# The criminalization of currency and the zero bound

Evan Soltas has a very good post on the surprisingly low interest rates observed in several European countries.  He points out that there are significant costs of holding currency:

But nobody really seems to have a good handle on what the new, negative lower bound might be. So how much would it actually cost, I wondered, to store \$10,000 in currency for a year?

This seems to me a decent, and admittedly entertaining, way of getting a rough estimate of a lower bound. I picked \$10,000 because it’s about twice the average balance of a savings account in the U.S., giving me a conservative estimate of the average percentage cost.

A safe deposit box at a bank seems to cost around \$100 a yearafter insurance. Then the average cost of storing currency is about 1 percent annually — maybe a bit more if you buy a safe.

Yet, rather obviously, having \$10,000 in a deposit box is not the same thing as having \$10,000 in a bank account. You can spend from your bank account using a credit card, or you can go to an ATM and withdraw cash. You can’t do the same with a safety deposit box.

How much is that convenience worth? It seems like a hard question, but we have a decent proxy for that: credit card fees, counting both those to merchants and to cardholders. That’s because the credit-card company is making exactly the same calculus as we are trying to make — how much can we charge before we make people indifferent between currency and credit cards? The data here suggest a conservative estimate is 2 percent annually.

So my rough guess is that the average depositor is probably better off keeping their money at a bank up to a nominal interest rate of -3 percent annually. (This is also what other people said, in an extremely informal poll, would be the most they would accept.) But, from an economic perspective, what we really care about is the marginal depositor — that is, who has the lowest cost of currency storage?

And here, I am at a loss. Are there are efficiencies of scale in currency storage? What does the marginal cost curve for currency storage look like?

I’ve only seen safety deposit boxes in pictures, but I’d guess they could hold considerably more than \$10,000, in packets of crisp \$100 bills.  Maybe \$100,000. On the other hand there are risks such as fire and theft, which don’t occur with T-bills.  But even those risks may be fairly low.  So I think Evan is correct to emphasize the convenience factor.  However, Paul Krugman raises some other good points:

In normal times, we invoke the convenience of money “” its extra liquidity “” to explain why people hold money at zero or at any rate low interest rates when there are other safe assets offering higher yields. We think of money demand as determined by people increasing their holdings up to the point where the opportunity cost of holding money, the interest rate on other safe assets, equals its utility from increased liquidity.

Once interest rates on safe assets are zero or lower, however, liquidity has no opportunity cost; people will saturate themselves with it. That’s why we call it a liquidity trap! And what this means is that the marginal dollar of money holdings is being held solely as a store of value “” the medium of exchange utility is irrelevant.

I like this argument, but I have a nagging feeling that Soltas must be right about the convenience factor.  I just can’t think of any other reason for the surprisingly large negative rates in Europe.  So let me throw out one other way of thinking about the vague term “convenience.”  Here are some things you should know about currency:

1.  Bringing more than \$10,000 in cash into the US triggers alarm bells at the border.

2.  Taking more than \$10,000 in cash out of a bank triggers alarm bells.  Indeed frequent cash transactions of \$5000 can be enough to trigger a report to the government, under the “know your customer” rules.

3.  If you are pulled over for a missing taillight and have an envelope with lots of cash in your car, the police in the US can seize the money.  If you’ve committed no crime and are willing to spend a lot of money on attorneys and many months of your time, you can eventually get the money back.  But it’s very costly to do so.

Just to be clear, there is no law against holding large amounts of cash in the US. But the government considers it to be a sort of quasi-crime, evidence of wrongdoing.  They strongly dislike people who deal in large amounts of currency.

Why should it matter if the government is very hostile to your behavior, as long as you’ve committed no crime?  It shouldn’t matter, but let’s not be naive.  If you are a wealthy person or a business, it’s almost impossible to go through life without breaking laws.  The tax code and other regulations are so complex that wealthy people and businesses are easy pickings for any prosecutor that wants to make his name nailing the next Michael Milken.  (Disclosure: I’ve gone through life with just one email account, and today I find out that you aren’t supposed to use your job email for personal use.  Hillary, I feel your pain.)

