Hold Physical Cash if Rates Go Negative?

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CoastalWinds
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Hold Physical Cash if Rates Go Negative?

Post by CoastalWinds » Tue Sep 10, 2019 7:04 pm

Trying to wrap my head around the implications of negative interest rates. If banks/bonds charged interest (ie, a negative rate) for holding assets, wouldn’t this likely cause people to start to hoard physical cash as an asset class preferential to bonds? And if so, what sort of plans have people thought of in terms of how they would actually implement this, practically speaking? A huge fire-proof vault? Bury it in the backyard?

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Cheez-It Guy
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Re: Hold Physical Cash if Rates Go Negative?

Post by Cheez-It Guy » Tue Sep 10, 2019 7:09 pm

Couldn’t you just hold money market funds instead of physical cash? They might not yield anything, but if they go negative, doesn’t that mean they “break the buck”, which could have other implications?

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CoastalWinds
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Re: Hold Physical Cash if Rates Go Negative?

Post by CoastalWinds » Tue Sep 10, 2019 7:10 pm

Cheez-It Guy wrote:
Tue Sep 10, 2019 7:09 pm
Couldn’t you just hold money market funds instead of physical cash? They might not yield anything, but if they go negative, doesn’t that mean they “break the buck”, which could have other implications?
I assume MM funds would sport a negative yield before bonds did. MM funds typically hold ultra-short term notes.

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Cheez-It Guy
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Re: Hold Physical Cash if Rates Go Negative?

Post by Cheez-It Guy » Tue Sep 10, 2019 7:17 pm

But the yield curve is inverted.

KlangFool
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Re: Hold Physical Cash if Rates Go Negative?

Post by KlangFool » Tue Sep 10, 2019 7:18 pm

OP,

Refinance your mortgage. Get the bank to pay you.

KlangFool

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dodecahedron
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Re: Hold Physical Cash if Rates Go Negative?

Post by dodecahedron » Tue Sep 10, 2019 7:21 pm

Pay estimated taxes (generously) ahead of time. Apply any tax refunds to next year´s estimated tax bill.

UpperNwGuy
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Re: Hold Physical Cash if Rates Go Negative?

Post by UpperNwGuy » Tue Sep 10, 2019 7:31 pm

Why do you think rates might go negative?

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CoastalWinds
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Re: Hold Physical Cash if Rates Go Negative?

Post by CoastalWinds » Tue Sep 10, 2019 7:34 pm

UpperNwGuy wrote:
Tue Sep 10, 2019 7:31 pm
Why do you think rates might go negative?
I’m not convinced they will (in the US; they already are overseas). I’m just thinking about the implications and potential strategies that might be used to deal with such an occurrence.

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Re: Hold Physical Cash if Rates Go Negative?

Post by nisiprius » Tue Sep 10, 2019 7:37 pm

CoastalWinds wrote:
Tue Sep 10, 2019 7:04 pm
...wouldn’t this likely cause people to start to hoard physical cash as an asset class preferential to bonds? And if so, what sort of plans have people thought of in terms of how they would actually implement this, practically speaking? A huge fire-proof vault? Bury it in the backyard?...
There are obvious ways a government could impose a negative interest rate on physical cash. India demonetized its paper money in 2016--just said your paper money would be no good after a certain date, and that you needed to exchange it at a bank for new currency with a different design. You could do the same thing, but also specify that it would cost $101 in old dollars to buy $100 in new dollars.

You could add a barcoded version of the issue date to the design, and have banks and stores scan the barcode to determine the decreasing number of dollars the bill was good for. It wouldn't be much different from a paper savings bond that has a dollar value printed on it, but has a value that changes with time. It wouldn't be anywhere near as hard as it was to transact cash in the mid 1800s, where every store had to look up the value of your cash in a "banknote reporter."

Much more easily, you could simply restrict the amount of physical cash that was easily obtainable at banks to a tiny amount, thereby forcing any significant accumulation to be made electronically in banks. This is the case in Venezuela now, and was the case in Greece in, IIRC, 2015.

Indeed, to a certain extent this happened in the US when denominations over $100 were withdrawn from circulation, in the 1960s.

And of course you could simply outlaw paper money, require all monetary transactions to be handled by means of gift cards.

