In a world of negative interest-rates they will try to take cash away from us

A central theme of this website has been to predict and then analyse the trend towards negative interest-rates. It is an adjunct of a world where central bankers feel the need to apply ever stronger doses of monetary stimulus as previous doses disappoint. Another way of putting this is that the junkie style culture they have pursued requires ever larger hits. At the moment the main outbreak of negative interest-rates surrounds the Euro area where the European Central Bank has reduced its main interest-rate to -0.2%. This has forced Switzerland and Denmark into a corner where they have reduced to -0.75% and it was only last Thursday that I analysed the reduction to -0.35% by the Riksbank of Sweden.

The concept of central planning is also on the rise as we see capital controls (more literally deposit controls and a closed stock exchange) in Greece and all sorts of machinations,edicts and threats in China against sellers of equities. In China what goes up is apparently not allowed to go down! Although to be fair it is general central bank policy that equity prices should be pushed higher with the Bank of Japan most explicit on that front under Abenomics. Also central banks like to see house prices rising with the Bank of England at the forefront of a group which again includes Sweden’s Riksbank where policy in recent times has driven house prices higher. So in asset markets the message from central bankers is “come on in the water’s lovely” as they tease us with hints of capital gains. This of course provides us with an alternative to cash savings and whilst it only applies to a section of them it is another attempt to move us away from them.

The Proposal To Scrap Cash

The paragraph above showed pressure on some types of cash holdings via an attempt to make both holding equities and investing in houses more attractive. Of course these have quite different risk profiles and so there are plenty of other types of cash holdings in existence. So it was inevitable that someone would have what they consider to be a brainwave and suggest scapping it entirely! As it happens Willem Buiter (who was my tutor for a year at the LSE) of Citi suggested it back in April so let us examine the rationale.

Central bank policy rates have been constrained by a perceived or actual effective lower bound (ELB) on nominal interest in recent years. The existence of the ELB is due to the existence of cash (bank notes) – a negotiable bearer instrument that pays a zero nominal interest rate.

The essential point here is that 0% is something of a rubicon in interest-rate terms because depositors and savers have an easy alternative once interest-rates fall below it. They can simply hold cash and avoid the negative interest-rates that the central bank is prescribing for the economy’s health at that point. Of course whether the central bank is correct in prescribing such medicine is a moot point but let us indulge that line of thought for a moment.

Following this logic and noting where we are makes central bankers unhappy as to coin a phrase the perception that their policies are “maxxed out” may grow.

We view this constraint as undesirable and relatively easily avoidable from a technical, administrative and economic perspective.

You may note the “relatively easily avoidable” and we get an explanation of how.

We present three practical ways to eliminate the ELB: i) abolish currency, ii) tax currency or iii) remove the fixed exchange rate between zero-interest cash currency and central bank reserves/deposits denominated in a virtual currency.

You may note that as Debbie Harry put it “One way or another” this paper has plans on your cash!

Tucked away in it was a rather damning view of Quantitative Easing (QE) and the emphasis is mine.

The option to lower interest rates significantly below zero would have been valuable in the past as an alternative to large-scale asset purchases (QE) by the Fed and the Bank of England and today in Japan and the euro area. Compared to QE, significantly negative interest rates would create fewer financial stability risks and political legitimacy risks.

Central bankers out of office seem suddenly to have a different view of house and equity market prices rises don’t they? “Wealth effects” suddenly morph into “financial stability risks”.

How long might interest-rate go? The example quoted is that of the Taylor Rule which would have had interest-rates at -5% back in 2009. At such a level you can see that cash would be very attractive and why the official view would head towards abolishing it.

Is it the banks again?

If we move to Bank of England research we see the central banking view of the money supply.

Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money……Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.

You can see that the broader measures of the money supply would head south rapidly if individuals withdrew money from banks to hold cash. This is in many ways what we are seeing play out in Greece right now. Negative interest-rates would create yet another credit crunch.


So far I have put this at 0% for simplicity but as Willem Buiter points out there are costs to holding it.

Storage, safekeeping, insurance, transportation and handling costs of currency imply that the effective lower bound on interest rates is not zero, but somewhat negative (and uncertain).

The ECB has set interest-rates at -0.2% because it thinks the ELB is there. Actually I think that we have a zone between 0% and -2% depending on individual solutions. Also this is in the rational world whereas us humans are prone to Ying and Yang changes and in an irrational one the ELB would be 0% and could if you think about it (fear of deposit haircuts) perhaps even be perceived to be positive.

What do the Danes think?

Denmark cut interest-rates to -0.75% back on February 6th so we have some information on the effects of such a move. Here are the latest thoughts of its central bank. It is happy that wholesale money markets have followed its move but the retail sector is much less clear.

Banks have not introduced negative interest rates for households, probably reflecting that negative interest rates could induce some households to cash in their bank deposits.

So 0% is proving to be a rubicon although not in all areas.

The rate of interest on corporate deposits moved into slightly negative territory for the first time in April 2015.

One area is to my mind outright dangerous.

Insurance companies and pension funds (the I&P sector)…… For the I&P sector, the rate was substantially negative in both March and April.