I may be totally off base on this, but I’d like to hear from people that work in the investment banking world.  How would your boss feel if you suddenly suggested investing billions of dollars or euros or francs in currency, and then storing this currency in hundreds of safety deposit boxes?  And suppose you justified this investment on the basis that the return would be higher than you’d earn on government debt?  I suspect the idea of all that currency would give most big institutions a queasy feeling, and would make wealthy individuals worry that the government might begin to take a very close look at their books  . . .  if you know what I mean.

What do you think?

PS.  Back in the old days it was acceptable to hold large amounts of currency, indeed banks held \$100,000 currency notes.  That was before the US government criminalized all sorts of business behavior that used to be acceptable.   Perhaps that’s why even during the worst of the Great Depression, the interest rate never went more than one or two basis points negative, if my memory is correct.

PPS.  I also recommend Alex Tabarrok’s post on the police in Ferguson, which shows that innocent low-income blacks and Hispanics also have plenty to fear from the police.  The people with the least to fear are academics, government bureaucrats, and others of that type.  No wonder they are so naive about the downside of big and powerful governments.

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45 Responses to “The criminalization of currency and the zero bound”

1. Gordon
5. March 2015 at 18:16

“Disclosure: I’ve gone through life with just one email account, and today I find out that you aren’t supposed to use your job email for personal use. Hillary, I feel your pain.”

It’s usually the use of personal email for business purposes that causes the most concern even in the private sector. While using business email for personal purposes can lead to problems, companies often mitigate the risk by adding a disclaimer to any email that leaves the entity with a statement that any views you express are your own and not the company’s views.

The use of personal email for business purposes is a very common problem in the private sector. Companies keep warning employees not to use it because of the records retention issue. But many continue to do it because the personal email is more convenient to access.

2. Derivs
5. March 2015 at 18:37

The last time I went back to the States I brought in just over 10,000 in cash in order to change for newer bills. They pulled me aside, asked me all sorts of questions, even asked me if I had ever been arrested, and pulled up my FBI report. Several times prior I had taken money from the bank in cash. Once I went to about 7 banks in order to take out about 50,000. It was not easy to get but I did not have to fill out any forms. One time prior I requested a little over 250k (fits in a normal size student type backpack) and had to fill out forms and it took 3 days in order to have it delivered to the bank. They tried charging me \$300 for the request. They waved it when I informed them I would remove my account on principal of making me pay to get back my own money. I brought it on an airplane leaving the States so I did not declare it until I was on the plane.
It is not criminal to transport more than 10,000 out of the country, it is criminal and subject to forfeiture if you do not declare it.
Stupid rules. It would be easier to take a multi-million dollar painting out of the country in a poster tube.
Yes, I was made to feel like a criminal for doing nothing wrong. I agree with you, it is a giant red flag and you better know you are clean as can be if you do it. I personally believe cash to be nothing more than a transfer mechanism and merely one of thousands of assets.
I said years ago, and I will keep saying it, the effort to make people use their cash in order to create consumption will only result in people seeking wealthy people assets (paintings, exotic cars, antiquities,…), not consumption. This is why I believed and continue to believe collectibles are an excellent investment. Unintended consequences. The wealthy bid up their own assets in a spiral… wealthy people like one thing more than anything else and it is not disposable consumption, it is their wealth!
Reminds me of the safe deposit box from the movie Marathon Man. How many pounds of diamonds can one fit in a box?

As for negative rates. Why not, if you know someone is about to buy Trillions(?) in bonds over the next months. Front run the assholes!

3. Derivs
5. March 2015 at 18:49

Hmm. If it’s the government buying the bonds, I guess as pass through accounting might define it, we are the assholes.
It amazed me in the conversations related to Krugmans inter generational payback of debt, no one commented on the fact that only half the people pay taxes. Therefore money is borrowed without consent from that half at negative, given to others, and in the future that half is the one responsible to pay themselves back. Awesome trick!
What is it you say Ray? Shut down the Fed!!!

4. Tim Cameron
5. March 2015 at 19:02

Withdrawing or carrying large amounts of cash triggers alarm bells today because there are very few reasons for a law-abiding citizen to withdraw or carry large amounts. If the nominal interest rate on deposits was below zero then there would be more of a reason to withdraw and carry cash so I daresay it would become a worse predictor of lawbreaking.

5. ssumner
5. March 2015 at 19:14

Thanks for the info Gordon.

Derivs, Very interesting story. When I was younger I knew people that carried lots of cash, and it was for completely legal activities–buying collectable cars on the spot, that sort of thing. Checks can bounce.

