Digital currency makes negative interest rates possible, which is either exciting or terrifying depending on your view.

Nothing makes negative interest rates impossible right now, in fact it is a reality in several countries. Obviously not something that is available to most borrowers, but government bonds with negative nominal rates do exist, and even US treasury debt has negative real rates (i.e. accounting for inflation) for shorter duration notes/bills. Obviously there is a limit to how negative the rates can become -- eventually the market will find other places to invest -- but that would be equally true with digital currencies.

CBDCs enable negative nominal interest rates on cash deposits, not just on bonds.

What I don't understand is the consequences of that on private banks.

I fear there is a curious feedback loop on the horizon, where stuff like this accelerates flight into decentralized crypto which then again accelerates further regulatory scrutinity, including bans.

This is possible now, since there's a practical limit on how much business can be conducted in all cash.

Even if every bank account in the country started charging an account fee to cover negative interest rates, people would continue to use banks because they are just so damn convenient.

Most US banks on the accounts of most US people (that is, the non-wealthy) likely charge more in fees each month right now than a negative interest rate would affect the balances.

It's really only the wealthy who would be faced with this being any significant amount of money, and those people comprise a tiny minority of bank accounts.

Most banks in Switzerland have negative interest rates on large balances (over 100k or 500k CHF).

Wow. Why?

In a sense, inflation regulation is already taxing based on savings. When the value of the currency falls, everyone's savings is worth a little less (and the more one saves, the more one's relative wealth has diminished).

Which is why TIPS were created -- at maturity TIPS pay the greater of the principle adjusted for inflation or the principle without adjustment (so if there is an extended period of deflation you will still get back the amount you put in, and thus benefit from the deflation). TIPS also pay interest, and the coupon is adjusted for inflation as well.

Though this is intuitive it's not really true in a real sense because it's trivially easy to avoid this "tax". Any asset -- down to a humble CD -- will beat inflation. However, assets increasing in value also increases tax revenue due to capital gains!

1 year CD rates are currently about .65% in the US - well below inflation even if you’re talking Core CPI only.

Just looked and yeah, this is not a good moment for CDs (or high-yield savings accounts). I used to get over 1% from my Ally bank savings account. I suppose you can't beat inflation with CDs or savings accounts right now, though in a higher-interest environment you certainly could.

> in a higher-interest environment you certainly could

Maybe, maybe not - it's possible for interest rates to be high and inflation to be even higher (stagflation).

Inflation isn't a tax on savings because you're not supposed to be saving currency. You're supposed to be saving value by investing currency. That's how currency works: it retains value only for as long as necessary. Investments, on the other hand, retain value in the long run. No need to conflate the two. In fact it's a harmful narrative to try and conflate the two.

This is a pretty fundamental misunderstanding of modern economics.

>Inflation isn't a tax on savings because you're not supposed to be saving currency.

It is a tax on savings whether currency is "supposed" to be saved or not. All retail banks offer savings accounts specifically for this purpose.

It's a "tax" on un-invested capital, sure, in the same way a fine is a "tax" on undesirable behavior.

I think tax is the wrong word because a tax implies a kind of tithe on top of desirable behavior. A fine implies that you are being penalized for undesirable behavior. I think the latter is a more apt description.

Your mattress full of hundos is detrimental to the economy and you are being fined for maintaining it.

Savings accounts are not an example of unproductive capital because they collateralize loans. That's why they're not subject to the inflationary haircut. They're not particularly productive hence the low return, which may be below inflation. However, that's an ROI below benchmark, not inflation. i.e. savings accounts are just a bad investment. Bad investments will exist in any market conditions.

Personally I maintain a small cash buffer in a savings account and I pay the (small) delta between inflation and interest rate as a fee for liquidity.

Where inflation gets people is typically with wages since wages rise slowly. People with large savings are not sitting on cash. They are invested in things that typically rise right along with inflation.

Wages have kept pace with inflation according to BLS data. Thing about wages though is that they're a social issue and a fiscal policy issue, not a monetary policy issue. Had there been no inflation, wages would have stayed flat in both notional and real dollar terms. The units don't matter, the quantities do. Pointing at monetary policy because the units shifted is not actually addressing the root of the problem.