If the central banks eliminate cash, people will no longer need banks:
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, 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 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.
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.
It shouldn’t surprise anyone that people are willing to accept low negative interest rates. After all, banks began as institutions that charged people to hold their gold for them. It wasn’t until they began creating money by handing out multiple certificates of ownership that they needed to start paying “interest” rather than receiving “fees”.
However, banning cash will go too far; the reason people use “money” is that it is less of an annoyance than barter. In their desperate attempt to remain profitable in a deflationary environment, banks are taking the risk of rendering themselves irrelevant.