The Death of Cash

Could negative interest rates create an existential crisis for money itself?

JPMorgan Chase recently sent a letter to some of its large depositors telling them it didn’t want their stinking money anymore. Well, not in those words. The bank coined a euphemism: Beginning on May 1, it said, it will charge certain customers a “balance sheet utilization fee” of 1 percent a year on deposits in excess of the money they need for their operations. That amounts to a negative interest rate on deposits. The targeted customers—mostly other financial institutions—are already snatching their money out of the bank. Which is exactly what Chief Executive Officer Jamie Dimon wants. The goal is to shed $100 billion in deposits, and he’s about 20 percent of the way there so far.

Pause for a second and marvel at how strange this is. Banks have always paid interest to depositors. We’ve entered a new era of surplus in which banks—some, anyway—are deigning to accept money only if customers are willing to pay for the privilege. Nick Bunker, a policy analyst at the Washington Center for Equitable Growth, was so dazzled by interest rates’ falling into negative territory that he headlined his analysis after a Doors song, Break on Through (to the Other Side).

What is rarer is for interest rates to go negative on a nominal basis—i.e., even before accounting for inflation. The theory was always that if you tried to impose a negative nominal rate, people would just take their money from the bank and store cash in a private vault or under a mattress to escape the penalty of paying interest on their own money. When the Federal Reserve slashed the federal funds rate in 2008 to combat the worst financial crisis since the Great Depression, it stopped cutting at zero to 0.25 percent, which it assumed to be the absolute floor, the zero lower bound. It turned to buying bonds (“quantitative easing”) to lower long-term rates and give the economy more juice.

Over the past year or so, however, zero has turned out to be a permeable boundary. Several central banks have discovered that depositors will tolerate some rates below zero if withdrawing cash and storing it themselves is costly and inconvenient. Investors will buy bonds with negative yields if they believe rates will fall further, allowing them to sell the bonds at a profit. (Bond prices rise when rates fall.) Global investors are also willing to put money into a nation’s negative-yielding securities if they expect its currency to rise in value.

Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.

As long as paper money is available as an alternative for customers who want to withdraw their deposits, there’s a limit to how low central banks can push rates. At some point it becomes cost-effective to rent a warehouse for your billions in cash and hire armed guards to protect it. We may be seeing glimmerings of that in Switzerland, which has a 1,000 Swiss franc note ($1,040) that’s useful for large transactions. The number of the big bills in circulation usually peaks at yearend and then shrinks about 6 percent in the first two months of the new year, but this year, with negative rates a reality, the number instead rose 1 percent through February, according to data released on April 21.

Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save. “Over time, market disequilibria are dangerous,” G+ Economics Chief Economist Lena Komileva wrote to clients on April 21. Which side of the debate you fall on probably comes down to how much you trust government. On one side, there’s an argument to be made that cash has become what John Maynard Keynes once called gold: a barbarous relic. It thwarts monetary policy and makes life easy for criminals and tax evaders: Seventy-eight percent of the value of American currency is in $100 bills. On the other side, 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,” Cecchetti says. The longer rates break on through to the other side, the more pressing these questions become.

Full article: The Death of Cash (BloombergBusiness)

One response to “The Death of Cash

  1. If you ever took Latin, you may have been surprised that certain modern concepts had no translation. One of those was “bank.” The closest equivalent was “argentarium,” a silversmith’s vault (Google Translate gives “ripae,” which is a river bank). While there was lending at interest in ancient times, it wasn’t large enough in scale to form the basis of an economy. Lenders were more like payday lenders. It COST money to keep money in the “bank,” because the vault had to be impregnable and guarded by unsympathetic guys with swords and spears. And it COSTS money to keep money in the bank today, only we disguise it with compound interest. The bank lends money at interest and gives you a slice. That’s why they don’t want small depositors and charge for transactions. It COSTS money to clear a check because somebody has to collect all the information on the checks and transmit it to all the banks. That’s why you have a fee if your balance drops too low. With more in the bank, the bank can make money by lending yours out. Compound interest hides most of this from the average American, who thinks a bank is a magical place that gives out money because the people there are so nice.

    Here we’re at the other extreme. Accounts so huge the bank can’t possibly lend it all out, but pays interest on it anyway. So, yes, they want to slough off the excess.