Earlier this year, we posted about negative interest rates and how there are already negative interest rates in some highly developed countries like Switzerland and Japan. Today we’re going to talk about negative savings account interest rates – and what it might mean if they come to America.
Even though negative rates don’t look imminent in the United States, we wanted to muse a bit about what negative interest rates at banks would look like in America. Hey, if Ben Bernanke can write about negative rates and helicopter drops (and quote himself) and Germany has signs popping up looking like this… it’s still topical.
When we talked last we had a brief discussion about negative interest rates actually being passed along to small savers – that is, while larger accounts might already have negative interest rates posted on their accounts in some countries, only in a few instances can we find individual savings accounts with negative rates. That’s where the more interesting effects begin, at least for you individuals who read our posts!
So, how about it: what if negative savings account interest rates came to America? What would it look like, and how could you avoid the worst effects on your wallet?
In a Way, We Already Have Negative Savings Account Interest Rates
The chart above shows a very interesting phenomenon – since the Great Recession, the United States has technically already featured negative interest rates for savers. Allow me to explain…
The Federal Reserve Bank of Cleveland maintains a series of market expectations for future inflation – a series which predicts that inflation over the next year will be in the low one percent area. Whether you agree with that number or not, you probably have a number in mind for how much you think inflation will be over the next 12 months.
Now, your bank account also quotes a rate over the next 12 months. Essentially, if you are predicting higher inflation over the next year than you are getting in interest on your savings account, you’re already getting a negative interest rate. That’s a phenomenon we wrote about (tongue-in-cheek!) in this post.
As for bank account rates… data on those don’t go back as far.
We mashed up the 1 month certificate of deposit series from the Fed, with the new (since 2009) interest rate series on deposits under $100,000. It’s not exact – but the CoD series is a good proxy; but feel free to tell me about the amazing savings account deals you got back in 2006 (I had a 6% savings account – I know.). If you’re curious, here are the two series together before the difference graph:
That’s Different! At Least I Get It All Back!
It’s true – you do get all of your money back even if your account is paying 0% interest rates right now. That’s one major difference between today and what would happen if there was a negative bank interest rate scenario.
(Now, remember, all of this is theoretical: the United States hasn’t seen negative rates yet. And the United States has posted higher core inflation for a couple months.)
At first, your bank would probably either eat the cost of negative interest rates or increase fees. At some point, though, one American bank will cross the rubicon and start charging negative rates. As we mentioned in our last piece, the market will probably withstand a small negative rate… bank accounts are convenient – think Debit Cards, Bill Pay, Insurance, and all of the safety of outsourcing security and protection from disasters to your bank.
Alas, that won’t last forever – at every rate, it will cross some marginal saver’s estimation of what a bank account is actually worth.
This isn’t just all just theoretical musing – note that negative rates in Japan have caused a huge uptick in the number of people buying personal safes. Assuming your cash isn’t destroyed or lost or stolen, burying it in your backyard or under your mattress guarantees you a 0% savings rate. That might also mean putting it in some proxy, like gold – which, yes, Japanese citizens did before a consumption tax law change in 2014. (Note that in the United States, gold is taxed as a collectible – yes, our Government already thought of that).
Can You Just Hold Cash at Home?
In theory, yes. But as the topic of negative interest rates has come up, the idea has started to be floated that we should ban the $100 Bill (and the 500 Euro Note). You can imagine why – the $100 is the largest denomination currently in use in the United States, and let’s you store the most cash in the smallest volume. This argument is quite literally the opposite side of the coin from when the US semi-seriously discussed removing small denomination coins like nickels and pennies because the cost of seigniorage meant it costs more to make a penny than a penny can nominally buy.
Of course, the main argument was that criminals find large bills convenient. Also convenient for banks, banning large bills would make it easier to implement negative interest rates… since then you could only store $50 or $20 bills at home. (And since the EU already has seen some countries go negative, don’t expect the 500 Euro note to last long).
And how much outstanding currency would banning the $100 affect?
As of September 30, 2015, $1.057 Trillion out of $1.342 Trillion total outstanding notes. 78.77% of outstanding bill value.
Negative Savings Account Interest Rates Can Happen In the United States
So, to summarize:
- In theory, you could see negative interest rates, even here.