None of these things are far-fetched, and I wouldn't bother to make any elaborate plans founded on a belief that the government wouldn't do any of them.
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Re: Hold Physical Cash if Rates Go Negative?

Post by Grt2bOutdoors » Tue Sep 10, 2019 7:45 pm

CoastalWinds wrote:
Tue Sep 10, 2019 7:34 pm
UpperNwGuy wrote:
Tue Sep 10, 2019 7:31 pm
Why do you think rates might go negative?
I’m not convinced they will (in the US; they already are overseas). I’m just thinking about the implications and potential strategies that might be used to deal with such an occurrence.
Buy long term fixed term nominal bonds in advance of when you think rates are going negative.
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Re: Hold Physical Cash if Rates Go Negative?

Post by goodenyou » Tue Sep 10, 2019 7:47 pm

Let me paraphrase the responses to the government's ability to devalue cash (if it come to that):

Embrace the suck.
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CoastalWinds
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Re: Hold Physical Cash if Rates Go Negative?

Post by CoastalWinds » Tue Sep 10, 2019 7:51 pm

goodenyou wrote:
Tue Sep 10, 2019 7:47 pm
Let me paraphrase the responses to the government's ability to devalue cash (if it come to that):

Embrace the suck.
Yup, sounds about right.

I know it’s all relative; long-term appreciation rates on all asset classes would come down. But I’m wondering if they would all be affected equally, or would certain assets be affected more or less? Would some even possibly “exchange positions” on the risk-reward investment spectrum?

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Re: Hold Physical Cash if Rates Go Negative?

Post by goodenyou » Tue Sep 10, 2019 7:56 pm

CoastalWinds wrote:
Tue Sep 10, 2019 7:51 pm
goodenyou wrote:
Tue Sep 10, 2019 7:47 pm
Let me paraphrase the responses to the government's ability to devalue cash (if it come to that):

Embrace the suck.
Yup, sounds about right.

I know it’s all relative; long-term appreciation rates on all asset classes would come down. But I’m wondering if they would all be affected equally, or would certain assets be affected more or less. Would done even possibly “exchange positions” on the risk-reward investment spectrum (so-to-speak)?
Tangible asset that are debt-free and cash flow will have value. Think about rental real estate in a desirable location. The ability of the players with "chip strength" to ride it out holding assets that people "need" will be handsomely rewarded in the long run.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Hold Physical Cash if Rates Go Negative?

Post by usagi » Tue Sep 10, 2019 8:26 pm

nisiprius wrote:
Tue Sep 10, 2019 7:37 pm
There are obvious ways a government could impose a negative interest rate on physical cash. India demonetized its paper money in 2016--just said your paper money would be no good after a certain date, and that you needed to exchange it at a bank for new currency with a different design. You could do the same thing, but also specify that it would cost $101 in old dollars to buy $100 in new dollars.

You could add a barcoded version of the issue date to the design, and have banks and stores scan the barcode to determine the decreasing number of dollars the bill was good for. It wouldn't be much different from a paper savings bond that has a dollar value printed on it, but has a value that changes with time. It wouldn't be anywhere near as hard as it was to transact cash in the mid 1800s, where every store had to look up the value of your cash in a "banknote reporter."

Much more easily, you could simply restrict the amount of physical cash that was easily obtainable at banks to a tiny amount, thereby forcing any significant accumulation to be made electronically in banks. This is the case in Venezuela now, and was the case in Greece in, IIRC, 2015.

Indeed, to a certain extent this happened in the US when denominations over $100 were withdrawn from circulation, in the 1960s.

And of course you could simply outlaw paper money, require all monetary transactions to be handled by means of gift cards.

None of these things are far-fetched, and I wouldn't bother to make any elaborate plans founded on a belief that the government wouldn't do any of them.
+1, and then some.

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Re: Hold Physical Cash if Rates Go Negative?

Post by retiredflyboy » Tue Sep 10, 2019 9:09 pm

Not long ago I felt I was out of step for continuing to hold my AA of bonds in a vanguard GNMA fund with intermediate duration because rates had to normalize — rise and short duration was important. Now I feel out of step because rates are going to negative and long bonds are the place to be. No body knows the direction of interest rates and a lot of money gets lost trying to prepare for what doesn’t happen. Stay the course. Don’t do something just stand there! 😀
Facts are stubborn things. Everything works until it doesn’t.

