On February 5th 2019, there was a post on the International Monetary Fund (IMF) blog describing how negative interest rates could be implemented, extending the use of interest rates into negative figures. One month later the the headline ‘UK cash system on the verge to collapse‘ appears in the Guardian.
One of the key tools in managing economies is the ability to set interest rates, since 2008 the major economic powers have held interest rates at close to 0% to try and stimulate their economies which are still far from recovery. There are a growing number of sources such as the NY Times, Guardian and International Monetary Fund (IMF) that are speculating on the next economic downturn, when it will be and what weapons left in the arsenal we have to combat it.
The interest rates we are concerned with are used by central banks as a tool to manage a countries economy by controlling inflation. They apply to entities that hold deposits with the central banks which consist primarily of other banks but are linked to interest rates offered on retail banking accounts.
Countries have targets for economic growth and so if its currency appreciates in value (gets more valuable) then its prices will rise and it will become less competitive in international markets. If the value of the currency rises too much then it can lead to reduced economic growth and may then result in higher unemployment as businesses need to cut costs.
Lowering interest rates discourages saving which then makes more of the currency available in the market. With more supply in the market, the value of the currency is decreased.
Negative Interest Rate
So what would a negative interest rate look like? If you had a balance of 100 (choose your currency) in your bank account and your bank account had an interest rate of -3% then, after a year, that balance of 100 would become 97. There is of course a simple way to avoid this loss of wealth and that is to withdraw your balance and keep it elsewhere.
Since the 2007-2008 financial crisis, most central banks require that the other banks keep a percentage of their reserves in the central bank and so it isn’t an option for the banks to simply take their funds elsewhere. Retail customers on the other hand do have the ability to withdraw their funds and so negative interest rates have not seen it to the high street.
There have been a few instances where negative interest rates are already being used. These have been limited to interest rates set by central banks to their customers who are primarily other banks. 2014 saw the European Central Bank (ECB) cut the rate to -0.1, then further to-0.2 and in 2015 the Swiss National Bank (SNB) lowered its interest rates to -0.2.
The IMF Blog sets out a roadmap to overcome the problem of how retails banks could pass on negative interest rates to their customers and it centers on the idea of moving away from cash all together.
Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive.
With a monetary system based purely on digital payments, retail banks would have the power to start introducing negative interest rates to us, their customers, who rely on their payments networks to complete transactions. The banks would find themselves in a very lucrative position where banking is compulsory as to make ANY purchase the bank would need to facilitate the transaction.
Not only does this give the banks power to implement negative interest rates, but also monitor and selectively censor any transactions that are seen as against their terms of service.
Fact or Fiction
It might seem far fetched, but there has been a sea change in the way that purchases are made in recent years and digital payments via cash cards or online have led to a massive decline in cash transactions.
Just 1 month after the IMF blog post came out, the headline ‘UK cash system on the verge to collapse‘ appears in the Guardian and seems to point clearly towards the possibility of the move away from cash and possibility of negative interest rates for retail customers.
With commerce evermore dependent on digital payments, the need for a public payments infrastructure is all the more important. With complete control over assets belonging to customers tied into their digital networks, banks are free to use negative interest rates to skim wealth from customers and to selectively choose which transactions to allow (more on this in a later blog post).
There is a technology poised to come to the rescue in what seems like an inevitable attack on personal wealth, privacy and freedom. Bitcoin provides a viable alternative to traditional banking methods and would address some fundamental issues that are raised by a cashless society and monetary policy.
The value proposition that Bitcoin offers to businesses is growing daily.