Walking past Poundland this week, I saw a sign in the window: “Free to use cash”. Gosh, I thought, has it come to that already? Let me explain. I had been thinking about Haruhiko Kuroda introducing negative interest rates at the Bank of Japan. I’d been thinking about just how much of the bond market in Europe offers a negative yield to maturity (about 30%, UBS’s Bill O’Neill told me this week). And I had been reading an article written by one of my colleagues about what might bring negative interest rates to the UK.
So my convoluted thought process went a bit like this: when interest rates are negative – that is, you have pay the bank to keep your money in an account rather than the other way around — no one wants to have cash in the bank. Why would you want to see the nominal value of it fall every day? So it makes sense to use physical cash instead: no one has yet figured out how to take interest off actual notes and coins.
If the point of negative interest rates is to force people into spending money by taking their money away from them if they don’t, this use of real cash clearly stops the policy working particularly well. And that in turn means that our central bankers need to find ways to prevent us holding and using cash.
The obvious way is something I have written about here before – banning cash outright. But you could also make it something no one wants by perhaps putting a surcharge on using it, rather like the plastic bag charge recently introduced across the UK. You could for example insist that an extra 1p was charged on for every £1 of physical cash used.
And if you really wanted to get the nation’s cash out from under its mattresses you could make it very clear that the charge would rise to 50p over, say, a five-year period. That would have the benefit of being forward guidance that you could deliver on (a pleasant change); but it would also get most of the cash in the UK into someone’s tills pretty sharpish – and very probably give central bankers the inflation they so crave.
However, in the short term it would also give the likes of Poundland a wonderful opportunity to run an advertising campaign along the lines of “A pound is still a pound at Poundland” or “Free to use cash at Poundland.” It would cut their margins a bit too, of course, but think of the love they would win from the one-time cash hoarders (me included). So that’s where my mind was going as I processed the fine. And why I went into Poundland to investigate further. It turns out the sign actually said “Free to use cash machine here”.
You think I’m crazy. Who goes out to have their hair cut (yes, finally – thanks for all your emails on the matter) and can’t make it back without having dark visions of extreme financial repression via cash confiscation? But it isn’t crazy.
First, negative interest rates are no longer unusual – although they aren’t yet much aimed at the retail market. You have them in Switzerland, in Denmark, Sweden, in the eurozone and now in Japan. The US has stress tested for them and in the UK senior central bankers have long been discussing how they might work. They are just part of the modern banker’s toolkit — one we could easily see used here if sterling started to strengthen or if deflation really took hold (let’s not forget that mountains of government debt don’t sit well with deflation) and one I’d be amazed not to see in the US next time recession hits.
And banning cash? When I last wrote about this I told you that it would happen, but that it would be introduced as a protection against money laundering terrorism and the like. That’s not crazy. There is talk about banning the €500 note (you haven’t been able to get this at bureaux de change in the UK since 2010) and this week Germany’s deputy finance minister said that he could imagine a national limit on cash transactions of €5,000.
It has begun. When I last wrote about this – negative interest rates and a possible ban on cash – not everyone was convinced. None of this will happen, said a reader in the comments section last time I wrote about this here. If the Bank of England made interest rates negative and then banned cash “we would all move our savings out of the UK and start using dollars or euros for cash transactions.” There’d be capital flight.
Unfortunately that’s something you can only believe if you haven’t ever had good root around in a central banker’s toolbox. If you have, you’ll know what they might be reaching for next: capital controls. You think that preventing people from moving their own money around the world as and when they want is archaic nonsense?
Then think back to the UK’s own long history of capital controls. Even in the early 1960s you couldn’t buy enough foreign currency to bag a house abroad unless you could prove “good medical reason” for needing to move to the sun. And even then you were only allowed to take “reasonable provision for furniture” with you when you fled. The IMF issued a report suggesting approval of capital controls under some circumstances in 2012. A primer on the matter from the St Louis Fed is so high up the search results on Google that I can only conclude that every junior central banker in the world has recently downloaded it.
And of course several countries already have them in place (in particular, China is tightening controls in an attempt to stop its rich moving their money out). Could controls come back in the UK? That depends on what our central bank might be trying to do. Capital flight is nice if you are trying to collapse your currency to create inflation. It’s rubbish if you want to force people to spend and invest inside your own borders in order to create inflation.
So you want a bit, but not too much. Start thinking down this route (trust me, you aren’t alone) and you will soon come up with other reasons why we might see capital controls again (most forms of extreme monetary intervention eventually prompt capital flight). It may never happen – perhaps some kind of government wisdom will intervene. But I’m making a mental list of possible medical reasons why I need to be allowed to hold enough foreign currency to finance a trip to Tenerife every year. Just in case.
• This article was first published in the Financial Times