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Re: Hold Physical Cash if Rates Go Negative?

Post by KlangFool » Wed Sep 11, 2019 1:24 pm

OP,

If you are diversified, aka, always holding some amount of cash and gold, why do you need to care and worry about what happened next?

1) Cash

2) Gold

3) Fixed-rate mortgage

4) Stock

5) Bond

Diversified and be prepared. Then, it won't matter what happened next.

KlangFool

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Re: Hold Physical Cash if Rates Go Negative?

Post by catalina355 » Wed Sep 11, 2019 2:16 pm

KlangFool wrote:
Wed Sep 11, 2019 1:24 pm
OP,

If you are diversified, aka, always holding some amount of cash and gold, why do you need to care and worry about what happened next?

1) Cash

2) Gold

3) Fixed-rate mortgage

4) Stock

5) Bond

Diversified and be prepared. Then, it won't matter what happened next.

KlangFool
But which bonds? ST and IT bonds are already negative in real terms and after taxes.

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Re: Hold Physical Cash if Rates Go Negative?

Post by KlangFool » Wed Sep 11, 2019 2:25 pm

catalina355 wrote:
Wed Sep 11, 2019 2:16 pm
KlangFool wrote:
Wed Sep 11, 2019 1:24 pm
OP,

If you are diversified, aka, always holding some amount of cash and gold, why do you need to care and worry about what happened next?

1) Cash

2) Gold

3) Fixed-rate mortgage

4) Stock

5) Bond

Diversified and be prepared. Then, it won't matter what happened next.

KlangFool
But which bonds? ST and IT bonds are already negative in real terms and after taxes.
1) Total Bond Market Index fund is good enough.

2) I do not put my fixed income into the taxable account.

KlangFool

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Re: Hold Physical Cash if Rates Go Negative?

Post by MotoTrojan » Wed Sep 11, 2019 2:27 pm

Cheez-It Guy wrote:
Tue Sep 10, 2019 7:09 pm
Couldn’t you just hold money market funds instead of physical cash? They might not yield anything, but if they go negative, doesn’t that mean they “break the buck”, which could have other implications?
A money market fund could maintain it's daily value of $1 but instead of paying interest, deduct a holding-fee interest payment every month.

deikel
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Re: Hold Physical Cash if Rates Go Negative?

Post by deikel » Wed Sep 11, 2019 2:33 pm

CoastalWinds wrote:
Tue Sep 10, 2019 7:04 pm
Trying to wrap my head around the implications of negative interest rates. If banks/bonds charged interest (ie, a negative rate) for holding assets, wouldn’t this likely cause people to start to hoard physical cash as an asset class preferential to bonds? And if so, what sort of plans have people thought of in terms of how they would actually implement this, practically speaking? A huge fire-proof vault? Bury it in the backyard?
would be interesting to see how short term bond funds do with their fees - they would go negative even before the rates go negative...

But other then the technicalities, thanks to inflation, you cash basically has a negative return of -2% right now, it just shows different...

If the government has any logical say in this we will get negative rates for a while (so the government can refinance) and then a period of strong inflation (so the government debt can be shed fast)....I am waiting for the second aspect since years...
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deikel
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Re: Hold Physical Cash if Rates Go Negative?

Post by deikel » Wed Sep 11, 2019 2:36 pm

retiredflyboy wrote:
Tue Sep 10, 2019 9:09 pm
Not long ago I felt I was out of step for continuing to hold my AA of bonds in a vanguard GNMA fund with intermediate duration because rates had to normalize — rise and short duration was important. Now I feel out of step because rates are going to negative and long bonds are the place to be. No body knows the direction of interest rates and a lot of money gets lost trying to prepare for what doesn’t happen. Stay the course. Don’t do something just stand there! 😀
exactly the same here

And over the last couple months I was thinking to maybe move my money to MM funds, just to see them drop rates and my bonds go up in value...go figure.
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buylowbuyhigh
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Re: Hold Physical Cash if Rates Go Negative?

