Back to school with you

Brian Richardson, CEO of mobile banking company Wizzit doesn’t understand the monetary policy, or so it seems.

He claims there is approximately R12bn of money outside of the formal banking system, or “under mattresses” as I believe he put it. This may be true.

Then, and this is where I have a problem, states that “It would have a massive impact if that money came into the market” with the implication that this would be a good thing. This reflects a broken understanding of monetary policy.

Putting this un-banked money into banks would allow it to be re-loaned, applying the multiplier effect and effectively expanding the money supply. Whether expansion of the money supply by R120bn (assuming effective multiplier is around 10) is a good thing or not is a question of fact, yet to be resolved.

Of course, if this were a good thing, the Reserve Bank could achieve the same thing through a combination of open market purchases of bonds (released cash into the money supply), weakening reserve requirements (allow the same money to be relent more times) or printing bank notes and dropping them from helicopters. They haven’t yet done this.

So it’s not really a good thing for the economy as a whole. It is a compelling argument for mobile banking though. Just saying.