Will the spread of negative interest-rates lead to a ban on cash?

Last Friday saw a new front opened in the world of negative interest-rates as the Bank of Japan joined the club by declaring an official interest-rate of -0.1%. At the time we discussed the possible rationales for this leading to two intertwined themes. The first involves an outbreak of currency war in the Far East between Japan and China and South Korea. The second involves the Bank of Japan preempting a further move lower from the European Central Bank. Let’s face it the ECB has been heavily hinting that it will plunge even further into the icy cold world of negative interest-rates in March. Thus -0.3% seems set to become -0.4% or -0.5%. Today I intend to look at some consequences of all of this.

Bond yields

This has been the most obvious move and this morning has seen an intriguing development. From liuk on Twitter.

MNI: SAYS NEW 5-YR BOBL DUE FEB 3 TO HAVE 0% COUPON || … and price ABOVE 100… the beauty of  (Negative Interest-Rates)

We should not forget how significant a development this is. After all the point of bonds was supposed to be that they pay interest and thereby acquire a value! This has no coupon or interest and even worse is priced above 100 so holders to maturity will be guaranteed a loss. On this road the business model insurance and pension companies faces an IED. Thus investment depends on a combination of the safe haven status of Germany and for foreign investors the strength of the Euro which of course is the same Euro the ECB is trying to push lower.As we stand the five-year yield in Germany is -0.3% and the two-year is -0.47%.

Japan has seen its bond yields plunge since its own announcement and there has been a similar picture where yields up to the five-year maturity dip to -0.1% as markets test the limits of what the Bank of Japan will buy at. The ten-year JGB yields a mere 0.05%. In fact if we raise our sights we note this new world as summarised by the Financial Times.

The BOJ’s action, which sets the stage for further central bank stimulus later this year, spurred investors to buy government bonds and pushed the universe of outstanding negative yielding bonds in Japan and Europe to a new peak of $5.5tn.

Personally I find the fact that Italian two-year debt has a negative yield ( it keeps dipping in and out of it) the most extraordinary. But those who used to use bond markets for yield now have a problem. You don’t get much in the UK ( ten-year 1.62%) or US ( ten-year 1.93% either. I guess everyone has piled in.

Who’s next?

If we use one of Pete Townsend’s album titles we find ourselves wondering who might be next. I have long argued that the Bank of England would be on the case should there be any dip in the UK economy which was reinforced by the words of Andy Haldane last September.

It involves finding a technological means either of levying a negative interest rate on currency……….here could be a need to loosen rather than tighten the monetary reins as a next step

Gertjan Vlieghe has headed in that direction too so there are two probable votes on a dip.

The United States would seem most set against it but even there this year we have had the words of Stanley Fischer.

Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation.

An odd point to make when you have just raised interest-rates and then promised another four increase in 2016! The theme here is that even in the US thoughts are congregating in this area and on this subject.


An attraction of gold in the current world is that negative interest-rates do not apply to it. Markets seem to be shifting back in its direction as the dip to US $1050 in December is replaced with US $1126 now. Not a surge but perhaps a shift after four years of declines.

Actually holding gold does have costs such as insurance and storage which is one of the reasons why I think that the state of play with negative interest-rates changes fundamentally at around -2%.

Banning cash money

This concept was raised by Andy Haldane of the Bank of England last September.

A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency.

He was followed by Stanley Fischer this January.

That observation has led some to ask whether it would it be possible for the financial system to operate effectively without physical currency provided by the central bank.

Then there was this from Andy Haldane

it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.

Please keep that in mind as you read the next bit.

The 500 Euro note

It was only on Friday that I pointed out that according to Gabriel Sterne that via the 500 Euro note then you could hold the equivalent of one billion US Dollars in the smallest possible space. In case you are wondering it is 3 metres cubed as opposed to 12 in US Dollars, 16 in Japanese Yen and a bloated 21 in UK Pounds.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

Well maybe not only criminals as this next bit from the Financial Times shows.

The €500 note, beloved by gangsters and Greek savers, is now being investigated for ties to terrorism.

Ah yes the Greeks trying to flee possible haircuts on their savings. Is that considered a criminal act these days? One for my financial lexicon for these times I think. Actually to do anything about this the European Commission needs to persuade the ECB which controls the supply of notes and coins. So what does ECB President Mario Draghi think?

“We want to make changes,” he said, adding that “we are determined not to make seigniorage a comfort for criminals.”

Again we wonder if a Orwellian style definition of criminals such as those trying to avoid ECB monetary policy is at play here.