Post by buylowbuyhigh » Wed Sep 11, 2019 2:45 pm

retiredflyboy wrote:
Tue Sep 10, 2019 9:09 pm
No body knows the direction of interest rates and a lot of money gets lost trying to prepare for what doesn’t happen. Stay the course. Don’t do something just stand there! 😀
I wager several years from now this advice ends up looking the best one.

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Re: Hold Physical Cash if Rates Go Negative?

Post by goodenyou » Wed Sep 11, 2019 2:49 pm

buylowbuyhigh wrote:
Wed Sep 11, 2019 2:45 pm
retiredflyboy wrote:
Tue Sep 10, 2019 9:09 pm
No body knows the direction of interest rates and a lot of money gets lost trying to prepare for what doesn’t happen. Stay the course. Don’t do something just stand there! 😀
I wager several years from now this advice ends up looking the best one.
You can look back at old threads and the advice was the same back then.
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Re: Hold Physical Cash if Rates Go Negative?

Post by firebirdparts » Wed Sep 11, 2019 2:52 pm

CoastalWinds wrote:
Tue Sep 10, 2019 7:04 pm
Trying to wrap my head around the implications of negative interest rates. If banks/bonds charged interest (ie, a negative rate) for holding assets, wouldn’t this likely cause people to start to hoard physical cash as an asset class preferential to bonds?
I'm no economist, but I think that this brings down the world around you. So I think rather the government would (quite easily) force you to stop. They would just go on the 6 o clock news and say that $100, $50, and $20 bills would no longer be legal tender about a week from now.

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catalina355
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Re: Hold Physical Cash if Rates Go Negative?

Post by catalina355 » Wed Sep 11, 2019 3:03 pm

KlangFool wrote:
Wed Sep 11, 2019 2:25 pm
catalina355 wrote:
Wed Sep 11, 2019 2:16 pm
KlangFool wrote:
Wed Sep 11, 2019 1:24 pm
OP,

If you are diversified, aka, always holding some amount of cash and gold, why do you need to care and worry about what happened next?

1) Cash

2) Gold

3) Fixed-rate mortgage

4) Stock

5) Bond

Diversified and be prepared. Then, it won't matter what happened next.

KlangFool
But which bonds? ST and IT bonds are already negative in real terms and after taxes.
1) Total Bond Market Index fund is good enough.

2) I do not put my fixed income into the taxable account.

KlangFool
I agree with you about Total Bond in tax deferred. That is what I do. What would you do if you had to have fixed income in taxable?

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Re: Hold Physical Cash if Rates Go Negative?

Post by KlangFool » Wed Sep 11, 2019 3:28 pm

catalina355 wrote:
Wed Sep 11, 2019 3:03 pm
KlangFool wrote:
Wed Sep 11, 2019 2:25 pm
catalina355 wrote:
Wed Sep 11, 2019 2:16 pm
KlangFool wrote:
Wed Sep 11, 2019 1:24 pm
OP,

If you are diversified, aka, always holding some amount of cash and gold, why do you need to care and worry about what happened next?

1) Cash

2) Gold

3) Fixed-rate mortgage

4) Stock

5) Bond

Diversified and be prepared. Then, it won't matter what happened next.

KlangFool
But which bonds? ST and IT bonds are already negative in real terms and after taxes.
1) Total Bond Market Index fund is good enough.

2) I do not put my fixed income into the taxable account.

KlangFool
I agree with you about Total Bond in tax deferred. That is what I do. What would you do if you had to have fixed income in taxable?
I do not know. I do not have this problem.

KlangFool

bberris
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Re: Hold Physical Cash if Rates Go Negative?

Post by bberris » Wed Sep 11, 2019 3:53 pm

CoastalWinds wrote:
Tue Sep 10, 2019 7:04 pm
Trying to wrap my head around the implications of negative interest rates. If banks/bonds charged interest (ie, a negative rate) for holding assets, wouldn’t this likely cause people to start to hoard physical cash as an asset class preferential to bonds? And if so, what sort of plans have people thought of in terms of how they would actually implement this, practically speaking? A huge fire-proof vault? Bury it in the backyard?
Physical cash has costs too. I'm not just talking about a large safe deposit box. You also need an armed courier moving the money around. The money won't just sit there, you need to pay bills. Saying, "I will just hold cash if banks start charging for deposits" is not quite so simple in practice.