- You would probably see rates get progressively more negative and marginal savers would react in different ways
- You might see moves to make it less convenient to store money at home
- You’ll probably see further pushes to make more transactions electronic
And that’s all there is too it, really. If you are really opposed to negative rates and don’t want to risk holding money at home, you can always dial up the risk slightly or work around it:
- Money Market accounts
- Longer duration Government Debt or Inflation Adjusted Securities (see TreasuryDirect.gov)
- Corporate Debt
- Other AAA rated sovereign debt (note there is a FX risk)
- Prepay longer dated debt like mortgages
- Overpay your taxes and get a huge tax return (oh, the irony)
- Even riskier assets – take a pick from most other things in the world.
Let us know what you think you’d do under negative savings account interest rates – prepay bills like property tax and insurance? Prepay the mortgage? Minimize the amount you leave in the bank? Decrease your withholding to zero and get a fat tax return?
I really don’t see banning the $100 as really having an impact. Ban the $100 and then people just switch to the $50 or the $20. It might be a bit of an inconvenience for criminals or foreigners hording millions of $ but for normal people its just a bigger stack of bills to put in the home safe or safety deposit box.
Besides that I don’t think there was any serious discussion of the idea and it was just one guys idea.
I could see ‘passive retirement’ of the $100 – it’s impossible to recover everything out there overnight (especially since it’s around 80% of the outstanding paper currency). That’s how the US got rid of our $500 notes up to the $10,000… retiring them under Nixon in 1969. FWIW, $500 today is worth less than $100 was worth in 1969, haha.
I’d disagree it’s just one person trying to ban large notes though… On the 500 Euro side, Mario Draghi himself is pro-ban (but it’s not unanimous at the ECB yet: http://www.bloomberg.com/news/articles/2016-02-04/ecb-wants-proof-that-500-euro-note-helps-criminals-mersch-says )… something like 30% of outstanding Euros are 500s. Charles Goodhart of the Bank of England spoke out against the 1000 Swiss Franc note and the 500 Euro note. On the dollar side it isn’t a ton of names, but it’s big names. The Harvard connection is there, with a paper by Ken Rogoff in 2014 and the aforementioned paper by Peter Sands supported by Larry Summers writing in Wapo. You’ve also (obviously) got a lot of pro-electronic currency folks… but they’d probably want to see everything disappear, even single dollars – see Andy Haldane at the Bank of England.
I thought this was an interesting historical piece – from 1976! – on banning large bills: https://www.unz.org/Pub/WashingtonMonthly-1976may-00026 . Key quote:
“There are only two kinds of activity in the U. S. which depend almost exclusively upon large, untraceable, non-credit transactions. The first is profit-motivated crime : illegal gambling, drugs, prostitution, loan sharking, protection, the fencing of stolen merchandise, etc. The second is tax evasion by people who arrange to receive cash income and don’t report it. ”
Maybe I’ll do a piece on criminal usage of large denomination bills – this stuff is too interesting, haha. For the record, I hate having $100s in my wallet.
I personally find it inconvenient to carry much cash, and I don’t think it’s safe to store money at home. I also try to keep my cash in the bank to a minimum and maintain most of it in an investment.
I imagine banks would do a few things to avoid ever having to print a negative rate as an advertisement: first, they would increase fees as you mentioned in the article. Second, I think they would find solutions around it, such as some sort of safe investment account that can be used as overdraft protection on your checking account…thus eliminating any need to actually keep cash in the checking account.
Just remember that lower interest rates incentivizes spending over saving. We already having a huge problem with saving in the US…so it just exacerbates an existing problem.
The Fed could easily reduce the reserve ratio to increase the velocity of money through the system to increase inflation…or the Federal Government could pass laws that don’t cause business to lend less. The Fed has a ton of options at its disposal other than just interest rates.
Have to agree on the safety side – you don’t want to be sitting on a significant sum of money and be robbed, or have some sort of disaster destroy your cash. (On the second point, funnily enough, the Federal Reserve has a system to try to replace mutilated money… so maybe if a fire does destroy a horde someone wouldn’t have to mark it down to zero: https://www.frbservices.org/operations/currency/mutilated_currency_and_coin.html )
Another issue with low savings rates is where it encourages money to be invested – if there are no ‘safer’ forms of money, you’ll see people move further and further out the risk curve. It starts with CDs and Overnight Paper and moves down the scale to… who knows, 100:1 leveraged ForEx and MBSes.
As for velocity, it never really recovered from the Great Recession: https://research.stlouisfed.org/fred2/categories/32242 . I’m sure it’ll be back eventually, but demographics may keep it in a trough.