
Negative Interest Rates May Spark Existential Crisis for Cash - prostoalex
http://www.bloomberg.com/news/articles/2015-04-23/negative-interest-rates-may-spark-existential-crisis-for-cash
======
mxfh
In short term scenarios with negative/penalty interest rates, cash is
considered an option favorable to accounted money by some.

 _It seems that a Swiss pension fund tried to evade negative rates on deposits
by withdrawing a very large amount of physical cash with the intention of
vaulting it. But the bank refused to allow it to withdraw the money in the
form of physical cash._

[http://www.forbes.com/sites/francescoppola/2015/04/25/the-
sw...](http://www.forbes.com/sites/francescoppola/2015/04/25/the-swiss-have-
eliminated-the-zero-lower-bound/)

ADDENDUM: The OP article is more about banks imposing negative interest rates,
actually triggering a renaissance in cash storage. While storing huge amounts
of cash as an individual during a deflation is, from an egoistic perspective,
the better option in terms of personal purchasing power (minus the obvious
physical risks). That the banks and financial regulators don't like this is
clear, since it's money not under their control.

------
Spooky23
The existential crisis is the brain dead policies leading to this situation.
We must not have inflation to protect the wealth of people and institutions
with billions of dollars. But it's ok to destroy the ability of normal people
to save or conduct business.

If we live in a world where it's too dangerous to have any unauditable
transaction, perhaps we're doing something wrong at another level.

Most of these arguments are bunk anyway. The government captures every phone
call in entire countries. We collect images of every piece of mail. Are you
telling me that the government forgot to collect the serial numbers of every
dollar bill as it enters the banking system?

The other sad thing is this really reinforces and legitimizes the fear that
fuels the right wing. Perhaps the goldbugs on talk radio are right!

~~~
hnnewguy
> _" But it's ok to destroy the ability of normal people to save or conduct
> business."_

I will never understand this argument. What right do people have to a return
on their savings? None. It's an economic transaction.

You realize that when you "save" money, there's someone on the other side of
that transaction that is taking that money, along with some risk and
ingenuity, and putting it to work economically?

If you want return now, take more risk. The world is awash in capital, safe
assets earn nothing.

As far as "conducting business", the largest corporations are selling massive
amounts of debt at historically low rates; it's not a bad environment to
conduct business.

~~~
Spooky23
I don't know why understanding my viewpoint is difficult. Earning interest
isn't some sort of exotic memory of the ancient past. You could get 4.75%
5-year CDs as recently as 2008.

Why 2008? "Safe" assets earn nothing because the US has printed trillions of
dollars to shore up bank balance sheets at low/no cost to the banks. Large,
"too big to fail" banks and large corporate entities are awash in cash.
Smaller business entities have a hard time getting access to capital.

Meanwhile, we've tightened controls on physical money to the point where
people with straightforward business models like salons, laundromats and
retail are one jump bank compliance offer away from some sort of interaction
with law enforcement.

------
nabla9
Anyone who has critical opinion of current system should first study enough to
pass "Turing test for mainstream monetary economics and monetary policy" (test
where you try to fake others that you are economist who understands prevailing
monetary theory and defends the policy). For example, to know how economists
think about general equilibrium theory of credit.

There is huge knowledge cap between economists and policy makers and
journalists and population.

Who here in HN thinks they could pass the test If I were to administer one?
For example questions related to macro- and microeconomic determinants of the
demand for money, Baumol–Tobin transactions demand for money, portfolio
selection, demand function stability, quantity theory, general equilibrium
framework for money, yield curve, interest parity, AA–DD paradigm, etc.

I feel that at least I know enough economics to know that I don't have simple
technical solution (bitcoin, gold, what have you).

~~~
irixusr
That's like saying 'anyone who's opposed to eugenics should pass the "Turing
test for mainstream eugenics and racial hygiene" otherwise they're ill-
informed'. Which is largely the argument used against opponents at the time
(the opponents were ignorant "medieval obscurantists", if religious speaking
from "superstition")

My objections to modern economics are as follows:

\- utility is an ordinal quantity, not a cardinal one. I can tell you I prefer
my soon-to-be-born daughter's first kiss to my sister's cheerful hello, but
not by how much (how much "what"? What are the units?).

\- the utility function, so widely used, is an unknown function. However
mathematics are performed after choosing an arbitrary functional form that has
the features desired

But most importantly:

\- It assumes utility exists and humans behave accordingly.

These are fundamental objections to the field. I can talk to an economist
about yield curves flipping, but that jumps over the foundational objections:
they are projecting complex human behavior onto fairly outdated mathematics.
And then making a mess of it.