How will industries that offer long-term contracts many of whom rely in effect on positive interest-rates work in a world of negative interest-rates. I recall a comment pointing out that UK pensions now had illustrations showing negative returns well what if the average expectation becomes that?!

On the other side of the coin some mortgage borrowers will be doing something of a jig.

.Interest rates on adjustable rate loans with fixed interest periods up to and including three years fell into negative territory in January and February.

Before all this happened it was easy to assume that banks would plunge deposit rates into negative territory but it would appear that they are afraid to do for the reason stated below.

If bank customer deposit rates fall into negative territory, customers can convert their deposits to cash.

Banking would then begin to eat itself.


Savers may be mulling the trends above and letting out a sigh of relief about the apparent 0% barrier for retail deposit rates. But should they move to ban or tax cash it would disappear and they should be very afraid of the likely next step! Meanwhile the Willem Buiter view confirms that standing up for savers is very unpopular in both official and banking establishments.

Many of these will refer to negative nominal interest rates disapprovingly as ‘punishing savers’. Most of that is simply people talking their own books and/or a failure to distinguish between nominal and real interest rates.

He even tries a bit of what he presumably considers abuse by labelling such thoughts as “German” and counters by arguing this.

. But it is important to highlight that discouraging saving (and encouraging spending) is not a bug of significantly negative interest rates, but a feature.

I am not sure that savers would think that! Here we get to the nub of the issue which is twofold. Firstly central bankers have shifted the balance between savers and debtors in the credit crunch era to “improve demand”. However this shift has required ever higher doses of measures as we see interest-rates not only be reduced but we face the possibility and maybe probability that on this road we need ever more cuts in interest-rates. We are always on the edge of a cure which turns out to be a mirage and repeat. Or as Taylor Swift put it.

I knew you were trouble when you walked in
Trouble, trouble, trouble
I knew you were trouble when you walked in
Trouble, trouble, trouble

In essence we are back to the central bankers thinking they know better than us, of which the easiest critique is the existence of and record so far of the credit crunch.

26 thoughts on “In a world of negative interest-rates they will try to take cash away from us

  1. Hello Shaun,
    It’s not hard to see how this might be packaged and sold in three easy steps:
    (i) Terrorists use cash. To help fight terrorism, holding more than 500 Pounds in banknotes is to be a criminal offence.
    (ii) Free banking for those in credit is subsidised by the poor, who have overdrafts. To ensure fairness, government requires banks to charge customers for maintaining accounts.
    (iii) Banks are greedy. As a consumer protection measure. the amount customers are charged for maintaining an account will be set by government, as a percentage of the balance in the account.

    • Did you see @craigmcginty reply to Shaun’s tweet for today’s post – France are set to do exactly that – referencing terrorism as a reason.

      “The finance ministry said in a statement: “The goal is to limit the number of potentially fraudulent transactions in the French economy, money-laundering and even the financing of terrorism.” “

      • Exactly how do they propose to enforce that I wonder?
        Think about it, if I want to pay 10000 Euro cash for something (because I’m being offered a big discount on account of the fact the supplier will “forget” to record the transaction in his accounts for the tax authorities) then I will make 10 or 20 1000 or 500 Euro cash withdrawals over say a month, make my payment receive my goods and cousin Robert is my Uncle- is the supplier going to declare the transaction to the authorities so he can pay tax on it? Am I going to declare the transaction so I can be prosecuted for indulging in an “illegal” activity of actually paying cash for something? Beam me up Scotty!!

  2. Hi Shaun

    It seems to me that your piece neatly encapsulates the Alice in Wonderland destination where we are headed.

    But are people really going to sit passively by if we have negative interest rates? to have negative returns on pension contracts? to pay people to speculate in the housing and stock markets? Frankly I can’t see it and although the British public can, and do, swallow an awful lot of nonsense there has to be “peak stupidity” somewhere and a reaction will ensue.

    Also, as you say, it takes higher and higher doses to keep the show on the road and I believe this is due to structural changes (deficiencies) in aggregate demand; debt replaces income at the private level with the public sector unable to take up the slack due to borrowing constraints.

    Let’s face it negative interest rates on any scale would amount to a rather perverse redistributive tax, openly penalising the prudent and rewarding the feckless and, what is more one that is essentially outside the control of government policy, in the sense that actual effects on the PSBR would be indirect rather than direct. How long is that going to last? It also seems to me to increase volatility and amplify speculative bubbles, hardly a sustainable policy.

    • ” ……hardly a sustainable policy. ”

      but one that will be tried because lets face it

      The BANKS ARE BUST !

      they are doing everything to avoid a asset bust , anything at all .

      then once you’ve converted your cash to assets

      shares will tank

      troops will take the the hard assets ( gold , land , etc )

      oh did you know the paperwork for land ownership has been “dematerialised ” ?

      one good ol’ computer crash………

      or actually one click of a button …….

      southpark – “its gone!”


    • Hi Bob J

      I am not sure where the threshold you mention will be. For example the Swiss and Danes have so far accepted -0.75% interest-rates albeit that retail savings rates haven’t gone below zero much. Also as Andy Z if I recall correctly pointed out on here a while back some UK pension illustrations are now forecasting a negative return.

