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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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  • Would You Pay Your Bank To Keep Your Money? 0 comments
    Jun 18, 2014 9:47 AM

    Interest rates have been declining over the last several years to record low levels. The latest idea is to make interest rates negative. This means that you would be paying the bank interest to keep money in your account. Why would anyone do this? Isn't it better to just keep money in a safety deposit box? The answer to this question is "it depends". If you are able to pay for items in cash, this would be the cheapest way to keep money versus paying someone to do it for you. On the other side of the coin (no pun intended), keeping cash is expensive if you need to safeguard it and there are restrictions for large purchases. There is also the factor of convenience for automated billing and money transfers. If you are an institution, keeping money in another institution is a given, and there are not many other options.

    There is also the idea of buying bonds that yield a negative interest rate. This sounds as absurd as the cash scenario above.(4)(5) The reasons why this is happening in Europe is to get banks to lend more money, to stop hoarding of cash and to prevent people from parking money for deposit in the Eurozone. (4) If you want people to spend money, give it to them directly and they will spend it based on human nature alone. Why should you pressure a financial institution to lend money to these same spenders? More deposits used to equal more funds available for lending. Why would you want to discourage this? If all countries did this, would the effect not cancel out much like the currency war is not succeeding in spurring trade through currency devaluation? Since the U.S. is issuing negative interest bonds, the "retaliation" has already started. (5) We are moving from a currency war to a war on cash, where banks actually don't want deposits and are discouraging them.

    These actions make sense as long as you assume that the system has to stay the way it is. Maybe the issue is that the system does not have to stay the way it is, and it is actually begging to be reformed. The bigger question to ask is: Why are these policies being implemented and what other solutions are there?

    Sources:

    1) http://news.goldseek.com/GoldSeek/1402940810.php

    2) http://www.ft.com/intl/cms/s/0/dfa5ee7c-e08e-11df-abc1-00144feabdc0.html

    3) http://www.cnbc.com/id/46223259

    4) http://paymentweek.com/2014-6-11-eus-negative-interest-rates-coming-to-us-4878/

    5) http://www.stlouisfed.org/publications/re/articles/?id=2316

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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