If it just goes into the cash account you're describing, it does nothing but exist, in the event of recessions this would be severely dangerous to a countries financial system because it would be the safest place to store your money, safer even than bonds, so at the exact time when the economy needs cheap credit, interest rates would rise as money drains into these electronic cash accounts.
So let's say I'm a bank with a stack of 1B in high denomination central bank notes. I calculate the rate of return as zero minus the annual cost of securing those and the annual risk that they are stolen or destroyed. Inflation isn't a factor because the bond is in the same currency. Based on your explanation that rate of return will be lower than the -0.11% that I would get from a german 30 year bond today. And there's simply nothing I can exchange those central bank notes for that would do any better than the bond.
Like OP I've never understood negative yield debt and I'm trying really hard to.
There's also the fact that bonds can appreciate, so even if on the face of it you're taking an 11bp hit that might not be true in practice.
There is no way to hold money that isn't ultimately lent to or borrowed from some other entity. You can store cash under your mattress, but even that's money that you've effectively lent to the government (the seigniorage of storing it under your mattress means that you've now given them the ability to print that same amount of money at zero extra cost).
This is harder to wrap your head around, but once you understand the principle - money is always at work, no matter what form it's in - it's a lot easier to understand the flow of money on a macro or international scale.
Yes, it can. It can't exist with the game playing that exists with most modern fiat currencies to create the illusion that they are something other than fiat of the issuing government, which creates a lot of artificial debt to create the illusion of a government constrained by the same fiscal concerns that apply to a country using commodity or foreign fiat currency rather than its own fiat.
But this is a behavioral hack to reduce the likelihood of a particular undesirable course of monetary policy (unrestrained money printing), not fundamental to the nature of fiat currency.
Money is debt. You hold something now and expect somebody else to give you something of value for it in the future. But the future is always uncertain. You may lose out on the deal by holding on to your money. But you seem to be demanding that somebody somehow should guarantee that people never do lose by holding on, no matter what. Who would that somebody be? How could that even work?
It's not so clear cut anymore. Most currencies aren't backed by anything anymore nor are they tied to any yearly returns. They've become arbitrary numbers manipulated by central banks to control the economy.
Moreover, the relative constancy of the gold supply is a problem, because as the economy grows that makes each unit of gold more valuable … which leads to deflation, which is far worse than inflation, and can lead to utter economic desolation.
I hate fiat money, I really do: I hate that governments can inflate their way out of debts and inflate away my savings. But gold — appealing as it is — is even worse.
Ultimately I agree that fiat currency is a necessary evil because of the ability to expand with the economy.
Physical cash is also debt (backed by the full faith and credit of the US government, in the case of the US, or the relevant issuer in the case of other fiat currencies).
Except it is being invested. That's a major part of the role that the government plays when interacting with the macroeconomy.
So people should be forced to invest their money beyond the extent to which holding that money inherently counts as an investment, even if they don't think any of the ventures that they directly invest in are worthwhile?
The fact that government "is debt backed by full faith and credit etc etc etc" does not answer the substance of the question I was actually asking, and which should have been clear from the context I was asking.
But your first question is much more interesting in what it seems to imply.
If i understand it correctly, the converse would be: entities are free to not invest their money when there are no worthwhile ventures.
This sounds all well and good on an individual level. But by what logic or mechanism can the ~200 countries that exist have the ability to 'hold' money and not 'invest' it?
I'm sure if government bonds were negative for a long enough time an alternative product would appear.
And the answer appears to be, because the Fed won't let them, because they are afraid it could undermine the regular banks.
Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.
* risk of physical destruction
* risk of physical theft
* risk of forgery
etc etc
There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.
Have $xx,xxx in a checking account at a national bank. It’s a database entry, not a pallet of pennies. Furthermore, with fractional reserve banking, I sincerely doubt if there’s enough coins and bills in the country to account for the total “cash” in all the accounts, let alone all the assets.
Similarly, everyone involved in these transactions have access to the same banking system. There’s no reason you need to fly a C-5 with pallets of Swiss francs around. (Even then, it seemed absurd since both governments could access Swiss banks.)
At the scales of financial infrastructure, bank deposits are not cash. They are debt issued by banks. The point of collateral is to give a bank’s word weight.
Cash is more of a general category of things that are suitable to use for similar purposes, than one specific thing.
28 since 2010.
In germany unless you're with DBAG it's not clear the government would step in and save you.
e.g. The Farmers and Merchants State Bank of Argonia with about $34M in assets.
The FDIC has stepped in as expected with all of these, I believe.
It’s disingenuous to claim that all banks are equal in terms of capabilities, assets, or risk.
Or say in the US, you'd buy that from US Bank, which isn't in the big 4 consumer, or top few commercial, and it could be let to fail.
It's still safer than a tiny bank, but it's not as safe as government bonds.
That's all it really boils down to - you pay a bit extra to get more safety.
You may be comfortable depositing $10MM in a US Bank reg D account, but I would not be.
Well actually for US Bank specifically I might because I know their business model is incredibly conservative. But replace that with another large but not big4 bank.
The true decision point isn't 0%. It's the rate for the risk/cost of holding cash.
BTW has there been any research toward what this rate actually is?
A) keep the euro notes in their vault, which only works if you deposit paper bills in the first place
B) keep electronic deposits in the ECB and pay interests to do so
In either case if they give back the money to the clients when they ask for it how do you expect them to cover their operating costs (plus the interest they are charged by the central bank in case b)?
The collateral needs to take the form of low-risk, liquid securities. Usually government bonds. Bringing a big bag full of cash to a derivatives exchange is not accepted. If you're a big financial institution, you have no choice but to buy government bonds. Even if they're negative yielding.
Since 2008, there's been a massive increase in financial regulations. Policy-makers have desperately pushed to make banks and other financial institutions less risky. That mostly means much higher capital requirements and more central clearing. In turn that means the demand for holding high-quality government has exploded.