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I like getting interest on my savings as much as anyone, but it is kind of weird how we just expect the price of storing money to be negative. No other storage

I like getting interest on my savings as much as anyone, but it is kind of weird how we just expect the price of storing money to be negative. No other storage service works this way. I can’t put a bunch of furniture in a warehouse and not only pay nothing, but receive a percentage of the value each month. I understand why it often works this way for money, but I don’t see why this must be the natural order of things. The price of storing money in a bank will be the underlying cost of doing so, minus the proceeds the bank can make from your money, plus some profit margin. Nothing says this sum must be a positive number.

Zhenya 7y ago
This is because banks lend against their deposit value (in many multiples). So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest. So sure, they will pay you a little, so they can make a lot. At least that's how it works today.
- mikeash 7y ago
  You’re the second reply who seems to think that I have no idea how banks actually work or why they can often pay interest. Did you just skip my second paragraph, or what’s the deal?
  - Zhenya 7y ago
    I read your second paragraph. There is almost a zero-cost to storing the money and as the account size grows the cost to transact on this account per dollar of storage also approaches zero. Meanwhile the lending power of the bank multiples by large whole numbers. They aren't storing your bills or gold coins.
    - mikeash 7y ago
      Yes, costs are low, but so is the potential revenue from loans right now. I never said anything about storing bills or coins.
      - JumpCrisscross 7y ago
        > so is the potential revenue from loans right now Broader interest rates are low, too. The revenue potential for banks is limited. Particularly European ones. European banks have failed to compete for investment opportunities. Negative rates push that onus back onto savers.
    - floatingatoll 7y ago
      “Zero-cost excluding the cost of insurance” is more precise here. Bitcoin is zero-cost^ to store for any dollar amount. So are gold bars. Insuring them against theft and loss is not zero-cost. A shovel for burying gold in your yard is cheap (high capex, low opex), but if a sinkhole opens up and eats your gold, you’re probably out of luck. A hard drive for your Bitcoin is cheap (high capes, low opex), but if a lightning bolt burns your house down and you aren’t paying for offsite backups, you might be out of luck. What degree of loss do you wish to insure against (accident, damage, theft, loss) — and what percentage of your money are you willing to spend on that? ^ “I bury coins on my land” seems zero-cost, but it just means that you’re paying property tax to insure against treasure hunters uncovering your hoard with a metal detector. External costs need to be accounted for.
- JumpCrisscross 7y ago
  > So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest Sigh This is not how it works. (It’s a common misconception, however.) Loans create deposits, not the other way. Most money is created by banks, not the central bank or mint [1]. From a consumer perspective, imagining a bank as taking your $1 and lending it out five times is okay. But systemically speaking, it’s a misleading model. The truth is the bank created $5 in loans, and through that $5 in deposits. About $4 of those deposits were then spent and ended up in other banks or bank accounts as deposits. The loan always comes first. The BoE has a good primers on this [2]. [1] https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c... [2] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - numakerg 7y ago
    So the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return?
    - JumpCrisscross 7y ago
      > the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return? No. Banks compete for deposits and compete to lend. The spread between those rates must pay the bank’s costs, cover its risks and turn a profit. When central banks reduce the return on safe assets banks hold, their income from lending to the government goes down. The banks thus seek to replace that income with other lending. Unfortunately, everyone in the system is doing the same thing. This competition forces lending rates down. Savers are competing for investments next to the banks. There are lots of them crowding into bank deposits; this lets those banks lower the rate they pay. (Nobody forces savers to deposit Euros only in German banks.) This is a system of feedback loops. Nobody is charging a tax, though banks may charge a fee for a service it costs them to provide. Depositors are free to take their business elsewhere. And entrepreneurs who think they can do better are free to launch competing financial services.
19870213 7y ago
You could rent your furniture out I suppose. That's basically what we were doing with our savings, the bank can use the deposits to fund mortgages and we get some interest on our deposits from the returns on investment the bank made.
Dylan16807 7y ago
Yeah. And an important consequence is that there is a natural cap on how low rates go, as banks put their vaults to use. Also with inflation the real rate of sub-percent interest is already negative, so a below-zero rate is more psychological than anything. The difference between inflation and inflation+1 isn't transformative.
jonatron 7y ago
Physical space is expensive in many places. 64 bits of disk space is cheap everywhere.
Isinlor 7y ago
Banks are not storing money. Banks lend money. They store only some ridiculusly small amount (something like 5%?) and lend everythig else. So in case everyone wants to get they money back bank goes bankrupt, because they don't have that money. They would need to force on moment notice that money out of people they lend it to.
- mikeash 7y ago
  I’m well aware of how banks work. See my second to last sentence in which I describe how the price of storing money in a bank is set and why it can be negative. Banks are definitely storing money. They’re just not storing physical currency. They mostly store money in various financial instruments such as loans, which provides them with some revenue. If that revenue is sufficiently high, they can make all their money this way and set a negative price for their money storage services. But there’s no natural law that says the revenue potential must be that high.
- Dylan16807 7y ago
  Well either something has gone wrong with the money-lending part, so it's not making enough money to pay interest... or there's a terrible lack in competition and banks are keeping all the profits. It would be nice to blame the latter but there seems to be evidence toward the former.
abernard1 7y ago
'No other storage service works this way. I can’t put a bunch of furniture in a warehouse and not only pay nothing, but receive a percentage of the value each month.' The distinction is that your savings in a "storage" scenario are yours exclusively. That is not how it actually works. Banks lend out your "stored furniture" to get a return. Due to fractional reserve lending and the fungibility of currency, the illusion of you being able to receive your stored furniture back is preserved. But there is never actually a scenario where there are truly idle resources--capital is always utilized at some ratio, and that ratio is independent of consumer behavior. The bank is investing on behalf of their customers. As banks can only invest based upon the deposits of their customers, I think it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate. That's not "natural" either. Guaranteed checked deposits is the only reason that this swindle can occur.
- JumpCrisscross 7y ago
  > it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate You’re paying for access to a checking account, an electronic payment mechanism. Savings should be invested, not stored with banks. That’s the nudge ZIRP and negative rates provide. Forcing investment decisions into the hands of the savers over banks’ lending managers. Decentralising the economy’s pool of investing decision makers.
  - abernard1 7y ago
    I understand the nudge, but my comment was qualified by a statement that is essentially "savers are already joint investors in the operations of a bank." On principle, receiving a guaranteed negative return for providing an investor your own capital is very unnatural. With regard to fees: the only reason banks charge them is due to the fact they believe that the possible returns from low income customers will never match their cut of the investment. The fact that this interest rate also applies to high income customers exposes the "what about fees" argument. This is about incentivizing moving capital out of the safer investments that bank make (homes, relatively light personal loans, modest business loans) into equity markets. As true "savings" rates in the form of completely unallocated capital is low, my guess is this is pushing on a string.
psadri 7y ago
There is a difference - the money that’s stored in the bank is not just sitting there. It is lent out with an interest to people who need to borrow money and earns the bank an income. The banks want your deposits because it lets them earn money. To compete with one another they offer interest bearing deposit accounts.
- 345218435 7y ago
  that‘s a nice theory. what actually happens is, when you borrow money, they put the numbers into your account and the negative on their balance sheet. that‘s the basic process of money-creation in a fiat system. out of thin air. debt-based on top so that nobody ever gets away. but yeah, everybody likes to believe that the amount of money in the system represents goods and services.
shultays 7y ago
Why price of storing electronic money differs in between 1$ or 1000$ though? Only difference is a few bit flips in a bunch of databases. Generally you already pay for a fee for your account/credit card.
- mikeash 7y ago
  Fraud risk is higher, which means the cost of insurance is higher. I think this cost actually goes up more than just proportionally, too. Criminals will preferentially target higher value accounts, and they’ll make off with more when they do, so the risk increases more than linearly. In any case, not all costs are fixed.

