We’re slowly but surely growing more accustomed to a weirder and weirder financial world.
Governments across Europe of varying degrees of creditworthiness are now being paid by investors for the privilege of lending to them.
And investors aren’t just paying to lend money to people who can print their own currencies (or at least ask a friendly central bank to do so) to pay them back.
They’re paying to lend money to companies as well. They’re paying money to take on credit risk.
What madness will be next? Well, if the mood music is anything to go by, negative interest rates could soon be coming to a high street bank near you…
How you might get rid of the banks without really trying
Yesterday, NatWest became the first British bank to warn that it might impose negative interest rates on depositors. In other words, it would charge them for holding their money.
We’ve seen negative interest rates imposed in countries across Europe. There’s even one small private bank in Switzerland – Alternative Bank Schweiz – that charges all of its customers, not just business ones, a negative interest rate of at least 0.125%.
But this is happening in countries that already have negative interest rates. It’s interesting to see the country’s premier taxpayer-owned bank (NatWest is part of nationalised treasure RBS) preparing the ground for charging its customers when UK rates are still (just) positive.
For now, it’s just a warning to business customers. And it’s tentative: “Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances.”
But it’s a worrying signal about the way things are going.
I do find it intriguing too that the Bank of England has very recently published a research paper outlining the benefits of a central bank-issued digital currency, such as bitcoin.
I mean, given the choice between paying to hold your money with a high street bank, or holding a highly convenient digital alternative at 0% interest (and maybe even incorporating some form of tax rebate incentive in the early days) with the safest bank in Britain – which would you opt for?
Central-bank controlled digital currency could wipe out cash
A central-bank issued digital currency could effectively wipe out the banking system as we know it. Why would you hold a deposit with a private bank – one that could conceivably go bust, and take most of your money with it or leave you reliant on an underfunded deposit insurance scheme – when you could hold any amount of money at all with the central bank?
And what if the new digital central bank money didn’t charge any fees? What if interest rates globally turned so negative that the idea of providing profitable free private banking services was impossible?
You wouldn’t even have to ban commercial banks. You just set up a monopoly provider with a huge competitive advantage over them. As Peter Stella, formerly of the International Monetary Fund, tells the Wall Street Journal: “I don’t see how banks could compete”.
Eventually, everyone chooses to use the central-bank controlled digital currency. At that point, as with the phasing out of cheques, you declare that all that dirty printed money is going to be gradually taken out of circulation, and after a while you declare that it’s no longer legal tender, to catch all the mattress hoarders.
And then – well, you can do what you want. Consumers failing to spend enough? Charge negative rates on their digital holdings. Or credit all of their bank accounts with a printed £1,000. Choice is yours.
You’d still have a black market, of course. But one with a lot more friction costs than before. It’s hard for your plumber to massage his VAT bill if every payment is recorded digitally. And no doubt unofficial barter and competitor currencies would arise. But that relies on people being willing to accept them.
That’s a vision of a world where a quite disturbing amount of control is centralised into one powerful entity under the guise of technological progress. Something to think about.
If it sounds concerning to you (it does to me), my colleague Tim Price has been particularly vocal on the subject of negative interest rates and the scrapping of cash – you should catch up with his thoughts in the London Investment Alert
.