Who Warned "Be Careful What You Wish For... If Interest Rates Go Negative"

Tyler Durden's picture

Now that the Bank of Japan has joined other central banks such as Denmark, Sweden, the ECB, and Switzerland into pushing its rates into what until just two years ago was considered the monetary twilight zone below the zero bound, and in the process sending a record $5.5 trillion in government bond yields negative...

 

... which quickly puts into in context all the recent warnings about physical cash being eliminated (because as a reminder negative rates and cash simply can not coexist as the latter provides a ready immunity from the former), such as the following:

Perhaps the only open question is which comes first i) Japan hinting at a cash ban, or ii) the Fed going NIRP as well.

So in light of all this monetary lunacy, we have dug up the following blast from the not so distant past, which contains several rather dire warnings about the dystopian future of a NIRP world:

  • if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.
  • I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.
  • If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.
  • As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly
  • if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers

And the punchline:

  • we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation

But the biggest surprise to all of the above is who the source of the warning is. First, however, here is the full text of said warning:

If Interest Rates Go Negative . . . Or, Be Careful What You Wish For

 

[T]his post examines some of the possible consequences. We suggest that significantly negative rates—that is, rates below -50 basis points—may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection. Such responses should be expected in a market-based economy but may nevertheless present new problems for financial service providers (when their products and services are used in ways not previously anticipated) and for regulators (if novel private sector behavior leads to new types of systemic risk). 

 

Cash and Cash-like Products 

 

The usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals. The largest denomination bill available today is the $100 bill. It would take ten thousand such bills to make $1 million. Ten thousand bills take up a lot of space, are costly to transport, and present significant security problems. Nevertheless, if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.

 

If rates go negative, we should also expect to see financial innovations that emulate cash in more convenient forms. One obvious candidate is a special-purpose bank that offers conventional checking accounts (for a fee) and pledges to hold no asset other than cash (which it immobilizes in a very large vault). Checks written on accounts in a special-purpose bank would be tantamount to negotiable warehouse receipts on the bank’s cash. Special-purpose banks would probably not be viable for small accounts or if interest rates are only slightly below zero, say -25 or -50 basis points (because break-even account fees are likely to be larger), but might start to become attractive if rates go much lower.

 

Early Payments, Excess Payments, and Deferred Collections

 

Beyond cash and special-purpose banks, a variety of interest-avoidance strategies might emerge in connection with payments and collections. For example, a taxpayer might choose to make large excess payments on her quarterly estimated federal income tax filings, with the idea of recovering the excess payments the following April. Similarly, a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later.

 

We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.

 

Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees. Commercial banks might find their liabilities shifting from deposits (on which they charge interest) to certified checks outstanding (where assessing interest charges could be more challenging). If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.

 

As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly. This is exactly the opposite of what happened when short-term interest rates skyrocketed in the late 1970s: people then wanted to delay making payments as long as possible and to collect payments as quickly as possible. Some corporations chose to write checks on remote banks (to delay collection as long as possible), and consumers learned to cash checks quickly, even if that meant more trips to the bank, and to demand direct deposits. However, if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers. Such a reversal could impose novel burdens on payment systems that have evolved in an environment of positive interest rates.

 

Conclusion

 

The take-away from this post is that if interest rates go negative, we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation. Financial service providers are likely to find their products and services being used in volumes and ways not previously anticipated, and regulators may find that private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants.

So who is the the source of the above critical warning about the coming global NIRP, which clearly neither ther Bank of Japan, nor the ECB, nor the SNB, nor the Sveriges Riksbank nor the Danmarks Nationalbank read?

Who Warned "Be Careful What You Wish For... If Interest Rates Go Negative"

The answer: the Federal Reserve. And this time, they will not be able to say "we never saw it coming..."

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Yen Cross's picture

  gold banks. Reserves will be held in banks backed by gold.

Scooby Dooby Doo's picture

Who Warned "Be Careful What You Wish For... If Interest Rates Go Negative"

SCOOBY DID. HA ha. Scooby time!

rbg81's picture

The Powers-that-Be want interest rates to go negative for a variety of reasons.  One is to get people to spend their $$ NOW, vs. putting in the bank where it will lose value.  In the mid-long term, this will discourage savings and make everyone MOAR dependent on the Government.  

But the #1 reason is to allow the Govenment to make $$ off its debt.  This will set the stage for an unprecedented round of helicopter $$, much of which will be used to import tens to hundreds of millions of voters (e.g, immigrants).  Why?  Because:  1) immigrants need to buy everything -- which is GREAT for business, 2) they will eagerly vote for Socialism -- giving politicians more power over the means of production & distribution, 3) they will replace all the old/dying/troublesome White people, and 4) they couldn't give a shit about the Constitution.

Dead Canary's picture

Yea! Those white people. They gotta go.