Yes, cash is often used for illegal activities, but it seems unfair to treat everyone holding large amounts of cash as a criminal. In other cultures like Japan, cash is even more popular.

6. Dikran
5. March 2015 at 19:15

Regarding the question of what an investment banker would suggest, the answer is not “hundreds of safety deposit boxes”. An investment banker would suggest using the services of a “custodial bank” (sometimes “custodian bank”), which is the same idea at a large scale. Thus, to get a sense for bounds on a negative rate for money in the billions, I would inquire about charges for custodial banks and insured transport of cash.

One would also expect some effort at differential pricing of interest rates by banks, so that the bound for individual depositors is lower than the rate for institutions. This second bound is probably more closely connected to the probability of theft, and the cost of a safe.

Finally, many forms of money transfer (paying your credit card bill, for example), depend in part on having cash in the bank. Of course cash can substitute for a credit card in many cases, but often it is inconvenient. Just try renting a car with cash. Some estimate of the convenience cost would be needed here.

Efforts at differential pricing would probably segregate the market according to how badly people need the relevant banking service.

I think the rate on a 5-year bond is mostly about the first case, and the rate on a checking account with a few thousand dollars is closer to the third case.

A more precise statement of the problem “what is the bound on negative nominal rates?” might be of interest in itself.

7. Ray Lopez
5. March 2015 at 19:20

A whimsical post by Sumner. It started out seriously then devolved. At least Sumner is not moderating his blog, I have just been banned by Econlog for apparently being too critical of Sumner, though I did not insult him as I sometimes do here (his disciples with their simplistic “+1!” posts have not been so banned). I have made my points exposing Sumner, and will be moving on except for an occasional lurk. You will note that Sumner has not (and will not) answer the question I posed to him (and at Econlog, where after 24 hours it was pulled): ‘where is the empirical evidence for the quantity theory of money being true in that if the Fed prints money, it can influence NGDP?’ Without this, Sumner’s theory fails. And since velocity of money drops and is unpredictable during bad times, fail it does. Anyway, I doubt the US public will ever endorse NGDPLT. At best, the Fed might adopt it as a rule of thumb, experiment with it, and see if they can raise NGDP. But Japan is the test case, not the Fed. Already Abenomics is showing to be a failure. If Japan, with massive printing of money, cannot move the needle, why should the US be different? Money is superneutral. If people don’t want to spend money, they won’t. But if you print too much money, they will panic and hyperinflation ensues. Simple.

@Derivs – serious money launderers use diamonds to transport money, since most of them are untraceable, they don’t set off metal detectors and are compact and easy to store. Not sure about your “half the people don’t pay taxes” stat but it’s true only about 33% of the US population formally contributes to GDP.

Goodbye readers. As somebody once said months ago here, Sumner has not convinced anybody of NGDPLT with his evasive and snide remarks. At best, NGDPLT is an internet meme that took off with econ bloggers due to Tyler Cowen’s promotion. As such, the “Pied Piper of Hamelin” analogy I made about Sumner is apt: he is just leading children astray, nothing more.

8. Jim S.
5. March 2015 at 19:23

Alex Tabarrok ended his blog post with a typically libertarian knock on government power. However, that the only thing that will limit the The Ferguson Kleptocracy will be the federal government. Without the federal government the Ferguson black people would be under some unrestrained Kleptocracy (actually there is a chance they would be property). Someone will always be in charge. The question is how to limit the greed of those in charge. You mentioned in one of your blogs that you liked Francis Fukuyama’s ‘End of History’. I found his ‘The Origins of Political Order’ also very good. His quick review of history showed that every government everywhere up till the late 1600’s was basically a Protection Racket, extracting wealth from the masses for the benefit of the rulers. With the birth of democratic governments the masses were able to finally have some control over the rulers. In Fukuyama’s last book ‘Political Order and Political Decay’ he talks about the institutions of government that are necessary to preserve freedom of the masses. Fukuyama does not appear to be a libertarian in his last book. Tabarrok was wrong to condemn government for ‘The Ferguson Kleptocracy’. Good government is the only thing that can stop kleptocracy.

9. Market Fiscalist
5. March 2015 at 19:47

Reading this post (and the PPS on Ferguson and Deriv’s comment) made me want to go back to being an Austrian again.

