Negative interest rates redux (and pushing for "cashless society")

[Zenaan Harkness]

OK, this one's actual negative interest rates, but on deposits (vs for
loans), where you pay the bank to keep your money on deposit; this
breaks the previous assumption/ model that the minimum interest rate
can be zero %, at least for deposits, and so why not for loans as
well, i.e. pay you interest to take out a loan - perhaps trial actual
zero % loans first? :

[the article contains a graph 'growth in notes in circulation across
nations, USD, AUD, EUR, GBP, swedish KRO]

http://www.telegraph.co.uk/finance/economics/11895084/How-Swedens-negative-interest-rates-experiment-has-turned-economics-on-its-head.html
"
How Sweden's negative interest rates experiment has turned economics on its head

Nordic experimentation with sub-zero interest rates has changed the
way central bankers think about fighting recessions


It has long been believed that when it comes to interest rates, zero
is as low as you can go. Who would choose to keep their money in the
bank if they had to pay for the privilege?

But for the people who control the world’s money, this idea has
recently been thrown out of the window. Many central banks have pushed
their rates into negative territory and yet the financial system has
still to come to an abrupt end.

It is a discovery that flips on its head the conventional idea of how
authorities could respond to future economic crises; and for central
bankers, this has come as a relief.

Central bank policymakers had believed they had run out of room to
support their respective economies
http://www.telegraph.co.uk/finance/economics/11704051/The-world-is-defenseless-against-the-next-financial-crisis-warns-BIS.html
, with their interest rates held close to the floor.

 Traditionally, it was thought that if you wanted to boost the
economy, the central bank would reduce its interest rates. Normally,
the rates offered on savings accounts would follow, and people would
choose to spend more, and save less.

But there’s a limit, what economists called the “zero lower bound”.
Cut rates too deeply, and savers would end up facing negative returns.
In that case, this could encourage people to take their savings out of
the bank and hoard them in cash. This could slow, rather than boost,
the economy.

What is happening now should not – according to conventional thinking
– be possible.

As central bank rates have turned negative, the rates offered on bank
deposits have followed. Yet rather than stuffing cash under
mattresses, people have left their money in the bank or spent it.

Nowhere is the experiment with negative rates more obvious than among
Nordic central banks. Sweden – the first to dabble with negative rates
– is perhaps the prime candidate for such experimentation.

The country already has high savings rates, the third highest in the
developed world according to the OECD
http://stats.oecd.org/Index.aspx?QueryId=51648
and, despite growing at healthy rates, there appears to be plenty of
slack left in the economy to prevent an overheat.

Unemployment is unusually high for an advanced economy at more than
7pc, still well above its pre-crisis levels of sub-6pc. Crucially, the
Riksbank’s mandate suggests that such a radical experiment is
necessary. Policymakers have battled with deflation since late 2012,
and with inflation at minus 0.2pc in August, it remains well below the
central bank’s 2pc target.

To a great extent, the Riksbank’s hand has been forced by the plight
of the eurozone. A tepid recovery in the currency union has required
the European Central Bank (ECB) to bring in ever-looser policy
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0CDkQFjAEahUKEwjrrq-r9ZfIAhVH0YAKHedjAqc&url=http%3A%2F%2Fwww.telegraph.co.uk%2Ffinance%2Feconomics%2F11362087%2FECBs-quantitative-easing-programme-launched-by-Mario-Draghi.html&usg=AFQjCNFFfDvJ2aZxqgaVu85yuyEhovaBvA&sig2=0XZ_SIjTr7yxN8PsUOwL6Q&bvm=bv.103388427,d.bGg&cad=rja
.

As the ECB’s actions have weakened the euro against Sweden’s krona,
the cost of importing goods into Sweden has fallen, and weighed down
on inflation. The Riksbank has had to cut its own rates in response in
an attempt to avoid deep deflation.