HidingInMontana's picture

Any ideas on how non-interest bearing checiking accounts would be treated in a NIRP environment?

KingTut's picture

Yeah, your balance decays exponentially.

jcaz's picture

Naw, it would actually out-yield an interest bearing (or in this case an interest-decaying) account-

Works great- at least until the inevitable imbalance causes the currency to be worthless,  then not so much.....

Until then, keep as much as that cash as you can physical, cause one way or another, your bank will figure out how to abuse your checking account....

Chad_the_short_seller's picture

Wait, we just raised rates I thought?????

Eireann go Brach's picture

They need to stop peddling fried chicken and watermelon fiction he said to chewbacca!

lordbyroniv's picture

This is why I love collectibles and Warhols.

FU Nazis !

Scooby Dooby Doo's picture

I love trinkets!

FY Nazi pigs!

flyonmywall's picture

Hey, time to have the bank pay me for the priviledge of being their mortgage customer !

 

ReignDeer's picture

This is the end... beautiful friend...

 

 

All these ideas are insane. The world as we known it has ended.

 

 

It's time.https://www.youtube.com/watch?v=qvhSaIh02dA

sun tzu's picture

Banks don't need deposits anymore. They are merely degenerate gamblers at the roulette wheel known as Wall Street. 

Kaiser Sousa's picture

Apmex order placed thursday and on its way...

that is all.

DEATH TO THE MONEYCHANGERS.

Scooby Dooby Doo's picture

Ban the plebs access to cash bitchez. Fuck 'em!

--NellenzNurplez

Spiritof42's picture

NIRP or no NIRP, I don't trust banks. I synchronize my outgoing payments within days of deposit.

NoMoJackboots's picture

AKA living paycheck to paycheck...........

FilthyPhil37's picture

Living pay check to pay check is just a rational reaction intended to gain a First Movers advantage on all future people.

Janet Shalom Bernanke's picture

This step is fully necessary to finish-off the Yen and Japan's economy.

Glad it happened sooner, rather than later.

Will enjoy watching Japan's people in the streets revolting once their currency crashes and burns.

Kuroda will need a bunker.

 

ah-ooog-ah's picture

there is no joy.  all that is to come, is sorrow

Scooby Dooby Doo's picture

Yen Cross on the way out? I hope they slip it in to him easily.

trueFacts's picture

...as long as deflation is more negative than NIRP, the yield remains positive.  but we are heading into the FED end game, mass deflationary collapse, so equity holders and junior bondholders get zilch, ...senior bondholders get all the farms, oil wells, and factories, which are the only things of value.  workers and equity investors (pensioners) become serfs.  FED wins and owns the whole shabang.

two hoots's picture

So along with cash they also rid the system of all paper; certified checks, money orders, personal checks etc?  Just 0/1s nothing else. 

There won’t be any tables to turn over. Thieves after jewelry, PMs, art.  No cash, no guns, kinda scary?

Dr. Bonzo's picture

Pretty simple. First negative rates. Next bank runs. Next collapse. Fucking genius. Bring it. Let's get the shitstorm started. 8 years of this bullshit already. Let's go. End game. I have a fucking life to live. Cunts.

Atomizer's picture

Thanks Patricia Routledge. Between United Kingdom and United States.. it's a farce. Thank you for providing countless hours of humor. 11 years ago, pushed in a old relic of Keeping up with Appearances. She was in tears laughing. I'm still Richard and she is you. One of my favorite scenes is the indoor /outdoor luxury barbecue with car filled with plants. I lived that episode, many times. 

It's time to renew etiquette. My great grandmother, grandmother, and mother would have loved your character teaching. Sure, the producers did a good job in retaining moral support. Fuck the liberal media. 

Patricia Routledge 80th birthday on Richard and ...

farmboy's picture

Negative rates in the US will kill the money market funds. That is how the 2008 crises got on steam.

Atomizer's picture

Thank you Patricia and BBC. We enjoyed the entire crew. Look at the fucking smut cable shows today. Sicking. You have too pay a TV license to watch this shit. 

 

Atomizer's picture

One of your American nutters downvoted. A Bernie Sanders Socialist. 

Margaret Thatcher on Socialism - YouTube

Sanity Bear's picture

Socially unproductive but individually beneficial financial innovation, huh? Hoocoodanode?

ZombieHuntclub's picture

"If" interest rates go negative?

Since1929's picture

So, as a recent gold cherry popper (staring at my first ounce), would this imply a gold standard would have to be or tend to be implemented?  Seems beneficial to hold gold and silver bullion for storage and (relative) stability barring fluctuation?  I mean ok, you have a risk of fluctuation vs. the real downside of being charged interest.

Or maybe (really) big players could still manipulate to their advantage?

 

 

honestann's picture

Much ado about nothing.  Convert everything you have into physical gold and silver bars/coins/rounds.  Then sleep well, and let morons suffer the consequences.