~~~
copsarebastards
Yeah, it's sure terrible to want people to be informed on a subject before
forming an opinion on it. /sarcasm

Your post boils down to: "The models are outdated, so let's throw out the
entire field." The thing is, the outdated models are predictive enough to be
more useful than your complete lack of a proposed alternative.

And even if you did propose a better model, you'd still have to understand the
outdated models in order to prove that they are worse than the model you're
proposing.

~~~
NoMoreNicksLeft
I don't agree.

If a climatologist proposes a model, good or bad, we can still use that model
to make predictions and then wait for them to come true (or not). The
climatologist is in no position to coerce the weather to adhere to what his
models says will happen.

An economist _is_ in a position to influence the economy. And economists _as a
group_ are in a position to steer the economy in the direction of whatever
their model predicts.

Any predictions they make are less predictions and much closer to being
promises.

~~~
copsarebastards
> If a climatologist proposes a model, good or bad, we can still use that
> model to make predictions and then wait for them to come true (or not). The
> climatologist is in no position to coerce the weather to adhere to what his
> models says will happen.

> And economists as a group are in a position to steer the economy in the
> direction of whatever their model predicts.

> Any predictions they make are less predictions and much closer to being
> promises.

Economists are in a position to coerce the economy in a direction, but I don't
think that economists are in a position to coerce the economy to fit a model
unless they have an accurate model (which may or may not be the same model as
the first model) of the economy already.

For example, I might predict that putting a 100% tax on oil will cause the
stock market to rise. But that model is just wrong. I might be able to put a
100% tax on oil and then coerce the stock market to rise _despite_ doing that,
but to do that I would have to have an accurate model of the economy.

An accurate model allows you to coerce the economy intentionally--without an
accurate model you can take actions that will affect the economy, but you
can't predict what effects your actions will have.

You can't steer the economy if you don't have an accurate model of it.

EDIT: There is significant incentive for economists to lie; that is,
economists might publicly espouse a model they don't believe in order to steer
the economy based on a model they _do_ believe. There is also some evidence
that some economists do this. However, this should not be mistaken for a proof
that non-economists are better qualified to talk about the economy than
economists. Ignorance is no more truthful than dishonesty.

~~~
irixusr
I don't think he meant that they can steer the economy towards validating
their model. Rather that the conclusion (right or wrong that they maybe) leads
to certain actions by our leaders.

~~~
copsarebastards
I can only respond to what he said, not what he meant.

~~~
irixusr
Sure you can, all reading is interpretation. :D Or perhaps reject the
principle of charity?

But with a handle like "cops are bastards" I'd be for charitable
interpretations. SOME cops are bastards, which anyone can agree to. Not All ;)

~~~
copsarebastards
Well, handles aren't exactly communication. Posts are.

If someone inadequately communicates what they mean, that's on them, not on
me.

------
fixxer
"If there’s one thing that militias and Tea Partiers hate more than “fiat
money” that’s not backed by gold, it’s fiat money that exists only in
electronic form, where it can be easily tracked and controlled by the
government."

Ugh. Good article until the author felt the need for this asinine political
gem. I am neither a militia member nor a tea party republican, but I recognize
the flaws of a system in which a bureaucracy controls money supply based on
arbitrary theory rather than some index immune to manipulation. Therefore, I
must be a militiaman. Cheap thrills kill copy, journo.

~~~
hnnewguy
In what way does that sentence imply that _you_ are a militia man or Tea
Partier, given your beliefs?

The sentence reads: "Militia men and Tea Partiers hate fiat money". Not
"people who hate fiat money are Tea Partiers or militiamen".

Some people love to be offended, I guess.