 Sweden’s flexible approach to monetary policy has won it the plaudits
of leading credit ratings agency. Standard and Poor’s recently
reaffirmed the country’s triple AAA sovereign rating, remarking on the
benefits it derives from “ample monetary policy flexibility”.

Noting that the Riksbank had introduced both negative interest rates
and quantitative easing, S&P said that “should inflation rates stay
low or the krona appreciate materially, the central bank could lower
the repo rate further”.

Many City analysts believe that the Riksbank will continue cutting,
reducing its key interest rate to minus 0.5pc by the end of the year.
Switzerland’s is already deeper still, at minus 0.75pc, while Denmark
and the eurozone have joined them as members of the negative zone.

What was once thought impossible now seems something that could come
to the UK in the years to come. And even in the US, which is thought
to be just months away from an interest rate rise, the idea of
negative interest rates has gained attention.

At the most recent meeting of the Federal Open Market Committee (FOMC)
http://www.telegraph.co.uk/finance/economics/11873141/Federal-Reserve-interest-rate-hike-hopes-pushed-back-to-2016-on-China-fears.html
, which decides US interest rates, one unnamed member said that they
expected negative policy rates at the end of this year and next.

But can policymakers keep at this forever? Even if turns out that the
lower bound was not negative, economists still believe that one
exists.

Attempts to estimate the unknown vary, but the fees charged by credit
companies give some indication as to how strongly we prefer to use
cash. These can be as low as minus 3pc according to Barclays,
indicating that central bankers have much more room to slash rates.

Pension funds might be among the first to abandon banks if things get
too painful, because of what in effect can look like a tax on holding
money.

One solution is to give savers nowhere else to go. This idea was
floated by the Bank of England’s chief economist in recent weeks, who
made the case that sub-zero rates will be needed in the near future
http://www.telegraph.co.uk/finance/bank-of-england/11874061/Negative-interest-rates-could-be-necessary-to-protect-UK-economy-says-Bank-of-England-chief-economist.html
.

 Andy Haldane, a member of the Monetary Policy Committee (MPC), the
UK’s equivalent of the FOMC suggested that to achieve properly
negative rates, the abolition of cash itself might be necessary.

This is one reason why negative rates have been used in Nordic
economies, where societies are already close to cashless. Even sellers
of Sweden’s version of the Big Issue magazine - Situation Stockholm -
are able to accept payment via debit or credit card.

For the immediate future, the British obsession with cash appears to
be intensifying. The Bank of England has said that demand for
banknotes and coins outstrips total spending in the economy
http://www.telegraph.co.uk/finance/bank-of-england/11865964/The-end-of-cash-It-might-not-be-as-soon-as-you-think.html
.

Some of like to hoard it for peace of mind, while many of us hold it
for day to day transactions. And much of it is held abroad, often in
bureaux de change.

There are other - perhaps more sinister - motives to prefer
non-electronic money. Unlike the money stored on spreadsheets, cash is
almost completely untraceable. For those who value their privacy, or
who deal in prohibited goods and services, there’s no beating it.

 Last week, Charles Goodhart, a former MPC member, said that Swiss and
ECB central bankers had been “absolutely shameless” in continuing to
issue high denomination notes, printing 1,000 Swiss franc and 500 euro
bills.

These high face values notes “are there to finance the drug deals”, Mr
Goodhart said at the annual Money, Macro and Finance Conference in
London. Sir Charles Bean, also a former deputy governor at the Bank of
England, echoed Mr Goodhart’s concerns.

He said that was “all in favour of getting rid of big-denomination
notes, which are used in the black economy”. Such a move could
increase the cost of holding cash, pushing the lower bound on policy
rates even lower. Sushil Wadhwani, a former MPC member, said: “We
should make it much more expensive to hold cash.”

No politician is likely to prohibit cash entirely, at least not until
it has already all but disappeared from day to day life. Concerns
about surveillance and the power of the state are likely to grow, as
electronic money is completely traceable.

“Cash is useful for small transactions, and until it disappears
naturally, I would be loathe to say let’s outlaw it,” says Sir
Charles.
"