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Negative Interest rates and the ban on cash


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I have read a lot recently about the potential for cash to be removed from society in an effort to remove the 'zero lower bound' - the point at which people pull their cash out of the banks and put it elsewhere. The idea would be that in a cashless society, interest rates can go to negative and people can be charged to hold currency savings in an effort to force people to spend and get money flowing. On paper this should help the economy, with people spending their income and savings for services and goods as soon as they could, just to preserve their purchasing power.

I think the problem, as the banks see it, is that people are currently holding onto cash, partly because that is what people do in uncertain economic times which in itself has deflationary consequences.

If interest rates do go negative, the effect should be to promote growth as people spend spend spend. In theory. The problem with this, as I see it, is that 'savers' would not spend, but simply look for alternative places to put their money. You see the other problem right now, as banks see it, is that 'cash is king' - it is the safe investment. Every other investment has more volatility and risk and so people are happy keeping their money in the bank keeping up with inflation. If savers lost this, would they go out and spend? Very unlikely in my mind.

This raises two questions I need other peoples opinion on;

Which asset do we think would benefit the most from people fleeing currency? Would it be Stocks? Bonds? Property? PM's? Bitcoin?

As the need for non digital transactions would remain in society, what would people use to transact with in place of physical paper currency?

This is all just theory/speculation at this point, and by no means going to happen, but any thoughts would be appreciated.

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We already have a problem with young men at the twilight of society, a cashless society will push more people outside the banking system completely only using it for the essentials eg paying tax.

Remember cash was supposed to be a a representation of something stored (Gold or Silver) in the central bank, it is now not backed by anything so not worth anything apart from confidence! When the con out of confidence is outed the population (sheep) will panic and the game is over.    

I would expect a minority of the population at first would put there money into Gold silver art etc, pockets of  barter systems would soon start up using food or Gold Silver wood anything of value this would then expand as the population realizes they are better off not using the banking system. The authorities would clamp down making any bartering a crime, but with so many people using bartering a tally system may start this is slightly different where a contract is drawn between parties.

Be warned the media will be on board if it happens and I think it will be done by baby steps.   

    

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Yeah I thought that some people would revert to using barter if cash is taken away. Individual to individual basis anyway. That would undoubtedly involve gold and silver for physical transactions. I wonder if the next step would be to ban those?

Something will always be needed to transact physically though, so as a consequence of banning cash the banking system and its currency would be replaced at a local level by something they can't control. If they ban one thing, another will take its place. In other words, a cashless society only serves to undermine the banks interests over the long term.  

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I don't think there would be much bartering.  If I needed funds for something I would sell my sov to someone/a dealer who would transfer funds to me digitally then I would spend those funds immediately.  

You would think pms would be in high demand in a cashless society though.

 

There are plans to bring in those plastic notes soon though so I think cashless is way off.

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People are very adaptable. If you take away their cash and charge them to keep money in the bank, they will use something else. The most liquid and fungible options would be foreign currencies, cryptocurrencies and precious metals. The government would need to ban all of those if they wanted to make a cashless/NIRP policy stick. Hopefully even the most docile of populations would baulk at that, but I suppose you never know.

Bear in mind that a negative interest rate set by the central banks (the Fed funds rate and the BoE's base interest rate) does not imply that commercial banks have to charge negative rates to customers. At the commercial level, rates will continue to be influenced by supply and demand for capital. The only direct effect would be the rate at which banks earn overnight interest by depositiing funds with the central bank.

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I think the banksters have thought about the benefits for them in going cashless and have set the plans in motion for a long term strategy, get the young used to the contactless payments now and wait for the old to die off and bring it in around 20 years time.  Of course I personally think financial disaster is coming much sooner than this so I might be wrong and it might be fast tracked a lot sooner.

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Great points thanks. There appears to be consensus that this cashless society is a long way off which I would agree with and therefore discount it as a factor to plan for, at least for the time being. 

Also I had not considered that commercial banks need to attract customers - this would really take the edge off of negative interest rates as banks would undoubtedly offer some interest to attract and keep customers. In other words, negative interest rates does not automatically result in cash being unviable as a savings vehicle. Potentially, even with negative interest rates, there would be no flight to other investments, so long as the available shelters the banks offered against negative rates were sufficient. Thanks for that one Bumble. 

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One more point, Santander Bank have now increased charges to their customers from £2 to £5 per month 100,000s have signed up to this current account are now hit with a £24 increase in charges.  Please be warned using this bank, Santander have sustained heavy losses in Brazil and are in a worse position financially than RBS or the Coop.  Plus with Santander having around 20% of the UK current accounts if the bank goes bust then you will not be bailed out by the Government.     