~~~
JackFr
I'm not a offended, but it's a throwaway line. It's both irrelevant and
unsupported by any facts in the article. (And in general only supported by
anecdotal evidence at best.) The author uses its merely to identify his
personal bona-fides to his intended demographic.

------
walterbell
Coverage of ten recent statements about cash,
[http://wolfstreet.com/2015/04/25/don-quijones-war-on-cash-
qu...](http://wolfstreet.com/2015/04/25/don-quijones-war-on-cash-quotes-to-
cashless-society/)

 _" As a result of technological advances and generational priorities, cash’s
days may well be numbered. But there is a whole world of difference between a
natural death and euthanasia. It is now clear that an extremely powerful,
albeit loose, alliance of governments, banks, central banks, start-ups, large
corporations, and NGOs are determined to pull the plug on cash.."_

In 2011, System D (global underground economy) was claimed to be $10 trillion
in size and growing,
[http://www.forbes.com/sites/benzingainsights/2011/11/07/rise...](http://www.forbes.com/sites/benzingainsights/2011/11/07/rise-
of-the-shadow-economy-second-largest-economy-in-the-world/)

 _"..the OECD concluded that half the world’s workers (almost 1.8 billion
people) were employed in the shadow economy. By 2020, the OECD predicts the
shadow economy will employ two-thirds of the world’s workers.."_

~~~
crdoconnor
The PR push seems mainly to be coming from Citi primarily (although other
banks may be involved).

It's pretty clear why _they 'd_ want to push to abolish cash and institute
negative interest rates. It would put them at the center of the economy
instead of the near center. Another back-door bailout like this might help
deal with their, um, insolvency.

What isn't clear is why anybody else would want it.

------
irixusr
When cash is abolished the bankers will own everything.

We're asked to trust bankers to keep track of bits when they'd foreclose on
homes that were current with their loan payments!

Bankers who consistently make risky bets because they know their losses will
inevitably be nationalized.

Bankers who have manipulated the libor index, engaged in insider trading,
broke the fiduciary trust between them and their clients advising them to buy
assets they were selling.

Ya, we should abolish cash and make these folks in charge of our money

~~~
feraloink
This is exactly the problem! What you wrote does not sound like extremist talk
or paranoia. Certainly not after reading this:

>Bank notes, as an alternate storehouse of value, are a constraint on central
banks’ power. “We view this constraint as undesirable,” Citigroup Global Chief
Economist Willem Buiter wrote.

He goes on to describe some ways that central banks could stop people from
trying to hold on to their cash, thus undercutting the supposedly desirable
goal of expanding bank power. They included:

> One, abolish paper money. Two, tax paper money.

One lone guy at NYU's business school made the only (to me) rational
observation. It was how the article ended:

> if you’re afraid that central banks are in a war against savers, or that the
> government will try to control your financial affairs, cash is your best
> defense. Taking it away “is a prescription for revolution”.

------
VLM
Two interesting concepts to think about:

This is a strange "basic income" strategy. Mash that meme up against that meme
and you get some weird observations. It seems to be failing, but its at least
interesting. The idea of a debt jubilee, of course only for rich people,
implemented as a low negative rate rollback instead of simply eliminating debt
accounts, is related and interesting. Consider a novel solution to the housing
bubble crisis or the death of the oil frack industry or the upcoming death of
the social media bubble, don't just write off mortgages and loans but make
them all neg 2 percent or whatever to not suddenly shock the economy. Its an
interesting implementation idea.

This is a symptom of a dying/collapsing economy. Not the rate itself, but look
at how fast people are getting kicked off the island and no longer allowed to
participate as they had participated for decades/centuries. Much like has been
happening in the labor markets. The way economies die is almost never a light
switch (that comes from reading greatly summarized histories deep in the past)
but its more like the number of people permanently kicked out of the game
increases YoY until no one cares about the legacy economy so it gets unstable
and the few remaining die hards watch the final irrelevant tipover. You can
see a technology analogy in software versions. Windows XP never died on a
certain date, just fewer people used it over time with variations in rate due
to external forces (support contracts, new windows version releases, pirated
releases, etc) and finally it'll no longer be relevant in the marketplace,
eventually. Likewise, economies die the same way. Its not only the quantity of
transactions or size of transactions, but literally the number of players.