Zhenya 7y ago

This is because banks lend against their deposit value (in many multiples). So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest. So sure, they will pay you a little, so they can make a lot. At least that's how it works today.

mikeash 7y ago
You’re the second reply who seems to think that I have no idea how banks actually work or why they can often pay interest. Did you just skip my second paragraph, or what’s the deal?
- Zhenya 7y ago
  I read your second paragraph. There is almost a zero-cost to storing the money and as the account size grows the cost to transact on this account per dollar of storage also approaches zero. Meanwhile the lending power of the bank multiples by large whole numbers. They aren't storing your bills or gold coins.
  - mikeash 7y ago
    Yes, costs are low, but so is the potential revenue from loans right now. I never said anything about storing bills or coins.
    - JumpCrisscross 7y ago
      > so is the potential revenue from loans right now Broader interest rates are low, too. The revenue potential for banks is limited. Particularly European ones. European banks have failed to compete for investment opportunities. Negative rates push that onus back onto savers.
  - floatingatoll 7y ago
    “Zero-cost excluding the cost of insurance” is more precise here. Bitcoin is zero-cost^ to store for any dollar amount. So are gold bars. Insuring them against theft and loss is not zero-cost. A shovel for burying gold in your yard is cheap (high capex, low opex), but if a sinkhole opens up and eats your gold, you’re probably out of luck. A hard drive for your Bitcoin is cheap (high capes, low opex), but if a lightning bolt burns your house down and you aren’t paying for offsite backups, you might be out of luck. What degree of loss do you wish to insure against (accident, damage, theft, loss) — and what percentage of your money are you willing to spend on that? ^ “I bury coins on my land” seems zero-cost, but it just means that you’re paying property tax to insure against treasure hunters uncovering your hoard with a metal detector. External costs need to be accounted for.
JumpCrisscross 7y ago
> So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest Sigh This is not how it works. (It’s a common misconception, however.) Loans create deposits, not the other way. Most money is created by banks, not the central bank or mint [1]. From a consumer perspective, imagining a bank as taking your $1 and lending it out five times is okay. But systemically speaking, it’s a misleading model. The truth is the bank created $5 in loans, and through that $5 in deposits. About $4 of those deposits were then spent and ended up in other banks or bank accounts as deposits. The loan always comes first. The BoE has a good primers on this [2]. [1] https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c... [2] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- numakerg 7y ago
  So the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return?
  - JumpCrisscross 7y ago
    > the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return? No. Banks compete for deposits and compete to lend. The spread between those rates must pay the bank’s costs, cover its risks and turn a profit. When central banks reduce the return on safe assets banks hold, their income from lending to the government goes down. The banks thus seek to replace that income with other lending. Unfortunately, everyone in the system is doing the same thing. This competition forces lending rates down. Savers are competing for investments next to the banks. There are lots of them crowding into bank deposits; this lets those banks lower the rate they pay. (Nobody forces savers to deposit Euros only in German banks.) This is a system of feedback loops. Nobody is charging a tax, though banks may charge a fee for a service it costs them to provide. Depositors are free to take their business elsewhere. And entrepreneurs who think they can do better are free to launch competing financial services.