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Doesn't the BoE cover 75k in each bank?

In nominal terms, yes. Bear in mind though, that if there were a systemic bank failure, such as nearly happened in 2008, the government would not have enough money to bail everyone out. They could, and probably would, print up some new money to cover it, but the resulting devaluation would still leave the customers out of pocket in real terms. 

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As Bumble says. Additionally, technically it is 100,000 Euro. Anymore than this and you will be part of the bail in like Cyprus.

The new norm since Dec.2014 https://www.gov.uk/government/consultations/bail-in-powers-implementation-including-draft-secondary-legislation/bail-in-powers-implementation

Currently stacking 1/4 oz (22ct) and Sovs.

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I use a Santander 123 current account as a savings account for its high interest rate, use a bit of standing order magic to keep the illusion of money flowing through it and a couple of superficial direct debits. The charges are offset by the interest and cash back. It took a bit of effort to set that up, but not as much effort as it did to earn the money saved in there - guess I had better try again with another safer bank?

Is there a safe bank? I always thought all banks would effectively be the same and the government's promise to keep peoples money safe was a false one, done to inspire false confidence, such is my cynical outlook :)

I have only considered a systemic failure, which I have hedged against, but I had best take a look at the outlook for Santander on an individual basis. I also had no idea the charge was increasing to £5 a month! Thanks for the heads up pipers.

 

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The whole point of the bank bail in agreement is to avoid a situation like last time where the taxpayer is levied for a failing bank.  The idea is now the shareholders then the patrons of a failing bank only are now levied for the funds to save it.  The problem is look how much every taxpayer had to pay for only a couple of failed banks, if that amount was only applied to the customers of those banks rather than everyone it would wipe out all their savings.

Haircut amounts of 40% are considered getting off light these days.

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It would appear that the Financial Services Compensation Scheme now guarantees the first £85,000 (€100,000 rounded to a nice number) of a single user account with a single institution (banks owned by other banks count as a single institution, so, for example, Bank of Scotland, The AA, Halifax, Saga, Intelligent Finance and Birmingham Midshires  are all part of Lloyds Banking Group), joint accounts are covered for double that amount. So if you have more than £85,000 in total in one or more single accounts with a single institution then for complete coverage under the scheme you would need to transfer the extra into a different institution.  But . . . the FSC is financed through levies on the financial institutions and the fund is pretty limited http://www.fscs.org.uk/industry/funding so just how this would (or could) be honoured in the event of a major catastrophic failure of the system is anybody's guess. The Government's bail in legislation https://www.gov.uk/government/consultations/bail-in-powers-implementation-including-draft-secondary-legislation/bail-in-powers-implementation (link from Baldy Bob's post, above) does NOT fully protect this money from the bail-in process but only gives it a preferred status over uncovered assets.

With regard to which bank is safest, Global Finance Magazine has included just three British banks in its latest Top 50 Safest Banks, HSBC, Nationwide and Barclays. Interestingly, Santander (Spain) is in tenth place!  http://www.gfmag.com/awards-rankings/best-banks-and-financial-rankings/worlds-50-safest-banks-2011, the Money Supermarket provides a table showing how British banks are rated by Moodies, Fitch and S&P, together with who owns who  http://www.moneysupermarket.com/c/news/how-safe-is-your-bank/0003043/

Clear as mud.

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Has anyone tried EuroPacific Bank? This is Peter Schiff's bank: it doesn't lend money out, so there is theoretically no risk of a bank run or a default.

The other option would be to use something like BitGold - effectively turning all your wealth into gold and spending it using a debit card.

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I like TSB and it's 5% interest. Just to add, I maintain a Negative Credit Card as in, it is in Debit not Credit, Bail In regulations do not cover Negative Credit Cards, as re-emphasised by the Bank of England 2 months ago and won't be for the very long term, I have access to ATM emergency cash within a Bail-In scenario.

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Trust and faith in banks, which ones are the safest ones? My thoughts are which ones are the least speculative but offer fair value to savers. Great point though, VW showed car makers can be just as bad as the bankers. Who can we have faith in? A few eggs in many baskets.........spread it out.

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Perversely, given that the Icelandic banks have had all their bad debts shaken out, their executives jailed, and stricter regulations imposed, they are now possibly among the safest places to have an account. But you wouldn't benefit from the deposit compensation scheme, and I'm not sure if Icelandic banks accept non-resident account holders.

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Santander Bank Gambled on Brazil to get it out of the sh-t after what has happened in Spain, and look whats happened in Brazil the country is now been classed as junk for investors. The Brazilian Government with Santander are doubling down on road building etc, this is a big gamble for Santander they are now in trouble in 2 countries Spain and Brazil.   

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