------
dmichulke
Negative interest rates may as well spark questions as to how f __*ed up a
system can be until it implodes and what happens then.

Seriously, if they truly were negative, we could all stop working now, borrow
some money and live of the proceeds.

IMO, the story that CBs know what they do and are there for our own good is
not believed by anyone anymore and the future will teach us a lesson of sorts
that will prevent us from repeating such lunacy for hopefully at least a few
decades.

~~~
mdemare
Negative interest currently only applies to a few banks and governments.

The goal of the central banks here is to get people to spend/invest their
money instead of saving it.

~~~
jrs235
"The goal of the central banks here is to get people to spend/invest their
money instead of saving it."

Because otherwise who will pamper and serve the central bankers and
politicians if we're allowed to live free off our savings?

------
tim333
The main issue is a bubble market for bonds. People are buying them because
they have gone up in spite of the fact they lose money in the same way they
used to buy loss making dot coms in the 90s dot com boom. For example a 10
year zero coupon bond paying $100 in 10 years time would traditionally have
sold for say $80 giving you some return but if people choose to pay $101 I
have a feeling it will go all webvan and pets.com on them. In fact the market
appears to have started crashing three weeks ago. Cash will survive of course
as it always has done.

------
jchrisa
Here's an unconventional but powerful take on the subject of negative interest
rates.

[http://sacred-economics.com/sacred-economics-
chapter-12-nega...](http://sacred-economics.com/sacred-economics-
chapter-12-negative-interest-economics/)

~~~
fche
"Money does not decay over time..."

... except in the form of inflation. Adding yet another centrally-planned
mechanism for that (negative interest rates & elimination of cash) will
amplify rather than reduce chaos, and (as intended) lead to a less-free
market.

~~~
cesarb
> "Money does not decay over time..." ... except in the form of inflation.

We've experienced another form of decay. We had a few old leftover dollar
bills from a trip to the USA we made last century. When we wanted to exchange
them back into local currency a couple of years ago, all exchange houses would
only give back around 70% of their face value, merely because they were old
bills (they were in good condition).

~~~
fche
"all exchange houses"

(American banks would give you face value.)

~~~
cesarb
> American banks would give you face value.

It's still a loss of value. When they were new, they could be exchanged
everywhere for their face value (minus a few percent for the commission).
After a few decades, they can be exchanged for their face value only in
certain places. Who knows what will happen after a few more decades? Will they
still be accepted anywhere?

In my country, if you still have any local currency bills or coins from before
1994, they're worthless except as a collector item. Won't surprise me if the
same happens one day to old US dollar bills.

------
koonsolo
I always saw money as some sort of unit for value. Everything valuable is
expressed in some currency. Inflation is expressed as "things becoming more
expensive", not "money loosing its value". Money seems to be the most basic
part of how our economy works.

I think the next decade will change everyone's perception of central bank
money and cash, going from the most basic law on value, to just another thing
that can be traded with another thing, losing or gaining value. The real
question is if merchants will still accept these "I owe you" notes in the far
future, instead of requesting something of real value.

Timing means everything for something to become successful, and bitcoins
couldn't have hoped for a better time than now.

~~~
seanp2k2
You're describing fiat money:
[http://en.m.wikipedia.org/wiki/Fiat_money](http://en.m.wikipedia.org/wiki/Fiat_money)

~~~
koonsolo
Yes, exactly! But the point I was trying to make (very badly that is), is that
most people call "fiat money" just "money". And they know no other money than
money (including my past self). You can earn money, you can buy stuff with
money, and you can save money. All fiat money of course, but that doesn't
matter, because that's the only money people know. In the next decade, that
perception will change. "Money" won't have a monopoly anymore.

------
dataker
If interests rates are lower, borrowing increases, including reckless
borrowers.

So, technically, wouldn't it be more likely to have an even stronger economic
crisis?

~~~
lucozade
It encourages borrowers to borrow possibly recklessly.

It doesn't encourage lenders to lend recklessly (they won't make any money for
the credit risk).

Of course, that won't stop anyone from lending recklessly any more than
rationality did last time around.

~~~
jrs235
"It doesn't encourage lenders to lend recklessly (they won't make any money
for the credit risk)."