19870213 7y ago

You could rent your furniture out I suppose. That's basically what we were doing with our savings, the bank can use the deposits to fund mortgages and we get some interest on our deposits from the returns on investment the bank made.

Dylan16807 7y ago

Yeah. And an important consequence is that there is a natural cap on how low rates go, as banks put their vaults to use. Also with inflation the real rate of sub-percent interest is already negative, so a below-zero rate is more psychological than anything. The difference between inflation and inflation+1 isn't transformative.

jonatron 7y ago

Physical space is expensive in many places. 64 bits of disk space is cheap everywhere.

Isinlor 7y ago

Banks are not storing money. Banks lend money. They store only some ridiculusly small amount (something like 5%?) and lend everythig else. So in case everyone wants to get they money back bank goes bankrupt, because they don't have that money. They would need to force on moment notice that money out of people they lend it to.

mikeash 7y ago
I’m well aware of how banks work. See my second to last sentence in which I describe how the price of storing money in a bank is set and why it can be negative. Banks are definitely storing money. They’re just not storing physical currency. They mostly store money in various financial instruments such as loans, which provides them with some revenue. If that revenue is sufficiently high, they can make all their money this way and set a negative price for their money storage services. But there’s no natural law that says the revenue potential must be that high.
Dylan16807 7y ago
Well either something has gone wrong with the money-lending part, so it's not making enough money to pay interest... or there's a terrible lack in competition and banks are keeping all the profits. It would be nice to blame the latter but there seems to be evidence toward the former.

abernard1 7y ago

'No other storage service works this way. I can’t put a bunch of furniture in a warehouse and not only pay nothing, but receive a percentage of the value each month.' The distinction is that your savings in a "storage" scenario are yours exclusively. That is not how it actually works. Banks lend out your "stored furniture" to get a return. Due to fractional reserve lending and the fungibility of currency, the illusion of you being able to receive your stored furniture back is preserved. But there is never actually a scenario where there are truly idle resources--capital is always utilized at some ratio, and that ratio is independent of consumer behavior. The bank is investing on behalf of their customers. As banks can only invest based upon the deposits of their customers, I think it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate. That's not "natural" either. Guaranteed checked deposits is the only reason that this swindle can occur.

JumpCrisscross 7y ago
> it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate You’re paying for access to a checking account, an electronic payment mechanism. Savings should be invested, not stored with banks. That’s the nudge ZIRP and negative rates provide. Forcing investment decisions into the hands of the savers over banks’ lending managers. Decentralising the economy’s pool of investing decision makers.
- abernard1 7y ago
  I understand the nudge, but my comment was qualified by a statement that is essentially "savers are already joint investors in the operations of a bank." On principle, receiving a guaranteed negative return for providing an investor your own capital is very unnatural. With regard to fees: the only reason banks charge them is due to the fact they believe that the possible returns from low income customers will never match their cut of the investment. The fact that this interest rate also applies to high income customers exposes the "what about fees" argument. This is about incentivizing moving capital out of the safer investments that bank make (homes, relatively light personal loans, modest business loans) into equity markets. As true "savings" rates in the form of completely unallocated capital is low, my guess is this is pushing on a string.

psadri 7y ago

There is a difference - the money that’s stored in the bank is not just sitting there. It is lent out with an interest to people who need to borrow money and earns the bank an income. The banks want your deposits because it lets them earn money. To compete with one another they offer interest bearing deposit accounts.

345218435 7y ago
that‘s a nice theory. what actually happens is, when you borrow money, they put the numbers into your account and the negative on their balance sheet. that‘s the basic process of money-creation in a fiat system. out of thin air. debt-based on top so that nobody ever gets away. but yeah, everybody likes to believe that the amount of money in the system represents goods and services.

shultays 7y ago

Why price of storing electronic money differs in between 1$ or 1000$ though? Only difference is a few bit flips in a bunch of databases. Generally you already pay for a fee for your account/credit card.

mikeash 7y ago
Fraud risk is higher, which means the cost of insurance is higher. I think this cost actually goes up more than just proportionally, too. Criminals will preferentially target higher value accounts, and they’ll make off with more when they do, so the risk increases more than linearly. In any case, not all costs are fixed.