Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?
There's a huge difference between a negative federal funds rate and a negative savings account interest rate. The former means banks get paid to borrow money; crazy, but maybe not broken in the instant-implosion sense (would need further careful consideration). The latter means savings accounts charge a percentage of the balance to maintain that balance; that would produce runs on the bank. I know I'd pull 100% of my money out of any bank that tried to pull a stunt like that.
Do you have money in a checking account? Since there still is some inflation, checking accounts pay a negative rate, after inflation. In fact its even pretty hard to find a savings account that pays > inflation rate.
Are you sure you would pull your money out if all the banks started charging -0.1% annual interest? If you have your money in your house there's a higher risk of theft, more than enough to counter the -0.1%. Add in the inconvenience of moving large amounts of money around by hand, not being able to write checks, and no automated bill pay, and I'm still keeping my money in the bank.
Yes, I'm sure. I certainly wouldn't stuff it in a mattress as cash, though. I'd start by finding a bank or credit union that didn't, as I'd be surprised if they all made that move at once. If that failed, I'd look towards accounts with a broker instead, or some other institution.
It seems to me that in this situation savings accounts would have the nominally negative rate, whereas checking accounts would have a nominal rate of zero. Since inflation affects the real value of both accounts equally, then the checking accounts would have a higher real rate.
Since both accounts are covered by FDIC insurance [0], it seems that the only difference (unless I am missing something) lies in the rate of return, thus ceteris paribus and the checking accounts have a better rate of return compared to savings accounts. Both have real negative rates, so the situation would be an active discouragement to hold the government-managed currency in any form.
Regarding cash holdings, you are right that they are probably a bad idea. However, if numerous banks could potentially experience a crisis beyond the intervention capabilities of the Fed and Federal government, then it would probably be more sensible to move the money into cash and store it in safety deposit boxes, possibly across multiple banks. This to me seems an unlikely scenario, but not necessarily impossible.
I am reading much of your premise to be related to checking accounts (check writing and automated bill pay). Most people don't carry a large balance there so a negative interest rate on those accounts will not really have a large impact.
Yet on savings accounts, or those accounts whose intent it is to be liquid yet remain relatively unused, could be impacted by this. Which at that point, again under your premise of robbery, a person is essentially wagering whether they would rather be guaranteed to be fleeced incrementally, or run the possibly of someday being taken for all of their savings. At that point I think you would see many people start to withdraw large amounts of savings, whether to be stored underneath a mattress or into bonds or some other investment, while still keeping an active checking account.
Since most people don't do this already despite losing money to inflation, I doubt there will be a significant change in behavior for most people when interest rates tip negative.
Don't underestimate perception. Fees/taxes/"negative savings interest" are much more visible than inflation. I'd be surprised if that didn't cause bank runs.
For my part, I already carefully manage how much I keep liquid versus invested, but anything equivalent to a fee would cause me to switch institutions or otherwise drastically change this strategy.
At some point, people might be afraid that the cash will be stolen or destroyed in a fire or something, and not think the risk is worth it. (But it seems like an easier compromise option might be to find a bank somewhere in the world that offers a non-negative interest rate and try to transfer the money to an account there. Though in the specific case of Americans, some foreign banks don't want them as depositors now because of U.S. account disclosure regulations.)
For individuals, this MIGHT be an option, though you would really have to consider the implications of storage, anti-money-laundering regulations, and security.
As for transferring overseas, you now have to consider the significant added risk of currency fluctuations, which over the mid-term can easily swamp out any impact of interest rates.
You can put a box with a thousands of dollars under your bed, but a company that needs to hold onto a few million to make payroll can't just put it under their collective beds. Maybe they decide to put it in the money market, which invests in commercial paper, instead of a bank which parks it at the Fed.
If I was a company faced with that problem I look to see if I could take the money off shore and pay through wire transfers if the fees were cheaper than the negative interest rate being charge.
If the rates go negative enough banks will set up cash management tools where money is held as cash rather than on deposit at the bank (i.e. banks won't be able to lend against it).
The existing interbank system couldn't be used for that though, so a parallel reconciliation, netting, and transfer system would have to be set up and dealing with physical cash is fairly expensive (don't forget insurance). I wouldn't expect it unless rates go below -1% and maybe even further.
It's an incentive for the bank to have as little money as possible. The banks will do everything to get rid of cash, which, in theory, should devalue the currency.
Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.
> The banks will do everything to get rid of cash, which, in theory, should devalue the currency.
Not necessarily. Far more likely is to encourage investments or holding cash-equivalents (bonds). Most banks are not going to engage in currency speculation merely because of a negative interest rate.
> Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.
No. That is not the goal of negative rates. The goal of negative rates is to encourage investment and spending, not to devalue the currency. The government has much more direct means for devaluing the currency if that's the goal.
Eh, well, it's either inflationary or deflationary... Depends on how people react.
Taking your money out of the banking system (as paper into a box) is extremely deflationary. In most places you'll take around 10 times more money from circulation than what you put on the box, but the US keeps this multiplier much higher.
Commodity prices have already crashed through the floor, seeing them crash further may actually start freaking people out.
Frankly I think we need to stimulate the demand side of things -- give people free money, and don't let the banks screw it up like the subprime mortgage crisis.
Exactly, my savings account would be deleted immediately and shoved into tax free or inflation protected bonds.
I bet many banks when confronted with those individuals that have savings account with $200,000 cash as an emergency fund will either pull them out entirely or pay the bank for a safety deposit box.
This is one of those things where is not a law that says "you may not keep cash in a SD box," however there are several laws and regulations that make it sub-optimal or difficult to disprove an allegation that you broke some other law.
1. No FDIC insurance (no legal impact obviously but flooding is not unheard of)
2. If you have a large amount of cash with no traceable origin, the IRS is definitely going to want to know how you came about it. Concealing the source of cash violates federal regulations.
3. I've heard many times that directly taking cash out of circulation is itself a crime, and that courts have interpreted SD boxes as such, however the only actual source I can find says that physically destroying cash (e.g. burning it) is a crime.
I have edited my post to reflect the fact that I'm actually not 100% sure now :)
That comment worried me: I found this reference from BankRate saying putting cash in a safety deposit box is only illegal if it is concealed for tax evasion purposes.
I can't seem to find anything definitive that identifies the legal grounds to claim that the storage of cash in a safety deposit box is illegal in the United States, but I did come across a couple of references that indicated that certain banks have included the prohibition in their terms of use.
Given that the contents of a safe deposit boxes are not covered by FDIC insurance, I can see why it's not necessarily recommended.
> Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?
Having a box with thousands of dollars in cash under your bed is, itself, an incentive to spend (specifically, on goods and services related to home security, protection of dollar bills from vermin, flooding, etc., and similar things.)
For one thing, there are assumed costs with storing cash under your bed. (Fire, risk of theft, transaction costs, etc.) There's a reason that banks/anyone will generally charge you to store valuable goods (in a safety deposit box).
Given the implicit costs of storing cash, a low-interest bond or investment looks better.
> Presumably negative rates are a response to deflationary concerns. Under that scenario, cash under the bed would lose value faster than it would in a savings account
>As a borrower you are getting paid to borrow, thats a good incentive to go spend..
> Presumably negative rates are a response to deflationary concerns. Under that scenario, cash under the bed would lose value faster than it would in a savings account
