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We used to think that rates couldn't go negative for exactly the reason you just described. Turns out that assumption was wrong for a few reasons a) holding on
by dcftoapv 7y ago
We used to think that rates couldn't go negative for exactly the reason you just described.
Turns out that assumption was wrong for a few reasons a) holding onto money is expensive b) in many cases banks have incentive to hold government securities c) sometimes they are outright required to hold government securities d) this is related to (a), but there is risk in holding onto cash where government debt is in many cases perceived as risk-free.
The thought today is that rates can go only slightly negative for short periods of time, which we will continue to believe until some government tries to push the lower bound again.
- csense 7y agoSo people are willing to accept small negative rates if it would be less than the operational costs of shipping enormous truckloads of bills around, storing them, securing them, and insuring them against theft / fire? Is that's what's going on here?
- dcftoapv 7y agoThat's kind of the thought, yes. Negative rates should not be sustainable for any significant period of time and most interest rate models are built on that assumption.
- dcftoapv 7y agoSorry, I want to clarify quickly that appleiigs is right that it isn't cost of insuring cash so much as depository risk. When I say cash, I mean currency as opposed to debt/equity, not physical bills.
- xiphias2 7y agoCan you even get a significant amount of money in truckloads of bills? If you would try it, you'd be surprised how much the banks would push against it.