Some of this is the law of unintended consequences as back in the day I thought that the Euro 500 note was introduced to help demand for the Euro. It always was the highest denomination note around amongst the major central banks and this  lead to demand  for it, some of it genuine but some of it was always going to be from criminal activities. These “criminal activities” were effectively encouraged but now 16 years later Europe has suddenly spotted it? The best reply is from Ajm to the Financial Times article.

If you see a €500 note in your wallet acting suspiciously, do not attempt to move it, but report it immediately to the authorities …

Pension Funds and insurance companies

Much of the business of these organisations relies on their being a positive rate of interest or at least return. Who would invest/save for the long-term when you are offered a loss? The World Bank tries to skirt the issue but cannot avoid it.

through funding problems for some non-bank financial
institutions, and through excessive risk-taking by
investors seeking a higher rate of return.

This bit is clearer though.

As discount rates of zero or less have no economic meaning, a prolonged period of negative interest rates would create large ambiguities for the valuation of assets and liabilities.

What could go wrong? Well this.

Under negative interest rates, some non-bank financial institutions—especially pension and life insurance companies—may struggle to meet their long-term liabilities, such as pensions or life insurance policies, offered at fixed nominal rates


I wanted to cover today the development of negative interest-rates so far and the risks going forwards. The intellectual debate and yes you could call the use of intellectual in this context an oxymoron is clustering around the issue and as even the supporters are considering what’s next after it? You can see that there is little confidence in it working. That is hardly a surprise as to be a supporter you have to argue that interest-rate cuts of the order of 5% have not worked. That is an odd line if you think that 0.1% of negativity will to say the least.

So they are on the march both in size and geographically and on that road there is a point where those with savings will be singing along with the Rolling Stones.

The floods is threat’ning
My very life today
Gimme, gimme shelter
Or I’m gonna fade away





32 thoughts on “Will the spread of negative interest-rates lead to a ban on cash?

  1. Hello Shaun ,

    I thouht the £100 pound note was not going be issued as HMG thought only the Crims would use it (!) I am convinced the real reason is that HMG thought they could get rid of notes & coins altogether then what a wonderful world it would be

    why wonderful I’ll leave to the reader

    same goes for gold bullion & coins, HMG says we need to know who owns the stuff because of nearfarious activity , mostly I suspect tax avoidance but that not the reason they feed to MSM, always terrorist ….

    The thing here Shaun is that if we did not have coins & notes I beleive TPTB would have had MIRP/BIRP down to atleast -2% by now. it only that we joe public can withdraw notes that stops them, after all think of the headlines if they tried that here ( Greece) – it would be additance that they have failed and that would not do .

    It pretty clear dispite the “feel good” MSM headlines that with still emergency interest rates and QE that the TBTF Banks are still bust.

    Did you see minitru the other day? about charites not being properly run and needing regulation …. geeeze , if they are that bad why did nobody menioned the Banks??

    So that’s what we’re back to , the only country to procecute the banking classes was Iceland and now they are piriah state . Vested intrerests in the finance industry is just a greater corruption as poor old African states ( except our Bankers are better at the shell game )

    Still nothing we can do


    • Hi Forbin

      The mantra that the banks have recovered does not seem to have reached shareholders in 2016 as their shares have had a really poor run. Meanwhile the US Federal Reserve is establishing its priorities. From Bloomberg.

      “As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.
      In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.”

  2. Hi Shaun

    The NIRP movement has only just got going and has virtually nowhere impacted on the retail level.

    If this insanity continues and we get down to -3,-4,-5% and there is a significant impact on the retail level then I can’t see folk putting up with this and there will be a movement to cash and physical gold. At this point a ban on cash may be attempted, or rather a “stealth” ban by the withdrawal of higher value notes. At this point even the “sheeple” are going to wake up to what is in effect a tax on cash and wealth confiscation and will be seriously disgruntled.

    The effect on pensions and insurers is a slow burn issue but is a major potential issue ( as it is now even with IRs at the current levels) and, again, another source of disgruntlement.

    And for people like Stanley Fischer to talk about extra “accommodation” is quite absurd; we’ve been awash with liquidity for years and it’s had no effect; does he really think things are going to change with NIRP and “animal spirits” are going to be reignited?

    I think NIRP is the last gasp of a failed system and will never really get going; I think the “bust” will be upon us before then.

      • Yes, Forbin I am afrais so. It is logical for NIRP to reach the exact point of switch when folk abandon their banks i.e. when the risks and security issued with holding cash as a known behaviour. Can you imagine 70 year olds keeping £3000 under their mattress, I can and also the increase in consequential house breaking. So I suggest -1.5 to -2% would bre required for folk to be motivated to do something.

