but a more useful word is “panic.”

Its important to study the dynamics of the supply and demand for cash, and what happens when cash managers suddenly change their “liquidity preference”.

Cash drives upside volatility

Cash also drives upside volatility. Riskier markets will MOON when central banks lend out more cash. We saw this on a huge scale during the pandemic. We saw it more recently during the January rally in stocks and crypto. The rally did not happen because traders increased their demand for risky assets. It happened because they got their hands on an increased supply of of money, correlated with PBOC and BOJ easing.

Cash is powerful

Startups bow to VCs. VC investment can be the difference between success and failure. VCs bow to the cash allocators who can moon their deals, and get their money out of accounts at FTX, SBV, and Circle. Cash is the difference between life and death.

Cash is borrowed, not bitcoin

I was in the Federal Reserve building in San Francisco at an “agile programming” geek meetup. I asked a woman what she was working on, and she said “cash management. The basement of this building has $2B of cash in boxes, and I write software to keep track of it.” This is the type of cash that comes to mind when people talk about “the money printer.”

That’s NOT the type of cash that we are talking about. Our cash is digital, and it’s always borrowed. The cash gets created when the Fed lends it to a bank. A bank lends it to someone, who gives it to you. You lend it to your bank. Your bank lends out overnight to someone who owes money, but doesn’t want to pay it back today. That ultimate recipient is putting the money to work.

This money has value because the borrowers intend to pay it back. People are willing to borrow and use money only if they think they can repay it at an affordable price. Bitcoin, gold, and other volatile assets cannot fit into this monetary system because very few people are willing to borrow those assets, and take the risk that the asset will go up in price, leaving them with loan payments that are too expensive.

About Sweep Protocol

Sweep protocol is a system for cash management that is automated, transparent and global. Learn more in our documentation, follow on Twitter, or contact us on Discord.

--

--

Andy Singleton

Software entrepreneur/engineer. Building DeFi banking at Maxos — https://maxos.finance . Previously started Assembla, PowerSteering Software, SNL Financial.