Negative Interest: The pros and cons of banking your money

Negative Interest: The pros and cons of banking your money

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Today throughout Europe, banks are charging customers to hold deposits. Negative interest rates are in effect a bank charging its customers a storage fee, much like a safe deposit box.

Stashing your cash. (Composite image)

WASHINGTON, Sept. 24, 2015 – During the Cold War, many western European banks stored their gold in America, for, as the reasoning went, if there were a Soviet invasion, that gold would certainly be lost. In the late 1960s, the Swiss and French started asking the U.S. for their gold back, causing a run on the yellow metal.

In 1971, Richard Nixon closed the gold window.

Today throughout Europe, banks are charging customers to hold deposits. Negative interest rates are in effect a bank charging its customers a storage fee, much like a safe deposit box.

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In America, a safe deposit box is typically used to store valuable items like jewelry, gold coins, Swiss francs, important papers and such. Rent ranges from $35 to $300 per month, depending on size and location. Chase Bank in Beverly Hills is probably at the higher end of the range.

If the items in that safe deposit box lose value, it’s tough luck for the owner. But at least the owner’s physical possessions are safe − unless the Russian Army invades, of course.

German bonds (bunds) almost turned negative this past April. The European Central bank has an official deposit rate of minus .2 percent, with the three-month Euribor at minus .3 percent. The Swiss National Bank is at minus 0.75 percent.

A Serta Perfect Sleeper Pillowtop King-size mattress and box set retails for around $1,000 at Sears; stashing $100,000 in it works out to roughly 1 percent.

What all this is leading up to is this: in 2015, a major problem for individual savers and investors is that wherever and however you store your money, central bankers can always get their hands on it, vis-a-vis inflation.

In a brilliant Bloomberg Businessweek article, The Death of Cash – April 23, 2015, Peter Coy wrote, “Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save.”

Coy is on his game in the realm of central bank-watching.

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Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity involving ways to drive interest rates deeper into negative territory, possibly abolishing cash or making it depreciable.

Coy also notes that if the government can make all transactions cashless, creating a permanent electronic record that can be traced to each and every individual who buys anything, thus dispensing with the anonymity of paper money. In other words, such actions will ultimately force the underground economy into the waiting arms of Bitcoin.

The custodian of a safe deposit box is guarding the box’s contents, but not the content’s value. While a bank keeps a record of dollars held in a customer’s account, it does not safeguard the actual value of what resides in that account. Only the Federal Reserve can do that.

Money held in bank accounts is the same money that can be created by the Federal Reserve whenever and in whatever amounts it pleases, and the custodian (your bank) is a member of this system. So is that safe deposit box.

All in all, maybe negative interest rates are not so bad. Think of it this way: there are millions of people around the world who would love to hold an American passport so that they might have the “privilege” of doing their banking here, even if our own interest rates take a negative, European-style turn. If you’re an American, you’ve won the lottery because you’re already here.

If you don’t want to pay banks to hold your money, you can buy a safe and store your cash at home. Lots of people are doing this, which is why safe deposit box use is on the decline. Many also store their passports and gold coins in the same safe with their cash.

In the current world banking and economic climate and all its confusion, perhaps the safest conclusion we can make today is that the business of the Liberty Safe Corp. is, most likely, going gangbusters.

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