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Negative Rates and Cash, possible futures.

February 18, 2016

Negative Rates and Cash, possible futures.

by Lushfun

There are several possible futures with negative rates and the “War on Cash”. Expectations that purchasing power would be contained within the financial system if Cash is eliminated is a folly. Any limit that is placed on deposit holders that prevents their use of their own resources leads to destruction of said purchasing power. Be it through a bail-in of depositor money into bank capital shortages or certain other ways. If said “War on Cash” ever succeeded it would lead to Chinese style mal-investments where funds would be stratified into non-liquid assets for the sake of controlling purchasing power in the future via natural claims. Ergo, you would buy a ton of copper even though you may not need it, because it would be more mobile if capital controls occurred, or if your bank decided to take a holiday and confiscate your savings.

All of this would not create inflation because every person and or business would go for assets that would have some intrinsic value or perceived value either for their business, liquidation, perceived liquidity, perceived transportability, and other attributes. In effect people would take higher discounts in the future through exchange of these ‘barter style’ funds in order to have more certainty in having something, rather than nothing. This would make the financial system not just insolvent if not on the brink of collapse but create a systemic market that shifts value and exchange outside of it. With banks losing the most and prevention of such a shift would be very unlikely.

Forcing capital and savings to eat negative rates long term will not be possible, even if most of this capital and savings is captured in the financial system and forced to not be convertible into physical cash. It will be shifted one way or another as discussed above.

 

Potential outcome of attempting to corral purchasing power as it is being amortized into non-performing loans will be to have no faith or backing in the system long term and every participant will be looking to get out as soon as their money clears and appear in their bank account. Ergo a perpetual bank run…

 

Negative rates will not trickle to end-users or corporations because they are a product of too much risk being in the system and too many losses taken on collateral. Margins for loans actually expand in a negative-rate environment, since banks have to ‘earn’ back their losses that they are not showing but carry on their loan books. The whole point of negative rates is to subsidize banks to earn enough capital to regain some measure of stability, so that they could perform the clearance mechanism in the financial system.

Be well dear reader, and fear not, for all things pass.

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