10. Njnnja
5. March 2015 at 19:53

I can’t speak for IB but at an asset manager if someone asked to generate some alpha by holding large amounts of currency they would be looked at like they had two heads. Even if you could get it by the compliance department (kyc laws) it just wouldn’t fly.

The closest analogies are probably the asset managers who physically hold gold, and since their business is more about guards and vaults than trading blotters and pnl “real” asset managers kind of look down on them. Like how an Ivy League school looks down at the southwest Illinois school of hairdressing, even though they both accept government student loan money. And there are (probably apocryphal) stories about commodities traders who forget to close out a position before maturity and have to take physical delivery of a ton of corn or something. The stories are brought up half in jest, half in warning; the point being that we do business with papers and computers, not the real world. And it’s supposed to stay that way.

11. ssumner
5. March 2015 at 19:59

Tim, Your attitude toward cash holders reminds me of the attitude of the police in Ferguson toward blacks. I have known several people who carried large amounts of cash for legitimate reasons.

Ray, You said:

“Money is superneutral. If people don’t want to spend money, they won’t.”

It’s fitting that you take leave with a comment that tells everyone that you don’t have a clue as to what the term ‘superneutrality’ means. Yes, I never succeeded in explaining NGDPLT to you, or to the raccoon that attacks my garbage cans at night. Best wishes, I’ll miss your unintentional comedy.

Jim, You said:

“However, that the only thing that will limit the The Ferguson Kleptocracy will be the federal government. Without the federal government the Ferguson black people would be under some unrestrained Kleptocracy”

I’m much less pessimistic. Whites are only 30% of the Ferguson population. It’s just a matter of time before they lose power.

You said:

“Tabarrok was wrong to condemn government for ‘The Ferguson Kleptocracy’. Good government is the only thing that can stop kleptocracy.”

Who should have have blamed, the private sector? The second sentence makes no sense. Suppose the Federal government is corrupt. The logic of your claim is that nothing can stop this, it must go one forever. Do you really believe that?

12. ssumner
5. March 2015 at 20:02

Njnnja, That’s sort of what I thought.

13. Blue Eyes
5. March 2015 at 20:12

The government could easily increase the cost of holding cash if it wanted to, by withdrawing the older notes from convertability from time to time.

Just imagine the cost of queuing up at your local bank/central bank with thousands or more to swap for newer issues!

14. Charlie
5. March 2015 at 21:28

I don’t think the marginal cash hoarder is storing \$10,000 in a safety deposit box. I think the right analogy is to gold bars. The alternative is people storing oodles of cash and vaults and trading pieces of paper that say, “_______ owns X oodles of cash in Bank of ______”

This Bloomberg article says it costs .5% to 1% to store gold in a vault: http://www.bloomberg.com/consumer-spending/2012-05-30/the-real-cost-of-owning-gold.html#slide4

I don’t know much about it, but I think that’s the right way to think about it. Why do I have to carry currency, if I can just carry and write claims to some money in a vault somewhere. Just like if money were giant stones, sometimes at the bottom of rivers. http://en.wikipedia.org/wiki/Rai_stones

15. am
5. March 2015 at 22:33

I suppose if the rates continue long enough and are negative enough then holding cash in a bank will become less attractive. There must be a value point where people just start moving out the money from the bank account and start holding it in cash. If this happens at one time there could be a new type of bank run with the cause that it is too expensive to hold money in the bank. As people monitor their statements and see deductions instead of credits then decisions will be made. But electronic payment facilities are so convenient and so part of modern life that banks will continue to have money in them. It may be less is held in bank accounts and more in cash than previously. The current situation is regarded as temporary and negative rates will soon go away and the problem with it. It is temporary question mark.

16. Vivian Darkbloom
5. March 2015 at 23:46

Another big cost of negative interest rates are the technology costs of complying with the unexpected reporting challenges, as reported by the WSJ, which compared it to Y2K:

http://www.wsj.com/articles/negative-rates-test-technology-at-european-banks-1425504420

This also caught my eye from that article:

“Every year, Sweden’s tax authorities require banks like Skandinaviska Enskilda Banken AB to report how much interest clients receive and pay. The problem is that the system that computes that data at SEB assumes interest rates are positive, and that is no longer the case in Sweden.

“Authorities told banks to treat negative interest rates as fees, but SEB spokeswoman Viveka Hirdman-Ryrberg said this may not work in practice. “How are transactions going to happen when something that is positive all of a sudden should be negative?” Ms. Hirdman-Ryrberg said.”

