Negative interest rates and what it means

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December 18th, 2016 at 6:57:59 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 765
Posts: 9037
I think that Cesspit's comments are interesting. In 1981 the 50 pound note was only worth about US$100 (today it is roughly $63) and the 20 pound note was worth about $40.

Circulation of 50 pound note in millions of pieces
Mar 20, 1981 introduced
Feb 28, 1982 5.48
Feb 28, 1983 12.66
Feb 29, 1984 18.18
Feb 28, 1985 21.78
Feb 28, 1986 24.66
Feb 28, 1987 29.50
Feb 29, 1988 35.10
Feb 28, 1989 41.08
Feb 28, 1990 45.84
Feb 28, 1991 47.50
Feb 29, 1992 50.30
Feb 28, 1993 54.64
Feb 28, 1994 57.68
Apr 20, 1994 Houbloun 50 pound banknote introduced
Sep 20, 1996 Wren banknote demonetized

Quote: TheCesspit
Nope the Wren was what I saw bundles over in the builders hands. By 1994 I was studying and seeing a fifty was like seeing unicorn poor.

So despite the relatively small number of banknotes (for a population of roughly 60 million), Cesspit remembers them as common in an industry that prefers cash.

The idea of cash is very powerful. If the federal governments pull out of cash, then private industry or banks will step back in and provide the equivalent.
November 26th, 2017 at 2:40:21 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 765
Posts: 9037
It looks like negative interest rates once adopted are difficult to shake. Ten years ago a negative interest rate by a central bank was only a concept. In sweden the repo-rate varied from +1.50% to 4.75% from 2000 to 2011

Traditional economic theory holds that people will convert bank accounts into cash without the inducement of earning interest.

The Swedish Riksbank deposit rate is the rate of interest banks receive when they deposit funds in their accounts at the Riksbank overnight and is normally 0.75 percentage points lower than the repo rate.

The deposit rate dropped to zero percent on December 18, 2013 only two weeks before the 1000 - kronor Vasa banknotes without foil (~$120) became invalid.Seven months later the deposit rate went from zero to negative and is forecast to remain zero or below at least seven years.

Forecast for the repo rate by Swedish Central Bank
2017 Q 3 -0.50%
2017 Q 4 -0.50%
2018 Q 1 -0.50%
2018 Q 4 -0.27%
2019 Q 4 +0.24%
2020 Q 4 +0.75% -> deposit rate is zero.

The suspicion became widespread that the huge reduction in circulation levels of banknotes (50% from 2007 to 2016) is related to monetary policy. Under the best of circumstances banks consider cash a money losing proposition, but with negative interest rates it becomes a severe liability.
November 26th, 2017 at 6:48:29 PM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 18
Posts: 2431
Quote: Pacomartin
Under the best of circumstances banks consider cash a money losing proposition, but with negative interest rates it becomes a severe liability.
Banks may not like the inconvenience of cash, but I would think they would hate Bitcoin cutting them entirely out of the loop? Banks did fine under the cash system, with fees on everything money.
Everyone gets thrown from the plane to maintain altitude
November 26th, 2017 at 7:52:02 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 765
Posts: 9037
Quote: petroglyph
Banks may not like the inconvenience of cash, but I would think they would hate Bitcoin cutting them entirely out of the loop?

Bitcoin is not really a threat to banks. It is not a real replacement for cash for many reasons. One is the energy requirement. Another is that the miners can get drawn away to work for a different crypto currency which is paying better (as happened 3 months ago). Transaction speed can drop from minutes to hours.

Quote: petroglyph
Banks did fine under the cash system, with fees on everything money.


The so called "cash system" is very dependent on interest rates.

In Sweden up until December 2013 commercial banks could deposit cash overnight with the central bank and earn interest. The Swedish deposit rate is defined as the rate of interest commercial banks receive when they deposit funds in their accounts at the Central bank overnight. The deposit rate dropped to zero percent on December 18, 2013 .

When the deposit rate went negative that meant that the commercial banks had to pay a fee. Handling of cash went from reasonable to the point where the commercial bank simply couldn't charge enough fees to make it profitable. Although cash in circulation was already dropping, the rate began accelerating.

Commercial banks keep almost no money in their offices and they won't do any cash transactions with the tellers (not even deposits).

Year Swedish krona per capita - USD equivalent using end of year exchange rates- Percent of cash in 1000kr banknote
2007 12,494 kr $1,948 34.0%
2008 12,130 kr $1,553 30.6%
2009 11,681 kr $1,641 28.7%
2010 11,106 kr $1,655 27.3%
2011 10,515 kr $1,527 25.2%
2012 10,059 kr $1,547 22.3%
2013 8,849 kr $1,378 11.4%
2014 8,578 kr $1,109 7.4%
2015 7,362 kr $872 5.8%
2016 6,242 kr $689 5.3% One 1000kr banknote for every 3 people. Token circulation


In comparison in the USA at end of 2016 per capita circulation is $1089 in banknotes & coins other than the $100
$549 in $20 banknotes
$398 in $1,$2, $5, $10 and $50
$142 in coins

Banknotes and coin held by banks in the USA are $269 per capita as of the end of 2016 and went up 9.87% since 2012.
Banknotes and coin held by banks in Sweden are 670kr=$18.50 per capita as of the end of 2016 and went down 80% since 2012.
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