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Phineas J. Whoopee
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Re: Hold Physical Cash if Rates Go Negative?

Post by Phineas J. Whoopee » Wed Sep 11, 2019 4:07 pm

It's an old idea, thoroughly examined and discussed in the history of economics.
PJW

bhsince87
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Re: Hold Physical Cash if Rates Go Negative?

Post by bhsince87 » Wed Sep 11, 2019 4:15 pm

Even with negative rates on government bonds in some parts of Europe recently, banks still paid positive interest on personal accounts.
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arf30
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Re: Hold Physical Cash if Rates Go Negative?

Post by arf30 » Wed Sep 11, 2019 4:34 pm

I'm curious how the average American would react to banks deducting interest from their checking/savings accounts, I'm guessing it would be a national freak out for a few weeks until everyone gets used to it. The better online banks will probably keep their rates at zero.

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Phineas J. Whoopee
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Re: Hold Physical Cash if Rates Go Negative?

Post by Phineas J. Whoopee » Wed Sep 11, 2019 4:38 pm

arf30 wrote:
Wed Sep 11, 2019 4:34 pm
I'm curious how the average American would react to banks deducting interest from their checking/savings accounts, I'm guessing it would be a national freak out for a few weeks until everyone gets used to it. The better online banks will probably keep their rates at zero.
My speculation is retail banks in the US would introduce new or higher monthly service charges and other fees, without calling them negative interest. The cash flows, in aggregate, work out the same.

I observe the gradual reduction of banks offering free checking accounts. That means we're seeing it happen already.

PJW

Silence Dogood
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Re: Hold Physical Cash if Rates Go Negative?

Post by Silence Dogood » Wed Sep 11, 2019 6:11 pm

nisiprius wrote:
Tue Sep 10, 2019 7:37 pm
CoastalWinds wrote:
Tue Sep 10, 2019 7:04 pm
...wouldn’t this likely cause people to start to hoard physical cash as an asset class preferential to bonds? And if so, what sort of plans have people thought of in terms of how they would actually implement this, practically speaking? A huge fire-proof vault? Bury it in the backyard?...
There are obvious ways a government could impose a negative interest rate on physical cash. India demonetized its paper money in 2016--just said your paper money would be no good after a certain date, and that you needed to exchange it at a bank for new currency with a different design. You could do the same thing, but also specify that it would cost $101 in old dollars to buy $100 in new dollars.

You could add a barcoded version of the issue date to the design, and have banks and stores scan the barcode to determine the decreasing number of dollars the bill was good for. It wouldn't be much different from a paper savings bond that has a dollar value printed on it, but has a value that changes with time. It wouldn't be anywhere near as hard as it was to transact cash in the mid 1800s, where every store had to look up the value of your cash in a "banknote reporter."

Much more easily, you could simply restrict the amount of physical cash that was easily obtainable at banks to a tiny amount, thereby forcing any significant accumulation to be made electronically in banks. This is the case in Venezuela now, and was the case in Greece in, IIRC, 2015.

Indeed, to a certain extent this happened in the US when denominations over $100 were withdrawn from circulation, in the 1960s.

And of course you could simply outlaw paper money, require all monetary transactions to be handled by means of gift cards.

None of these things are far-fetched, and I wouldn't bother to make any elaborate plans founded on a belief that the government wouldn't do any of them.
According to this source, there are actually, "technically", still some $10,000 bills, $5,000 bills, and $1,000 bills "in circulation" (almost certainly all stored away as collectibles).

Anyway, inflation is making cash irrelevant. Since 1964, the dollar has lost 87.9% of its value. If you're walking around with a $100 bill in your pocket, then you have the equivalent amount as someone who was walking around with $12.08 in their pocket back in 1964.

Cash will only become more of a nuisance to deal with over time (unless the Treasury does something like what France did in 1960 and drops a couple of zeros).

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Cheez-It Guy
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Re: Hold Physical Cash if Rates Go Negative?