As long as lenders are Too Big To Fail and therefore don't take on the full
risk of their lending decisions why wouldn't they continue on the private
profits/rewards and public losses/risks trail?

------
anon4
I'm pretty sure that if you abolish paper money, you'll just give rise to a
strong barter economy culminating in private paper money.

~~~
VLM
Or you get a commodity bubble. Also a bubble in art, collectibles in general,
metals... Also the old "alpha strategy" or whatever it was called from the
70s. If you know the price of TP is going to go up 20% per year (or even just
1%) if thats the best rate of return you can get, you buy a years supply of
TP. Its not like you're going to stop using it anytime soon and you know
prices only go up. This is the middle class version of the strategy, the poor
don't have the money to buy a years supply of TP at once and the rich are
talking about larger sums of money.

In the short term this "activity" is exactly what they're trying to spark. The
problem is in the medium and long term all you've done is pull demand forward.

~~~
pjc50
Absolutely. Faced with a choice between "deflate property prices" and "rewire
the entire economy to force property to be the only long term store of value",
people holding a lot of property are trying to organise the latter.

~~~
mxfh
So in effect for any non-institutional, non-property owning individual it
still feels like an inflation since increasing rents and property prices will
eat up way more income than any negative interest rate could raise. Classy way
to ramp up societies inequality.

------
websitescenes
This is an excellent example of the extreme polarization of wealth that exists
in America. Banks have so much money they don't need more!? All while more and
more Americans slip into poverty. Remember, we bailed these institutions out
with tax payer money. Does anyone else find this incredibly ironic?

~~~
coldcode
Economists rarely if ever care about people who have little or no money.
Neither do most politicians. This has been the norm since people invented
money and politics. If you eliminate money and deny credit to poor people, how
does that work? Eventually it results in an uptick in guillotine
manufacturing.

------
chiph
"Hmm. You're going to charge me $250 a month, based on my cash balance, to
keep my money in your institution. How much would it be to rent a large safety
deposit box and just put my cash in there?"

~~~
fexl
Some have already closed that exit, banning the storage of cash in their
boxes. They want to keep your funds available for negative interest rates and
possible bail-ins.

~~~
linuxlizard
I think the difficulty would be finding enough safe deposit boxes. If I had
$100M (let me dream, will you!) where could I store that physically? That much
cash takes up a lot of space.

The Oatmeal had a post where he talked about how heavy his $200,000 withdrawal
was (that was in 20's).

A little Google searching found:
[http://www.cockeyed.com/inside/million/million_dollars.html](http://www.cockeyed.com/inside/million/million_dollars.html)

I think Adam Curry talked about buying actual gold bullion and storing that.
Still takes a lot of space and a lot of cost in storage. $100M in gold is over
80,000 oz. Two tons of gold?

[https://en.wikipedia.org/wiki/Gold_bar#Standard_bar_weights](https://en.wikipedia.org/wiki/Gold_bar#Standard_bar_weights)
[http://demonocracy.info/infographics/world/gold/gold.html](http://demonocracy.info/infographics/world/gold/gold.html)

Me, personally, if I had $100M, I'd buy an island somewhere close to an
internet backbone. Real estate is always a good investment!

~~~
fexl
Yes, you're talking about 4.7 cubic feet of gold there. Buy the island and
then you'll have a place to store 1 cubic foot of gold, to pay your routine
expenses.

------
norea-armozel
Okay, I'm not quite understanding the idea of the negative interest rate other
than it's levied against people who hold on large stores of cash in their
accounts. My question is under what situations would a bank implement such a
policy? It is because there's no way for a bank to invest the funds? Or is it
something deeper?

~~~
xnull2guest
The policy maker mentioned in the article claims that credit is now more
liquid than cash.

This could be taken quite a number of ways.

One way is to think that the conveniences of credit has made cash less
relatively liquid (there are fewer goods, such as those online, that can be
traded for credit whereas most things in the physical world can be traded for
credit).

Another way is to see this as a hedge against a currency backed by a US facing
fundamental challenges to its place as the global leader (not just in
finance), whose growth even with stimulation boasts a mere 0.2%; 7% under
major competitors.

