Will Central Banks Abolish Cash?

By Mark Nestmann

Cash has never been a popular asset with the totalitarian set. It’s difficult, if not impossible, to trace. Cash makes it possible to do business “off the books.”

For decades, with the US leading the effort, governments have engaged in a War on Cash. The original justification for this war was to fight racketeering. The War on Cash morphed into the War on Drugs, then the War on Money Laundering, and subsequently, the War on Terror.

But now, central banks and their lackey governments have a new rationale for the War on Cash: the very existence of cash makes it more difficult to enforce negative interest rates. That’s a big deal, because nearly $3 trillion worth of bonds with negative interest rates have already been issued. Incredible as it may seem, investors actually pay financially insolvent governments for the privilege of buying their bonds. Negative interest rates punish banks that fail to make loans but instead maintain reserves at a central bank. And of course, they punish savers seeking a positive return on their investment.

The European Central Bank has had negative interest rates in effect since June 2014. These rates apply to the “deposit facility rate,” which is the rate on “excess reserves” banks maintain at the ECB. Currently, that rate is -0.2%. If you’re a bank in the eurozone, your “reserves” gradually dwindle in value if you don’t lend them out. For instance, after one year at a -0.2% rate, €1 million of your reserves would only be worth €998,000.

The Danish and Swiss national banks have gone even further, with negative interest rates of -0.75%. After a year, 1 million Danish krone or Swiss francs would be worth only DKK/CHF992,500, respectively.

This policy isn’t reserved just for banks. I hold a position of Swiss francs at a domestic brokerage house. A few weeks ago, I was informed that money market holdings over CHF100,000 would now be subject to negative interest rates. I suspect this policy will gradually percolate into money market accounts for all currencies sporting negative interest rates.