A-Musings – No Place Left To Rob

Musings are thoughts, the thoughtful kind. For the purpose of these articles, a-musings are thoughts that might amuse, entertain and even enlighten.

We live in dangerous times, and not in the way you might think.

A longstanding rule of economics says that interest rates can’t go below zero. Yet just a few weeks ago, Sweden’s Central Bank introduced a negative interest rate that means that other banks have to pay the Central Bank to deposit money there, instead of the Central Bank paying them. In theory, this means that every time people deposit money into their accounts they have to pay interest to the bank for being kind and taking care of their money instead of the bank paying interest to the account holders for having access to their money.

(As an aside: For decades, Swiss banks have charged their international clients negative interest on deposits – in other words, it has cost such clients to deposit and keep money on accounts in Switzerland. The clients obviously felt it was worth their while to pay the bank rather than allow authorities “back home” to know where they had their money. It was all part of money laundering, I suppose.)

When central banks introduce negative interest, regular banks that already load, some might say overload, their clients with fees for just about everything except breathing the air in their offices are suddenly faced with an extra cost that could be passed on to their clients if they chose to do so. In reality, no bank has or will pass on this negative interest rate to its customers because savers would rather hide cash under their beds, goes the logic, than lose money by leaving it in the bank; banks are not being kind; they are scared they will lose out if they pass on the cost.

So why negative interest? Well, some central banks are trying to revive growth in nations through massive purchases of government bonds, while others are pushing rates into negative territory to revive slowing economies. The big question is whether this “new” monetary tool might be enough to resuscitate spending and push inflation back up in our part of the world. Things have really changed: We live in a brave new world in which inflation rates need to climb. When my generation was young we struggled to reduce inflation rates, not raise them.

Negative interest is a potential game-changer for central banks. Normally, they stimulate spending by lowering the real interest rate, that is, the nominal interest rate minus inflation. With inflation now close to zero or lower in many countries, negative nominal rates make possible more negative real rates.

For the most part, positive interest rates suit both savers and borrowers. It provides households with an incentive to save for tomorrow rather than spend their money today. Companies are probably willing to pay to borrow because they plow the money into projects that promise higher returns. But nothing is self-evident; worry over the future can drive people and companies to stash money away even if they receive nothing in return. Companies can have such low expectations about the viability of new projects that only zero or negative rates can entice them to borrow and expand. The truth is that despite central banks holding real rates in negative territory since 2008, very moribund investment environments and low inflation rates have persisted.

There are, of course, financial experts who warn against below zero rates on the grounds that they aren’t needed. Such interest rates, they say, might disrupt the financial system because money-market mutual funds, unable to promise investors a positive return, will close up shop. And depositors may simply take their money out as cash – though Europe, it must be said, has not yet seen a surge in currency demand. On the contrary, thanks to debit cards, online payments, etc, physical cash has become relatively more burdensome and costly, and thus less attractive, to use. In digitally savvy Sweden, currency in circulation has fallen by about 25% since 2009. For big savers such as banks and investment funds, transporting and storing hundreds of millions of Euros, Dollars or Francs, not to mention complying with anti-money-laundering laws, is expensive and time-consuming.

Negative rates deter inflows of so-called hot money.

A cash-free world may be just around the corner, Folks, and it is surprisingly easy to get used to. In the past seven weeks I have visited so far eight different countries, with two more ahead of me, and have not used “real cash” once. Petty thieves and other criminals are crying foul: They have no one and no place to rob!