Another way to see this (e.g. in these comments) is a strategic means for
banks to try to institute consumer credit as a currency of their own.

One could also think of it as a fed inspired policy trying to get cash into
circulation. The point of inflation is so that those holding large amounts of
currency can't sit on the currency and make money from doing nothing. Banks
and finance basically allow people to do this despite inflation (tending to
benefit the rich more than the poor in this case). Putting a negative growth
rate on storage of cash simulates the same thing.

~~~
norea-armozel
Thanks for the break down.

I think all the points are true within the context that it's clear the
negative interest rate is a way to get around problems of stimulating the
economy, but also that there's certain banks who would love to get more people
hooked on consumer credit. Frankly, I just hope this situation is resolved
without having to chain everyone to such a terrible situation of perpetually
needing consumer credit to pay for goods/services. I don't feel it's the right
way to ensure a healthy economy. Or at least that's my view of it.

------
Random_BSD_Geek
It's curious to read contemporaneous reports about negative interest rates on
record hoards of cash, the pending insolvency of social security and medicare
(in the US), and high unemployment globally. You'd think we could find better
uses for those massive piles of cash.

I for one welcome our pending transition to federation credits. ;)

~~~
fche
"You'd think we could find better uses for those massive piles of cash"

But those piles of cash don't belong to "us" to spend as "we" like.

------
malteof
Econtalk on interest rates are quite on topic, check out here:
[http://www.econtalk.org/archives/2015/04/scott_sumner_on.htm...](http://www.econtalk.org/archives/2015/04/scott_sumner_on.html)

------
snake_plissken
This article is mixing up a few things, that although related to each other,
are distinct.

The theory behind negative nominal interest rates is that depositors will move
their money out into the economy where it can earn a the least a positive rate
of return, or used for consumption. For some reason this isn't explained very
well in the article. Personally I've never bought it, both in theory and
practice. Real interest rates (the rate of return you get after accounting for
inflation, i.e. real = nominal - inflation) have been negative for some time
and there has not been this huge outflow of deposits into other or potentially
better investments. It is mostly institutional investors and banks with money
parked on the sidelines who are affected by these negative rates, but being
(supposedly) risk averse entities, it does sometimes make more financial sense
to know you are going to lose 1% a year rather than something more.
Ironically, if anything, having a nominal negative rate of interest in a
situation where the money remains parked in a bank says more about how low
economic expectations are.

But the ECB and the Swiss National Bank are setting a negative nominal
interest rate because there is political opposition to expanding their balance
sheets in the same way the Federal Reserve has done, so negative rates are
really their only additional option. Right now there is an ECB bond buying
program, but it will only purchase (and inject) about $1 trillion dollars in
the Eurozone. The Fed bought about $4 trillion dollars.

To call what JP Morgan has done through this "utilization fee" a negative
interest rate is slightly disingenuous albeit still correct in principle, in
which case your could call any fee that decreases what you put in a negative
interest rate. They want to get rid of these deposits because it improves
their balance sheet and lets them operate more freely under the current
regulatory regimes, or at least make something on the side if the money stays.
The articles does state this but it's buried at the end of the third
paragraph.

Then there is the part about moving away from cash. There has been this push
lately by well known academics and some main stream economists of an idea that
cash is somehow detrimental to the economy. Beyond the privacy implications
and the affect this would have on people who are in the low income segment of
society and those who are un-banked, I really don't get it and I think it's
driven by the need to try and get creative about monetary policy. I suppose
with a cashless society you could technically also move to a completely
consumption based taxation system, but this idea runs contrary to the idea of
trying to get people to spend money since tax liability would be proportional
to how much of your income you spend.

It's also difficult to accept the proposition that trying to force people to
spend money and increase consumption will improve the economy in a real and
long lasting way, when it is savings and investment that drive the real
economy. This is my main issue with an extended period of ZIRP or NIRP. No one
is inclined to save anything and so investment is funded by further periods of
monetary expansion. (And for everyone who is going to say something about the
identity S=I, I know, I completely bastardized it and technically it's only
true for closed economies but the point still holds the same, savings are
important to a having a good economy.)

------
Eye_of_Mordor
Huge drop in oil prices has driven inflation lower (oil had been high for a
long time). Nothing to see here.