I suspect that Sweden treats “negative interest” much like the US would. That is, “positive interest” is taxable, but “negative interest” (treated as a fee) would be subject to significant restrictions if you want a deduction. In the US, non-business taxpayers would likely need to treat this as a “miscellaneous itemised deduction” subject to a 2 percent threshold and Pease limitations. Symmetry often does not apply when the government’s take is at stake.

17. Doug M
6. March 2015 at 01:48

The opening chapter of “Bringing Down the House” the story of the MIT blackjack team discusses the challenges of transporting \$1 million.

18. Major.Freedom
6. March 2015 at 01:48

Krugman:

“And what this means is that the marginal dollar of money holdings is being held solely as a store of value “” the medium of exchange utility is irrelevant.”

Sumner:

“I like this argument”

Why do you like wrong arguments?

To hold money for the purposes of “store of value” IS to hold money for the purposes of exchanges, namely future exchanges. The economic concept of value in a division of labor, money based society is exchange value. The term “exchange” is left out only for convenience. A short hand.

When people hold money, which you interpret as them “storing value”, why they are actually doing is accumulating exchange value.

To believe that these events are events where the medium of exchange aspect of money is “irrelevant”, is to believe that these accumulators of money have no intention to ever spend that money. But that is clearly false because to own money rather than spend it or give it away, presupposes an intention to spend it at some point. Everyone holds cash for all lengths of time for the purposes of making future exchanges, or to a lesser extent as future gifts, in which case the receivers hold it for making future exchanges, or to a lesser extent gifts, and so on.

Storing value in a division of labor, money based context means storing exchange value. Medium of exchange is certainly relevant.

19. Benjamin Cole
6. March 2015 at 05:19

And yet, as Scott Sumner knows, the amount of cash in circulation is skyrocketing!

“There was approximately \$1.34 trillion in circulation as of January 7, 2015”—The Fed.

That’s \$4,202 for every man, woman and child in the United States!

Egads! Your next-door neighbors, average family of four, have \$16k in the basement? Couple thou in shoeboxes upstairs in case they want go out on the town?

BTW, I once figured out that an attache-style briefcase holds about \$1 million (unfortunately, this was not for practical purposes, but theoretical).

So, with \$1.34 trillion in US cash out there, that works out to about 134,000 attache-cases stuffed with cash. Okay, let’s say the bad guys have only half of it. That is 67,000 attache-cases stuffed with cash.

I wonder how many cash euros are out there.

Something is off with these numbers. I have the number right, that is not what I mean. The amount of cash in circulation suggests huge underground economies.

Love the Woodrow Wilson!

I wonder if strong-built, locking attachÃ© cases are an item.

20. Derivs
6. March 2015 at 06:12

Benjamin,
Maybe you want to include stores/vendors that need cash to make change for consumers. I would think that would be a very big component.

21. Ray Lopez
6. March 2015 at 06:12

@Sumner – you think superneutrality supports NGDPLT? You are dumber than I thought. Obscurity is indeed your best weapon. Let Wikipedia teach you: http://en.wikipedia.org/wiki/Neutrality_of_money (“Many economists maintain that money neutrality is a good approximation for how the economy behaves over long periods of time but that in the short run monetary-disequilibrium theory applies, such that the nominal money supply would affect output. One argument is that prices and especially wages are sticky (because of menu costs, etc.), and cannot be adjusted immediately to an unexpected change in the money supply.”).

22. JP Koning
6. March 2015 at 06:22

Scott: “…indeed banks held \$100,000 currency notes.”

No. The \$100,000 note was issued to the Fed by the Treasury in 1934 in return for gold ounces transferred to the Treasury. They were never held by banks but used purely as an inter-governmental accounting mechanism.

23. Orn Gudmundsson Jr
6. March 2015 at 06:25

Mr. Sumner says: “I like this argument, but I have a nagging feeling that Soltas must be right about the convenience factor. I just can’t think of any other reason for the surprisingly large negative rates in Europe.”