Post by Cheez-It Guy » Wed Sep 11, 2019 6:29 pm

MotoTrojan wrote:
Wed Sep 11, 2019 2:27 pm
A money market fund could maintain it's daily value of $1 but instead of paying interest, deduct a holding-fee interest payment every month.
Has this ever happened? I’m guessing not in the US, but I know some funds have broken the buck.

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Re: Hold Physical Cash if Rates Go Negative?

Post by Kitty Telltales » Thu Sep 12, 2019 6:43 am

bhsince87 wrote:
Wed Sep 11, 2019 4:15 pm
Even with negative rates on government bonds in some parts of Europe recently, banks still paid positive interest on personal accounts.
Yup, I still get a few euro of interest added to my bank account at the end of each year, from which they withhold some cents of tax.

staustin
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Re: Hold Physical Cash if Rates Go Negative?

Post by staustin » Thu Sep 12, 2019 7:19 am

one would be forced to consider alternative stores of value: real estate, gold, local currency international / emerging market bonds, currency shares of varying types (mrs. watanabes) etc.

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Oicuryy
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Re: Hold Physical Cash if Rates Go Negative?

Post by Oicuryy » Thu Sep 12, 2019 10:29 am

Silence Dogood wrote:
Wed Sep 11, 2019 6:11 pm
Anyway, inflation is making cash irrelevant.
But what if we are facing deflation? Negative yields, inverted yield curves and holding currency all make sense during deflation.

Ron
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nisiprius
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Re: Hold Physical Cash if Rates Go Negative?

Post by nisiprius » Thu Sep 12, 2019 10:44 am

Phineas J. Whoopee wrote:
Wed Sep 11, 2019 4:38 pm
...My speculation is retail banks in the US would introduce new or higher monthly service charges and other fees, without calling them negative interest...
Seems plausible :)

Nation's largest bank contemplates new fees for consumers if rates hit zero
Jamie Dimon, CEO of JPMorgan Chase, said bank officials have begun discussing which fees and charges it could add if interest rates slide to zero or even lower, according to the Wall Street Journal.
As for marketing, I can think of some approaches.

"Gee, Jessica, it just doesn't seem fair that everybody has to pay these same high bank fees."

"Well, Matthew, not everybody does! We bank at Bank of America with their revolutionary new Flex-Fee® system. We have a low balance so we only pay a low fee. We only pay for what we use! Here's how it works: you pay just 0.02% per day on your balance. Why, even on a $10,000 balance that's just pennies per day... OK, more than a hundred pennies, but still, pennies..."

"So do you think I should do, Jessica?"

"You should switch to a Flex-Fee® account at Bank of America, Matthew! It's where all the attractive young people bank."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Green Street
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Re: Hold Physical Cash if Rates Go Negative?

Post by Green Street » Thu Sep 12, 2019 11:04 am

Seems like opportunity is knocking. Normally hold about 10% in cash. Should get interesting over the next year or so.
Searching Through The FiRE

Silence Dogood
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Re: Hold Physical Cash if Rates Go Negative?

Post by Silence Dogood » Thu Sep 12, 2019 4:39 pm

Oicuryy wrote:
Thu Sep 12, 2019 10:29 am
Silence Dogood wrote:
Wed Sep 11, 2019 6:11 pm
Anyway, inflation is making cash irrelevant.
But what if we are facing deflation? Negative yields, inverted yield curves and holding currency all make sense during deflation.

Ron
If I were concerned about deflation, I'd probably just buy Series I Savings bonds.

Inflation is definitely making cash irrelevant. The Fed has stated that they are aiming for 2% inflation over the long-term.

I already consider coins to be a nuisance. Even at 2% inflation, it won't be long until lower denomination bills reach that status.

It's too bad, in my opinion, because cash does have its advantages.

Broken Man 1999
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Re: Hold Physical Cash if Rates Go Negative?

Post by Broken Man 1999 » Thu Sep 12, 2019 5:45 pm

No chance of us going to cash. We have only $3.07 in our joint taxable account.

Everything else is in some type of tax-deferred account (IRAs, Vanguard Variable Annuity, U.S. Savings Bonds Series I).

Anything tapped to hold cash would result in higher taxes. No thanks!

Cash is way too expensive for us to hold. Whatever we lose with even negative interest rates would be a pittance compared to actually going to cash. :shock:

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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