Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?
Yet on savings accounts, or those accounts whose intent it is to be liquid yet remain relatively unused, could be impacted by this. Which at that point, again under your premise of robbery, a person is essentially wagering whether they would rather be guaranteed to be fleeced incrementally, or run the possibly of someday being taken for all of their savings. At that point I think you would see many people start to withdraw large amounts of savings, whether to be stored underneath a mattress or into bonds or some other investment, while still keeping an active checking account.
For my part, I already carefully manage how much I keep liquid versus invested, but anything equivalent to a fee would cause me to switch institutions or otherwise drastically change this strategy.
Since both accounts are covered by FDIC insurance [0], it seems that the only difference (unless I am missing something) lies in the rate of return, thus ceteris paribus and the checking accounts have a better rate of return compared to savings accounts. Both have real negative rates, so the situation would be an active discouragement to hold the government-managed currency in any form.
Regarding cash holdings, you are right that they are probably a bad idea. However, if numerous banks could potentially experience a crisis beyond the intervention capabilities of the Fed and Federal government, then it would probably be more sensible to move the money into cash and store it in safety deposit boxes, possibly across multiple banks. This to me seems an unlikely scenario, but not necessarily impossible.
As for transferring overseas, you now have to consider the significant added risk of currency fluctuations, which over the mid-term can easily swamp out any impact of interest rates.
The existing interbank system couldn't be used for that though, so a parallel reconciliation, netting, and transfer system would have to be set up and dealing with physical cash is fairly expensive (don't forget insurance). I wouldn't expect it unless rates go below -1% and maybe even further.
Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.
Frankly I think we need to stimulate the demand side of things -- give people free money, and don't let the banks screw it up like the subprime mortgage crisis.
That's a fiscal policy choice that would take action by Congress, and doesn't seem likely with the Congress we have.
OTOH, if people get to care enough about it, well, it is an election year, so in principal that could change.
Not necessarily. Far more likely is to encourage investments or holding cash-equivalents (bonds). Most banks are not going to engage in currency speculation merely because of a negative interest rate.
> Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.
No. That is not the goal of negative rates. The goal of negative rates is to encourage investment and spending, not to devalue the currency. The government has much more direct means for devaluing the currency if that's the goal.
Taking your money out of the banking system (as paper into a box) is extremely deflationary. In most places you'll take around 10 times more money from circulation than what you put on the box, but the US keeps this multiplier much higher.
I bet many banks when confronted with those individuals that have savings account with $200,000 cash as an emergency fund will either pull them out entirely or pay the bank for a safety deposit box.
Edit: maybe
1. No FDIC insurance (no legal impact obviously but flooding is not unheard of)
2. If you have a large amount of cash with no traceable origin, the IRS is definitely going to want to know how you came about it. Concealing the source of cash violates federal regulations.
3. I've heard many times that directly taking cash out of circulation is itself a crime, and that courts have interpreted SD boxes as such, however the only actual source I can find says that physically destroying cash (e.g. burning it) is a crime.
Given that the contents of a safe deposit boxes are not covered by FDIC insurance, I can see why it's not necessarily recommended.
Having a box with thousands of dollars in cash under your bed is, itself, an incentive to spend (specifically, on goods and services related to home security, protection of dollar bills from vermin, flooding, etc., and similar things.)
So those two things aren't opposed options.
Given the implicit costs of storing cash, a low-interest bond or investment looks better.
>As a borrower you are getting paid to borrow, thats a good incentive to go spend..
False. In deflation, cash gains in value.
0% Bank accounts
0% Mattress/Freezer
?% investments (stocks, bonds, direct to businesses)-0.3% Bank account 0% Mattress [-100%..0%] Investments
No government goes into negative rates when the times are good.