There are three characteristics that define money. Firstly, it must be easy to store and transport to serve as a medium of exchange; secondly, it must be a unit of account to allow us to compare the value of different products and services; and thirdly, it must serve as a store of value in which to materialize a portion of financial savings. Naturally, all parties involved in the economic exchange in question must agree on these premises for money to be considered as such.
Money, and the form in which it materializes, has evolved alongside innovation and the habits and customs of society over time. And everything suggests it will continue to do so. But beyond its specific representation, money allows for the financing of growth in terms of spending and investment, which remains constant. Cash, deposits, and everything that can be easily converted into a payment instrument is money. As such, it must fulfill the theory that its growth responds exactly to what the economy needs to function. At least in the medium and long term, since in shorter periods this relationship can become very unstable.
Historically, the monetary aggregate in Europe most closely identified with economic growth is known as M3, which includes cash, deposits, and other liquid instruments. Its growth rate has accelerated with the crisis, as a result of both ‘forced’ savings derived from the lockdown and those produced for precautionary reasons in the face of high uncertainty, facilitated by the monetary expansion measures decided by the European Central Bank. The sharp increase experienced by cash contrasts especially with the decline in its use as a means of payment since the start of the crisis, compared to the alternative offered by digital and mobile means. Thus, cash has lost its traditional prominence in payments in Europe, initially due to social distancing health measures and subsequently due to the positive experience in using alternative payment methods.
This liquidity retained by households and the continuity of expansive monetary policy are key to expecting a strong initial boost in post-COVID demand. However, it is not clear that this initial recovery will be sustained over time. Nor is it clear that an expansive monetary policy can be maintained indefinitely. It is a matter for reflection that many see the continuity of exceptional monetary measures over time as a potential risk to consider, as is currently the case with rising inflation expectations or instability in financial markets. Central banks reaffirm their objective of preserving favorable financial conditions, thereby guaranteeing both financial stability and the maintenance of low financing costs during 2021.
Parallels are increasingly being drawn with the Bank of Japan’s monetary policy before the financial crisis, which in 2012 was framed within the so-called ‘Abenomics’ formula: an economic policy supported by monetary expansion, fiscal expansion, and structural reforms. The main failure economists recognize in this formula is that, ultimately, the global economic recovery scenario following the financial crisis was not leveraged with the necessary economic transformation for an increase in potential growth. Favorable financing conditions and fiscal stimulus were not enough to achieve sustained growth in the absence of structural reforms.
The expansionary unconventional monetary policy measures adopted by the world’s leading central banks have reduced markets’ risk perception by cushioning tensions that would otherwise have arisen due to the pandemic, and by preventing them from materialising in the markets and feeding back into the economic crisis. Although it is impossible to speak with certainty about the future recovery if we do not overcome the virus, this does not mean that the strategy to be followed by economic policymakers should be one of “wait and see”. The monetary policy transmission mechanism developed by banks and expansionary fiscal policy are helping to mitigate the impact of the crisis on households and businesses. However, it is crucial that a reform strategy is put forward to enable us to generate sustainable medium-term growth, and that, when the time comes, these reforms are implemented.
José Luis Martínez Campuzano, spokesperson for the Spanish Banking Association