  3. There is one point you’ve missed; the 1% hoard cash in order to evade tax.
    The govt. is not going to do anything to upset its masters.

    • the Masters of the Universe are the Banks themselves

      one rule for the poor and one rule for the rich

      is now

      2 laws for the Banks!


      Ps no cigar ? no frigging popcorn either !!! Grrrh !!

  4. Hi Shaun,
    If it happens the tax-take of the government of the day will surely increase given the number of traders who quote ‘for cash’. It might encourage a concerted effort to buy into a local currency like the Bristol Pound for example-or could the cash form of that be banned as well?

  5. Shaun,
    Cash or disposable income at least will be taken in Oct when the “all in it together” pension deductions commence for both employers as well as employees.
    As for tracking cash transactions I always thought bar coding the serial number of high value banknotes would do the trick.

  6. Hi Shaun

    I never tire of mentioning that Debbie Harry once threatened to whip me to death with cold spaghetti if I didn’t behave.

    That was a good day at work. 😉

  7. Hello Shaun

    despite the misgivings any attempted zero or negative interest rate will cause a bank run – and crash

    of course if they ban cash first …..

    Oh what a wicked world we live in !!

    do they realize we the people will in the end go back to barter ?

    are these top notch Bankers fools?

    oh fuggit , I’ve answered my own question ………..:-)


    Ps; will popcorn be traded for work ?

    • Hi Forbin

      There is another area which points towards banning cash and that is tax receipts especially from VAT. As countries in Europe including the UK have raised VAT rates I am sure that evasion has risen along the lines of the Laffer curve.

      Perhaps we will see local currencies as well as more barter. I know there is a Brixton Pound and a follower of mine on Twitter regularly refers to a Totnes Pound so there are a few in existence already.

      Corn prices have been rallying recently perhaps you had better stock up on the popcorn….

  8. It’s getting quite dystopian. Technology is enabling the state to control citizens yet we don’t have any say in how as elections seldom mention any of these key factors. Most of our control over money has been removed from the democratic process and handed to the BoE and the privatised banks.

    It’s quite disturbing.

    • Hi benfitzg

      It is bad enough so much power has been delegated to central bankers but of course ordinary bankers have grabbed control of a fair few things too. As we see the Chancellor putting the squeeze on welfare it is hard not to think of all the money the banks have cost us.

      Government of the banks, by the banks for the banks as a latterday Abraham Lincoln might say

      • Quite. Feels like we are coming to a real cross-roads. As you say if they can move to electronic cash you can only exist inside the system and an overnight haircut for all (except the connected) is but a click away.

        Not that anybody in the UK cares. Sleepwalking.

        • There are already ways out unless you are a corporate or “large” small business.

          When quoting for jobs I am regularly invited to re-quote a “cash price” and failing that (and this applies in the instance of a cash ban,although how you enforce that when you run across UK laws banning the purchase solely of alcohol in any way other than cash is beyond me and if you think a simple change in the law is easy watch the backlash from the “moral right”) I am offered “time” i.e. we agree a monetary value for the job and for my customers time whereupon I do the job and they reciprocate with the agreed number of hour work for me either immediately or at some timein the future when I call them to do a job for me and no money changes hands, either electronically or cash. Now, beat that!

  9. Attempts to ban cash and/or apply negative interest rates will simply accelerate the development and adoption of cash-like alternatives. The most obvious example is bitcoin which, incidentally, has surged since the greek crisis has approached its zenith. There are many other cryptocurrencies (litecoin, namecoin, dodgecoin, etc) although BTC is by far the most widely used. Then there is anything else people will accept as a temporary store of value. For example after the soviet union dissolved and the ruble was collapsing, russian people used unopened packets of cigarettes as a currency. Over here maybe we will see the circulation of argos gift vouchers, national lottery tickets, mobile phone credits, locally recognised currencies or even just any old foreign currency notes that people can get hold of (eg Malaysian Ringgits). The more the establishment resort to authoritarian command and control measures the more creative and exotic will be the response of people to avoid being commanded and controlled…Adam Smith’s human chessboard pieces and all that.

    • Hi Redshift

      On that theme I remember a documentary which stated that mobile phone cards were used as currency in some parts of Africa. There are other obvious candidates as a store of value as you point out.

      No doubt there will be plenty of others should this continue to play out as human beings can be very inventive at times like that….

  10. There are two huge, overwhelming, counter-productive problems with the idiots who argue for a cashless society, whereby the manipulation of interest rates is supposed to regulate spending.
    The first:

    The second problem is that most people’s savings are not “deferred spending” or even “spare money”; many, many people save for future financial security. In fact, many go without the simplest luxuries to make sure they have money put aside “for a rainy day”.
    Make interest rates negative in a form where such people cannot avoid a loss in their value, they DO NOT SPEND, THEY CUT SPENDING WHEREVER POSSIBLE TO AMELIORATE THAT LOSS.
    They fear 0.1% disinflation? Financial confiscation would multiply that one-hundredfold at least.
    Utter economic devastation.
    Have these economists no connection with the human psyche?

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