Would Negative Savings Account Interest Rates Work In The United States?

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Includes: RINF
by: Don't Quit Your Day Job

Earlier this year, we posted about negative interest rates and how there are already negative interest rates in some highly developed countries like Switzerland and Japan. Today, we're going to talk about negative savings account interest rates - and what it might mean if they come to America.

Even though negative rates don't look imminent in the United States, we wanted to muse a bit about what negative interest rates at banks would look like in America. Hey, if Ben Bernanke can write about negative rates and helicopter drops (and quote himself) and Germany has signs popping up looking like this... it's still topical.

When we talked last, we had a brief discussion about negative interest rates actually being passed along to small savers - that is, while larger accounts might already have negative interest rates posted on their accounts in some countries, only in a few instances can we find individual savings accounts with negative rates. That's where the more interesting effects begin, at least for you individuals who read our posts!

So, how about it: what if negative savings account interest rates came to America? What would it look like, and how could you avoid the worst effects on your wallet?

In a Way, We Already Have Negative Savings Account Interest Rates

The chart above shows a very interesting phenomenon - since the Great Recession, the United States has technically already featured negative interest rates for savers. Allow me to explain...

The Federal Reserve Bank of Cleveland maintains a series of market expectations for future inflation - a series which predicts that inflation over the next year will be in the low one percent area. Whether you agree with that number or not, you probably have a number in mind for how much you think inflation will be over the next 12 months.

Now, your bank account also quotes a rate over the next 12 months. Essentially, if you are predicting higher inflation over the next year than you are getting in interest on your savings account, you're already getting a negative interest rate. That's a phenomenon we wrote about (tongue-in-cheek!) in this post.

As for bank account rates... data on those don't go back as far.

We mashed up the 1-month certificate of deposit series from the Fed, with the new (since 2009) interest rate series on deposits under $100,000. It's not exact, but the CoD series is a good proxy; but feel free to tell me about the amazing savings account deals you got back in 2006. (I had a 6% savings account - I know.) If you're curious, here are the two series together before the difference graph:

Effective Negative Savings Account Interest Rates

That's Different! At Least I Get It All Back!

It's true - you do get all of your money back even if your account is paying 0% interest rates right now. That's one major difference between today and what would happen if there was a negative bank interest rate scenario.

(Now remember, all of this is theoretical: the United States hasn't seen negative rates yet. And the United States has posted higher core inflation for a couple months.)

At first, your bank would probably either eat the cost of negative interest rates or increase fees. At some point, though, one American bank will cross the rubicon and start charging negative rates. As we mentioned in our last piece, the market will probably withstand a small negative rate... bank accounts are convenient - think debit cards, bill pay, insurance, and all of the safety of outsourcing security and protection from disasters to your bank.

Alas, that won't last forever - at every rate, it will cross some marginal saver's estimation of what a bank account is actually worth.

This isn't just all just theoretical musing - note that negative rates in Japan have caused a huge uptick in the number of people buying personal safes. Assuming your cash isn't destroyed or lost or stolen, burying it in your backyard or under your mattress guarantees you a 0% savings rate. That might also mean putting it in some proxy, like gold - which, yes, Japanese citizens did before a consumption tax law change in 2014. (Note that in the United States, gold is taxed as a collectible - yes, our government already thought of that.)

Can You Just Hold Cash at Home?

In theory, yes. But as the topic of negative interest rates has come up, the idea has started to be floated that we should ban the $100 bill (and the 500 euro note). You can imagine why - the $100 is the largest denomination currently in use in the United States and lets you store the most cash in the smallest volume. This argument is quite literally the opposite side of the coin from when the US semi-seriously discussed removing small denomination coins like nickels and pennies, because the cost of seigniorage meant it costs more to make a penny than a penny can nominally buy.

Of course, the main argument was that criminals find large bills convenient. Also convenient for banks, banning large bills would make it easier to implement negative interest rates... since then you could only store $50 or $20 bills at home. (And since the EU already has seen some countries go negative, don't expect the 500 euro note to last long.)

And how much outstanding currency would banning the $100 affect?

As of September 30, 2015, $1.057 trillion out of $1.342 trillion total outstanding notes. 78.77% of outstanding bill value.

Negative Savings Account Interest Rates Can Happen In the United States

So, to summarize:

  • In theory, you could see negative interest rates even here.
  • You would probably see rates get progressively more negative, and marginal savers would react in different ways.
  • You might see moves to make it less convenient to store money at home.
  • You'll probably see further pushes to make more transactions electronic.

And that's all there is too it, really. If you are really opposed to negative rates and don't want to risk holding money at home, you can always dial up the risk slightly or work around it:

  • Money Market accounts
  • Longer-duration Government Debt or Inflation-Adjusted Securities (see TreasuryDirect.gov)
  • Corporate Debt
  • Other AAA rated sovereign debt (note, there is a FX risk)
  • Prepay longer-dated debt like mortgages
  • Overpay your taxes and get a huge tax return (oh, the irony)
  • Even riskier assets - take a pick from most other things in the world

Let us know what you think you'd do under negative savings account interest rates - prepay bills like property tax and insurance? Prepay the mortgage? Minimize the amount you leave in the bank? Decrease your withholding to zero and get a fat tax return?

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