        As you allude, there are plenty more wheezes and rabbits in hat. Even tonight Mr Cameron was announcing how we can enjoy a “reformed Europe”, now that has got to be a wheeze.

        Paul C.

    • ‘I think NIRP is the last gasp of a failed system ‘

      Mark Carney has big lungs built up over years of jawboning about raising IR’s.

  3. Won’t someone think of the children?!
    More seriously put, what effects would the removal of physical currency have on children? Would they have to have a debit card, in order to spend anything, or receive pocket money? A 6 year old with a debit card is a significant cultural change.

    Back to the interest rate conundrum, much as I’ve enjoyed the low mortgage payments (once my poorly timed 5 year fix expired, at least), I do fear for the effect on pensions. I know that my generation were never going to have it as good as the current baby boomers retiring, but with coming up on ten years of near zero interest rates, with the only signs being of going down rather than up, I think many will be in for a very rude awakening. I’d love to see some analysis from you in this area Shaun. How much trouble are today’s 30, 40 and 50 year olds in?

    • ‘How much trouble are today’s 30, 40 and 50 year olds in?’

      A lot.For me,the fed rise was all about US pensions and not about the recovery.

      Hence why so many have piled into property as an alternative.Getting onto a crowded lifeboat doesn’t prevent the lifeboat sinking.

  4. Shaun,
    If drug gangs are taxed via currency withdrawal then what happens to GDP calculations?
    Will paying insurance premiums monthly attract lower costs than presently to avoid large cash penalties – a mad mad world of possibilities!

    • Hi chrislongs

      Yes good point! Can the new GDP calculations allow for the new taxation? Perhaps we will have to have imputed dealers profits..

      As to your latter point this did come up in Switzerland where one of the cantons (Zug I think) asked people to pay their taxes later rather than earlier and the former saved them money. Pure madness!

  5. It was stated in 1990 that as part of the ‘sweetener’ to germany to accept the Euro, the €500 note was promised-no other country (Switzerland?) had ever contemplated such a high value scrip.

    • Hi Rowland

      I agree that the 500 Euro note was a result of German pressure. Perhaps they wanted the demand to stop the Euro falling in its initial stages.

      The Swiss situation ( h/t Geneva Girl) is as follows. As of 2014 then some some 61.1% of Swiss currency in circulation consists of 1000 Swiss France note and there were some 38,326,310,000 of them

      • Hi Shaun,
        the €500 was probably a direct replacement for their 1000 Deutschemark note. I know all the Germans were against the Euro (and thus given no voice in the matter). Maybe TPTB thought the psychological retention of the DM1000 as a €500 would keep the unwashed masses calm?
        I read today that Schäubler is suggesting a €5000 cash transaction limit (I believe it is currently €15000). France reduced their limit (down to a couple of thousand) last year.
        The cash as an assett exit doors are being slowly closed to open the way for large negative rates. But only those with considerable cash savings and/or higher incomes (and no heads up) will be in for a shock.
        As a high earner that would be the point where I demand an equivalent employer compensation, or remove my skills from the market altogether. After all, what’s the point of wasting your valuable time earning money which you do not “need” to spend, but is (effectively) taxed to zero in a bank account?
        Interesting times, unfortunately!

  6. Cash will never be banned for at least two reasons;
    1) the black economy is part of GDP and banning cash would severely restrict it.
    2) TPTB store huge amounts of their undeclared wealth in cash.

    I may be wrong, but I was under the impression that Gilts were more a secure store of value, at least in very recent times, than an investment for return. That’s not to say a return wouldn’t be welcomed, but not the primary motive.
    If such is the case, the squeeze on negative interest rates will happen only when other safe forms of storage of value are cheaper.

    • Hi therrawbuzzin

      In my experience foreign investors mostly invest in a UK Gilt if they feel the UK Pound will benefit them but they also hoped for some interest. These days there is little interest and of course many countries have negative interest now. So it is a combination of currency and safe haven status which of course are interrelated.