First, I see no reason for a huge increase in the need for convenience (except as noted below) where convenience is the value (rather than the result). It certainly isn’t very convenient to bank outside your home country. Second, I see lots of good reasons that rates are negative. One, many people (especially Europeans) would rather keep money in currencies other than the dollar (the Patriot Act allows the US to monitor USD transactions, see: http://www.ted.com/talks/loretta_napoleoni_the_intricate_economics_of_terrorism/transcript?language=en -but, it is not just terrorism, also tax evasion, which is much higher in Europe). Two, cash is easier to store in Europe, especially EUR with the 500 note. Three, why would anyone keep money in a southern European bank? Easy enough to open accounts in Sweden, Germany or Switzerland. Well worth the transaction costs as cheap insurance against waking up and finding your bank is now only dishing out drachmas. All of this tracks with the low deposit bases in southern Europe, it is not just fear of bank failure (although that could be a factor, deposit insurance still exists).

24. benjamin cole
6. March 2015 at 07:25

Derivs—think it over. No. Stores take in net cash, not dispense it. Credit cards are big. The amount of cash in circ in mindboggling. Economists hate the topic btw (not Scott Sumner).

25. Ray Lopez
6. March 2015 at 09:30

@benjamin cole – I’m breaking my vow of silence, thanks to you. In fact, the large cash M0 balance is generally believed to be caused by overseas governments (like Costa Rica I believe) and others who hold cash, not due to black market (i.e. drug) economies, though that may also play a role IMO as illegal drugs are a \$100+B industry

26. Steve
6. March 2015 at 09:33

I don’t think very many individuals would stash a safe-deposit box full of cash. It isn’t just the annual fees; it’s the risk that the government would decide to start a tax case against you and order the bank to open your safe box.

More likely those who store cash rely on secret hiding places, fireproof home safes, and guns and ammo stashes. Your home has greater legal protections against unjust search and seizure than you bank.

The convenience factor of negative interest rates that Evan Soltas points to is wrong, as the 3% cc fees are assessed to the merchant rather than the consumer. In fact, I prefer to use credit cards over cash precisely because I get 1% cash back–it’s more expensive to pay cash! In instances where I get a cash discount, e.g., some gas stations, I often pay cash.

Retailers with high gross margins usually accept the 3% fee as a cost of doing business, not for convenience, but for the ability to entice large numbers of people who are living hand-to-mount into purchases with credit. If retailers could figure out how to price discriminate based on credit-by-necessity, vs credit-for-rewards, I’m sure they would.

Businesses with thin gross margins or higher default risks ofter prefer cash, and impose surcharges on or ban credit. Gas station are one example, but collectible dealers, pawn shops, and auctions are others. Of course these are precisely the types of businesses often targeted by government.

The views of asset managers and financial firms are largely normative. There’s a preference for sticking to the middle of the herd, and a reluctance to financially engineer ways around negative interest rates.

However, if negative rates become persistent, you can bet someone will test the waters and introduce a product to evade them. At that point the ball will by in the government’s court.

Consider how the Winklevii are trying to introduce a Bitcoin Trust ETF. It doesn’t take a big leap of imagination to picture a Vault Cash ETF, as an alternative to money market funds.

27. Student
6. March 2015 at 09:49

Ray, your vow of silence lasted just over an hour. haha. You should try going on a hunger strike between lunch and dinner to.

28. collin
6. March 2015 at 10:03

1) Of course, which movies do you see the safety deposit box filled with \$100 bills? Gangster! My immediate imagine is Sharon Stone and Robert Deniro in Casino locking a box up that contained ~3 – 5 million dollars. Controlling the movement of cash is a way to put barriers to crime. Also does the US government really go after that many million and billionaires?
2) Of all the causes of less crime 25 years ago, I rarely hear that near cashless societies limits how much crime pays. Back in the 1980s liquor store robberies could get away with \$300 – \$500 cash or so. Now it probably \$100 – \$200.
3) And I bet bank and stores love less cash. A lot workers ‘taking their cut’ and robbery potential.
4) Anyway, transporting lots of cash is huge problem and costs. The Simpsons, The Trouble With Trillions, proved that with Harry Truman printing a billion dollar bill, The Truman(?), and Montgomery Burns stealing for 50 years. So European could have printed its way of the Post War Economy!

29. pct
6. March 2015 at 10:45

When the price of gold started to go up, one saw a proliferation of gold mutual funds which simply held physical gold in vaults. I would expect to see analogous behavior for cash if interest rates went appreciably negative. (My guess at “appreciably” might be around -2%.)

