Less than no interest: charging for money

Wednesday 02 December 2015

With the introduction of negative rates, customers are paying for their own money. Does this lack of interest explain the growing interest in bitcoin?

For almost 18 months now the ECB has imposed below-zero interest rates. Euro-banks are currently charged 0.2% to hold their cash. A major aim of this policy is to make it unattractive to keep funds in a bank, therefore pushing them out of the door into the the big wide world, where they will be put to good use paying for things. In other words, negative interest rates theoretically act like inflation, stimulating an economy that’s otherwise inclined to secular stagnation, or mediocrity at best. To understand how unorthodox this policy is, consider only that it is the resort the ECB chose after several rounds of QE.

 

As a result of the ECB's deckchair-rearrangement policy, safety has been much improved

Until now, customers have largely been insulated from these charges. No more. Switzerland has a -0.75% ‘overnight’ rate, and one bank, the Alternative Bank Switzerland, has said it will start charging customers from next year. The ECB has indicated its willingness to do ‘whatever it takes’ to preserve the Euro, and it’s entirely possible that this will involve even lower interest rates.

Markets are chaotic and unpredictable, and it’s a human trait to want to find patterns and explanations. There are many possible explanations for bitcoin’s recent rise, including renewed Chinese capital controls, a Russian ponzi, and simply ‘natural’ market forces at last taking effect. But are ever-declining interest rates a piece of the puzzle?

There’s a limit to what negative interest rates can achieve, since if customers are charged too much the perceived (e.g. security) benefits of using a bank are outweighed by the cost. At that point, probably somewhere around 0.5%, they start to withdraw their money and put it under the mattress. (In fact, some banks have even kicked around the idea of abolishing physical cash to stop that happening.) And perhaps a little bit goes into other asset classes that are less vulnerable to such unilateral interference. Like bitcoin?

One thing is clear: banks are looking less and less attractive right now. There aren’t so many good reasons to keep funds in dollars or Euros or Yuan. At that point, money will flow elsewhere, in greater and greater quantities.

Discounting short-term effects like the Russian ponzi, there’s a theme that unites almost all of the suggested reasons for bitcoin’s rise. It’s the dysfunction of the existing financial system. Capital controls, poor returns, unilateral intervention. Bitcoin is not a perfect solution to these, but it has enough advantages to attract some money - and that it what it’s doing.


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