Press, Journal Article
Second, beyond central bank deposits and “safe assets,” in the euro
area, for example, household deposit rates are low but still positive
(see
Figure 2
above), meaning NIRP has yet to hit retail investors and
savers. When it does, we think savers will respond and seek out alter-
natives.
HOW LOW CAN THEY GO? IT’S UNKNOWN
So how low can
nominal
interest rates go? It’s unknown. Federal Re-
serve staff concluded in 2010 that negative rates
below -0.35% would trigger currency
hoarding among the American popu-
lation. Both the Swedish Riksbank
and SNB’s negative rate regimes have
exceeded that rate for sometime. The
ECB’s deposit rate just dipped to -0.4%.
In the short run, NIRP could go further still. Put yourself in the shoes
of a saver facing the prospect of a negative rate.What steps would you
take?
First, you could liquidate your bank account. If you withdrew a stack
of 1 million US dollars comprised of only $100 bills, your loot would
weigh 22 pounds and tower nearly 4 feet high. You’d need a large piece
of luggage to haul the cash home from the local bank branch and
probably require an entire room—or at least a large walk-in closet—
in your house for storage.
But, your problems wouldn’t end there. You’d have to hire someone to
keep an eye on the cash, count it, organize it, and insure it. It would be
subject to fire, flooding, environmental degradation. For the average
person’s wealth, this wouldn’t be much of a hassle. For anyone with a
substantial stash of cash, the problems would mount.
Not quite vault-ready with the size of your savings? You could pur-
chase gift cards as a way to “store value” (but then you are an unse-
cured creditor to a retailer). You could store value in non-cash, non-
3
STILL FLOATING ABOVE? BOTH LONG-TERM AND SHORT-TERM RATES HAVE FALLEN IN THE EUROZONE, BUT
HOUSEHOLD DEPOSIT RATES ARE STILL ABOVE ZERO
fig. 2
“NIRP” ZONE
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2012
2013
2014
2015
2016
LONG-TERM INTEREST RATES
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
2012
2013
2014
2015
2016
SHORT-TERM INTEREST RATES
European household deposit rate
Three-month Eurolibor
Germany 10-Year
Italy 10-Year
Source: Bank for International Settlements
% Yield
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LOAN EARLY!
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