30. Don Geddis
6. March 2015 at 11:16

@Ray Lopez: “I have just been banned by Econlog…

You ever think that it might be you? As David Letterman suggests, maybe you’re the problem.

@Student: “You should try going on a hunger strike between lunch and dinner too.

LOL!

31. Full Employment Hawk
6. March 2015 at 11:18

“If you are pulled over for a missing taillight and have an envelope with lots of cash in your car, the police in the US can seize the money. If you’ve committed no crime and are willing to spend a lot of money on attorneys and many months of your time, you can eventually get the money back. But it’s very costly to do so.”

This is a blatant violation of the constitutional provision that “No person shall be deprived of life, liberty, OR PROPERTY without due process of law.” Why have civil rights attorneys not gone all out to challenge the constitutionality of this major abuse of government power? This is something that liberals and libertarians can work on together in challenging. With the current make up of the Supreme Court there should be a good chance of having this found to be unconstitutional.

32. Njnnja
6. March 2015 at 11:28

In addition to the general harassment by law enforcement that someone holding a lot of currency would have to deal with, isn’t another problem with storing cash “under the mattress” the fact that there is not an unlimited supply of FRN’s? And if the demand for FRN’s went up at the same time that the Fed was happy with a significantly negative interest rate, couldn’t they just stop printing \$100 bills?

And since the laws of supply and demand work on just about everything, maybe the demand for \$100 bills could be so high and the supply so limited that they would be worth more than face value. Of course, this could lead to the strange effect that one would have to transfer more than \$100 (from a bank account) worth of goods to get a \$100 bill, effectively making a \$100 bill just another negative interest rate yielding financial instrument. Which is yet more justification that rates could go pretty negative because holding your wealth in sheets of paper sucks.

33. TravisV
6. March 2015 at 12:23

Is Jonathan Chait correct or incorrect about the new Rubio-Lee tax proposal?

http://nymag.com/daily/intelligencer/2015/03/fight-for-soul-of-the-gop-is-over-the-rich-won.html

34. Scott Sumner
6. March 2015 at 12:42

Vivian, Thanks for that info.

Ray, You said:

“Sumner – you think superneutrality supports NGDPLT?”

It doesn’t support of oppose anything, it’s a concept, not a person. It has nothing to do with NGDPLT, either way.

Thanks JP. Do you know the largest currency notes held by banks?

Orn, I’m afraid you lost me there. How does ease of storing cash explain negative rates?

Steve, Good comment.

Njnnja, Right now you can convert bank reserves to cash on demand. The Fed could stop that, but it would be a HIGHLY controversial decision.

35. TravisV
6. March 2015 at 12:49

Correct or incorrect:

Republican Congress: “Dear utilitarians, we agree that we should tax consumption more, but only if we also make the tax code dramatically less progressive.”

Republican Congress: “Dear utilitarians, we agree that we should increase the entry rate of high-skilled immigrants, but only if we decrease the entry rate of low-skilled immigrants.”

36. Orn Gudmundsson Jr
6. March 2015 at 15:08

Scott, on my point #2, I should have been more clear. The reason I mention the ease of storage is that since euros are so easy to store outside of institutions “convenience” of a bank account isn’t a cause of negative interest rates vs holding cash any more than normal, and is even less so in Europe (due to large bills). We are always able to see the price of convenience as part of the lending spread which I assume banks will preserve wherever rates go.

The preference cash vs negative interest is a false choice. You can open a EUR account in London or New York with at least a zero rate. Swiss Franc as well. Negative interest rates are reflecting country risk and regulatory choices and necessities.

37. benjamin cole
6. March 2015 at 16:35

Ray Lopez–There are 67,000 briefcases filled with cash in Costa Rica? Keep posting. Orthodoxy needs taunting.

38. Derivs
6. March 2015 at 17:10

“Derivs””think it over. No. Stores take in net cash, not dispense it. ”

Benjamin, are you saying then, that stores hold more cash than even I suspected?

I agree with you that stores are net recipients but would believe they Brinks it out nightly. Leaving them with operating cash. So maybe a Wal-Mart has 20 registers with \$500 in each to start the day (10k total). Then during the day they accumulate 100,000. They remove 90k but still must maintain 10k for the next day. Always holding the 10k. The 90k goes to the bank and then the consumers, by law of large numbers take back the cash from ATM machines in order that their wallets are not empty for tomorrow. That way net cash outside the banking system does not change. Or as you said, stores accumulate ALL the cash in order for money outside of the banking system to not change.

