European News

Cash Stored in Vaults as Negative Interest Rates Spread

A new report by Finch Ratings indicates that negative interest rates are spreading rapidly. As of June 27, $11.7 trillion of sovereign debt globally was based on the purchase of bonds and other assets with negative yields. This is up by $1.3 trillion from the end of May. 

The way that this works in "normal" times is that an investor pays $95 for a bond that will pay $100 when it expires. But in today's "new normal," the demand for bonds is surging, and by the law of supply and demand, the prices of these bonds are also surging. So the investor is forced to pay $105 for the same bond that will pay only $100. That's a negative yield. 

In "normal" times, banks make money by borrowing money at low interest rates and lending it out at high interest rates. But in today's low and negative interest rate environment, it's impossible to lend it out at high interest rates, except to the riskiest borrowers, the subprime borrowers most likely to default. 

For financial institutions(including individuals) looking for a place to park their money, some of them are returning to the old days when banks stored their money in vaults. Money in a vault earns no interest, but it also doesn't lose value.

When American outlaw "Willie" Sutton was once asked why he robbed banks, he replied, "I rob banks because that's where the money is." Somewhere there may be a modern day Willie Sutton who's thinking the same thing.

DYI Comments: If interest rates go negative or zero bound basic savings will be in the form of cash, gold and silver.  Vaults will become very popular for home usage along with safety deposit boxes at the banks.  Banks will need to respond as their customers desire to hold cash so their vaults will be full.  Yep there is a new Willie Sutton first in Europe then later, IF rates go negative, here in the States.

DYI