  7. Great column, Shaun, as usual.
    It would take more space to hold US$1,000,000 in Canadian dollars than in pound sterling. The maximum denomination of the Bank of Canada is CAN$100, and in January £50 would have been equivalent to about CAN$102.30. In this sense, Canada is headed towards the cashless society faster than the UK is.
    I was one of the people who thought that Governor Poloz would lower the overnight rate to 0.25% in January, but he kept it at 0.50%. It may just be a decrease delayed though, as the economy remains weak, and Governor Poloz almost seems programmed to drive the loonie down as far as he can. Real GDP declined in October, and even with solid growth in November, it now looks dicey whether there will be any growth in 2015Q4. It should be remembered that under the Harper government’s balanced budget legislation, still not repealed by the Justin Trudeau government, it requires two quarters of positive growth once a recession (two quarters of negative growth) is determined, before the economy is considered to be out of recession. So in terms of that legislation, we may still be in recession status in March, when the 2015Q4 update is released.
    If Governor Poloz does take reduce the overnight rate to 0.25% in March or April, we are right back to our record-low interest rate from the global financial crisis, and any fresh shock to the economy to which the Bank of Canada might be obliged to respond with a reduction of more than 25 basis points would take us into negative territory.

    • Hi Andrew and thank you

      You are not alone in wondering if Canada will join the negative interest-rates club. As I type this WTI crude oil has fallen below US $30 again and if the commodity complex falls with it then more economic pressure will be on the Bank of Canada.

      One other matter that has hit the twitter sphere is the price of vegetables in Canada as what seem really high prices have been tweeted . Has there been a substantial change over the past year?

      • You are very well informed as usual, Shaun. In December, fresh vegetable prices were up by 13.3% from the previous December, the largest contributor to the annual inflation rate after purchases of passenger vehicles (3.1%). As Dick Little said in the latest issue of Frank: “It’s gettin’ so a head of lettuce at Loblaws [a major Canadian grocery store chain] costs more than the price of head out back of Loblaws.” The CPI for lettuce showed an annual price increase of 21.8% in December. The dependence of the Canadian market on American and and other foreign imports is greater in the winter than in the fall, so now Canadians shopping for fresh produce are really feeling the pinch. (Fresh fruit prices aren’t much better, rising by 13.2% in December.)

  8. Negative IR’s at the retail level will have exactly the opposite consequence to that which will be intended.

    it will drive demand for cash and drive velocity even lower.

    • Hi Dutch

      The banks fear this ( as well as a loss of deposits) which is why there have been relatively few examples of negative interest-rates at the retail level. However they have maintained margins as far as they can by using mortgage rates which of course has a contractionary effect. Whichever way you spin it negatuve interest-rates look to be a deflationary influence.

  9. I believe that banks, and even organised criminals have historically issued their own notes. More recently Governments have been seen as a safer issuer and this has prevented others from issuing currency. I’d hazard a guess that someone will offer various unofficial currencys in the absence of a trustworthy government currency.

  10. With BT, NatWest and TalkTalk the Government’s providers of choice for the cashless data transmission, payment processing and account security, what could possibly go wrong?

    Natwest’s problems with their Irish bank electronic transaction problems that went on for several months a few years a go, show the dangers of a cashless society.

    The banks would love it as every payment means their processing and handling taxes, sorry charges, would mean they and the government would have us even more by the short and curlies!

    Human ingenuity means that new payment systems like Bitcoin that are outside of the establishment’s vice like grip will become even more popular along with gold and bartering as people seek to escape this straight jacket.I view the support for more radical and extreme politicians and parties as part of a growing anti-establishment backlash, where people are getting increasing angry at political stitch-ups, and the politicians personal benefitting from this corporatism and crony capitalism.

    • Hi Rods

      TalkTalk particularly resonates with me as by default I became a customer and they have gone from scandal to scandal. As the Chief executive gets around £7 million a year we can say that there is nothing like a Dame! Meanwhile my oster card failed recently as well which is not reassuring for the prospect of a cashless society.

      Meanwhile as you can human ingenuity continues to devise ways around it all.

  11. Hi Shaun,

    Thanks for continuing to shine a light on this subject. None of this fills me with confidence; these extreme measures smack of desperation. Heaven knows what will happen when the next financial crisis hits! The only improvement in most people’s circumstances are thanks to OPEC! Strange times indeed.

  12. Constantly lowering interest rates to allow debtors to stay afloat and continue to increase borrowing has been a major moral hazard. Pushing on to negative rates for deposit accounts coupled with the abolition of cash would perhaps be the impetus for digital currencies, eg Bitcoin, to really take off amongst the masses. Perhaps we could even see foreign currency notes start to circulate (at least between individuals if not for payment in shops). However i think for the most part people would simply empty out their savings accounts into financial assets – particularly shares, gold and property – rather than spending it on consumer goods. In other words NIRP would likely just force up market prices rather than boost GDP much as QE has done.

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