As an FYI. I had a home in Costa Rica and there are not 67,000 people that have cash. Beautiful country filled with really good people, but POOR! Now Panama, maybe, lots of money flows through there.

39. TallDave
6. March 2015 at 19:07

I just can’t think of any other reason for the surprisingly large negative rates in Europe.

If people expect the value of their currency to appreciate, then they will accept negative rates for the same reason they will not accept lower rates if they expect inflation. It’s true that the rate of return for holding cash is higher, but holding large amounts of cash is obviously improvident. It’s worth asking what the real return is on a given negative-interest loan, or (my favorite) what interest rates would be with a -20% target.

Remember, it’s not like the borrower is saying “whee, I get to borrow your money and get paid for it! free lunch!” The borrower is forced to pay back his loans in currency that is more valuable than when he borrowed.

In any case, there’s no trap here, CBs can simply inflate until expectations push yields well into the positive.

40. Ray Lopez
6. March 2015 at 21:55

Sumner: Ray, You said: “Sumner – you think superneutrality supports NGDPLT?” It doesn’t support of oppose anything, it’s a concept, not a person. It has nothing to do with NGDPLT, either way.

You can lead a horse to water… Earlier you stated money neutrality has no bearing on NGDPLT, yet SUPERneutrality surely does, and in another post you agreed. Here is that exchange (March 2):
Question for Sumner: do you adopt the clear explanation of the nexus between RGDP and NGDP provided by Don Geddis above? I repeat it: “@Ray Lopez: “why do you think NGDPLT is good?” Because nominal shocks can have real effects (due to sticky wages and debts). NGDPLT essentially eliminates nominal shocks, thus removing an important class of unnecessary economic damage.

You agreed later: (Sumner): “And yes, I agree with the italicized statement about NGDPLT.”

Now you are presented with the question of whether SUPERneutrality affects NGDPLT adversely, and you say it does NOT?? Wikipedia: “Superneutrality of money is a stronger property than neutrality of money. It holds that not only is the real economy unaffected by the level of the money supply but also that the rate of money supply growth has no effect on real variables”. Can you not connect the dots? If your IQ is not 120, nevertheless it must be greater than 80?

Then you wonder why I and others think you’re will stop at nothing to ‘win’ an argument? Typical polemical economist. Krugman, M. Rothbard, M. Friedman would be proud of you.

41. ssumner
7. March 2015 at 09:18

Travis, Good questions.

Orn, So a SF account in London is much riskier than a SF account in Zurich?

Ray, You are mixing up two unrelated questions. The ability to do NGDPLT, and the effect NGDPLT would have if done. You are just horribly confused, about everything.

42. Orn Gudmundsson Jr
8. March 2015 at 06:41

Scott, that’s exactly the point, the answer is probably not. Is having a foreign bank account more convenient in London vs Zurich? I don’t think so, not with modern communications and cheap plane travel. Did the Swiss suddenly decide they had a new preference for bank savings and emptied out their mattresses? If the money is foreign, and it probably is, then it must be tax and regulatory in nature since safety and convenience aren’t the real issue. Likely it is mostly tax dodge money, or as the Spanish call it “B” for black money. And this money can sustain substantial negative rates vs a high income tax or penalty. Moreover, consensus has been that the EUR is going down, so a lot of Europeans probably made private bets to convert money already in Zurich to SF. We all know why it was there at the start.

Convenience is solved by any bank, that this is country specific in nature (rather than merely currency specific) implies there are other reasons.

43. ssumner
8. March 2015 at 10:20

Orn, OK, but haven’t the Swiss stopped providing secret bank accounts to tax evaders?

44. Orn Gudmundsson Jr
10. March 2015 at 13:04

Scott, presume that is irony? And, if not, tax dodges don’t have to be illegal or obvious. But, what of legal ones, e.g., holding companies loaning money to subsidiaries in other countries and essentially moving the profits to different jurisdictions? Also, it is perfectly legitimate to want to diversify your holdings into different countries and have savings accounts in other places, many many Europeans (and their companies) do, it may sound exotic to Americans, but it is really quite common, especially in the upper-middle class and above..

45. ssumner
11. March 2015 at 06:31

Orn, No, not irony.