{"id":7373,"date":"2020-06-15T06:31:25","date_gmt":"2020-06-15T06:31:25","guid":{"rendered":"https:\/\/www.foxymonkey.com\/?p=7373"},"modified":"2020-06-15T06:32:18","modified_gmt":"2020-06-15T06:32:18","slug":"pay-for-cash","status":"publish","type":"post","link":"https:\/\/www.foxymonkey.com\/pay-for-cash\/","title":{"rendered":"How much will you pay to hold cash?"},"content":{"rendered":"\n

It’s a serious question. I’m not joking.<\/p>\n\n\n\n

You may have seen your bank deposits earn anywhere between 0-1% interest. That’s nothing compared to the 4-5% we enjoyed before 2008.<\/p>\n\n\n\n

Governments have adopted this zero-interest-rate policy (ZIRP) to boost growth. The idea is to punish savers for holding their savings in\u00a0cash\u00a0and make them pay down debt,\u00a0invest\u00a0in risky assets and create businesses. These actions help the economy.<\/p>\n\n\n\n

Obviously ZIRP has pushed all risky asset prices higher. House prices, stocks, gold, you name it. These assets usually go up anyway, thanks to inflation. But if money is almost free, then they go up even higher.<\/p>\n\n\n\n

Now I’m far from an economics expert but I read a lot. And lately, a what would otherwise be a far-fetched clickbait title has become an upcoming reality in my view.<\/p>\n\n\n\n

You will pay money to hold cash.<\/strong><\/p>\n\n\n\n

One thing governments do to try to create growth is money printing. You may have heard the official economic buzzword quantitative easing<\/em>.<\/p>\n\n\n\n

But another way, perhaps stronger way to boost economic growth is to lower interest rates. The theory is this: Loans are cheaper, businesses can borrow at more competitive rates to start projects and create jobs. People then have money to spend which boosts business profits and so on. Also, mortgages get cheaper! ;) Dalio has a nice video<\/a> on how the economic machine works.<\/p>\n\n\n\n

The US government reduced interest rates by 5% during the 2008 crisis. But we’ve been running a zero-interest-rate policy for 10 years or so now. If rates are already near 0, what happens when you cannot lower rates any longer?<\/strong> This useful tool is now useless. And taxes can only increase so much before the ruling party becomes massively unpopular.<\/p>\n\n\n\n

Some countries have gone to the extreme and have dropped rates to below zero. Switzerland, Germany, Japan, Sweden and more. And their bonds are trading in negative territory. So you lend money to the government and you get back less than you invested.<\/strong><\/p>\n\n\n\n

Obviously some people prefer to keep their money in cash. Cash earns nothing, so nothing is better than minus!<\/p>\n\n\n\n

Now I’m not sure why we couldn’t have increased rates before shit hits the fan. It may be that growth was anyway weak so increasing rates would cause a recession. But we are where we are.<\/p>\n\n\n\n

What do I care? These non-sense bonds are not affecting my wallet<\/h2>\n\n\n\n

Here’s why you should care. Have you noticed that banks now pay almost nothing to you as a saver? Me too.<\/p>\n\n\n\n

As I’m writing this article in mid-2020, the highest-interest paying bank is Marcus Goldman Sachs at 1.05%. Which has just stopped accepting<\/a> new customers because they’ve received so much money in deposits. My mortgage is also at its cheapest, around 2.2%. I know some readers will point out some better deals in the 0.70% territory.<\/p>\n\n\n\n

How banks make money<\/h3>\n\n\n\n

One of the main ways retail banks make money is by charging interest on money they lend. This can be mortgages, credit cards, business loans, overdraft etc. They can fund the loans using customer deposits and pay a small interest, borrow from other banks (aka interbank rate) or from the central bank. <\/p>\n\n\n\n

Now, everything is working fine when interest rates are positive. Paying 1% to attract customer money is not that bad when you can lend it out at 5% and make 4% profit. But what happens when Bank of England rates drop to -2% and you lend money at 1%? Suddenly paying 1% for customer deposits is just too expensive.<\/p>\n\n\n\n

If a central bank attempts to move its policy rate significantly below zero, commercial banks will see their interest margin compressed as long as they do not charge negative interest on deposits. If they pass on negative interest to depositors, those may, in turn, decide to switch from (negative) interest-bearing deposits to cash, which could lead to a substantial outflow of deposits from the banking sector.

This risk of substitution from deposits and reserves into cash is at the core of the existence of a lower bound on interest rates.<\/p>Assenmacher, Krogstrup IMF Paper, 2018<\/a>: Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money<\/cite><\/blockquote>\n\n\n\n

In other words, there is only so low that the customer interest on deposits can go before you keep the cash under the mattress.<\/strong> <\/p>\n\n\n\n

If they pass on the cost to us, the consumers, then no-one will use banks for stashing money there anymore.<\/p>\n\n\n\n

Which is why it’s really hard for central banks to drop rates to deep negative territory. Retail banks will start charging customers\/businesses for keeping their money or otherwise they will make no money, and eventually default. Bad, and bad. People would withdraw all their cash before the bank takes their share. Cash has an interest rate of zero after all.<\/p>\n\n\n\n

If this sounds too sci-fiy to you, the majority of Swiss banks have now introduced negative interest rates to customers with deposits of one million Swiss Francs or more. I guess it’s harder to keep a million under the mattress so you’ll have to swallow the negative rates. I’d say it’s coming to us faster than expected.<\/p>\n\n\n\n

Will governments abolish cash?<\/h2>\n\n\n\n

An cashless society paves the path to deep negative rates without the fear of customers keeping cash at home.<\/p>\n\n\n\n

Another proposal is to abolish cash altogether. But cash is what makes money… money! Obviously, this depends on which country you look at. Some countries like cash more than others.<\/p>\n\n\n\n

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