Hoarding Cash

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BearBones
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Hoarding Cash

Post by BearBones » Sun Feb 28, 2016 7:58 pm

So I was thinking about all of the recent posts about super low or negative interest rates tonight, and I was wondering if many wealthy people in Germany, Switzerland, Japan and others are starting to hoard cash. Why earn close to zero, or even worse, lose money on a bond, especially long term, when you could just store cash? It could be a great investment in a deflationary environment, guaranteed to earn 0% and redeemable at any time in the future (assuming solvency).

But more importantly, what would be the long term effect for the monetary system if lots of people start putting a decent proportion of their net wealth as cash in safes and safe deposit boxes? Would banks (or governments) ever start limiting cash outflows?
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ochotona
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Re: Hoarding Cash

Post by ochotona » Sun Feb 28, 2016 8:18 pm

Article:

The Global Run on Physical Cash Has Begun

I'm going to buy US Savings Bonds up to the legal annual limit.
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dualstow
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Re: Hoarding Cash

Post by dualstow » Sun Feb 28, 2016 9:11 pm

ochotona wrote: Article:

The Global Run on Physical Cash Has Begun

I'm going to buy US Savings Bonds up to the legal annual limit.
My only comment is that I sensed the link was from zero hedge. Moused over it...yep!
ethnic: "pagan, heathen," Greek ethnikos ".. national," from ethnos "band of people living together, nation, people, tribe, caste,"..Earlier in English as a noun, "a heathen, pagan, one who is not a Christian or Jew" (c. 1400)
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ochotona
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Re: Hoarding Cash

Post by ochotona » Sun Feb 28, 2016 9:33 pm

The funny thing about tabloid journalism is... there is always a seed of truth in it. Back in the 2007 or so, I was seeing many really seedy, tabloidish banner ads in Yahoo! Mail soliciting investments in shale oil. Exactly the same as those "one weird trick" adds you see today for... whatever.

I asked my colleague, basically the chief geologist at the largest oilfield services firm in the world if shale oil would amount to anything, and she didn't think so. Well...

The oil shale revolution was being driven by engineers, not geologists. That's why we didn't know about it.

So sometimes things that sound outrageous and improbable stay outrageous and improbable. And sometimes they don't. I also like to follow Harry S. Dent, because he defines the outer limits of probability. Most of what he says is BS, except when it isn't.

At least if you entertain the weird and obscure, you don't get blindsided as badly by reality.

So a run on cash? Sure, why not? I went peering into the prospectus of the Charles Schwab brokerage cash sweep options, they waive management fees in order to keep the interest rate from going below 0%. They eat the fees for the benefit of their customers, because there is not enough margin to go around to pay the fees.

So if they had to "break the buck", and if my bank also had to break the buck, what would I do with non-invested funds? Just sit there and get nibbled away at?
Last edited by ochotona on Sun Feb 28, 2016 9:38 pm, edited 1 time in total.
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BearBones
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Re: Hoarding Cash

Post by BearBones » Mon Feb 29, 2016 7:41 am

ochotona wrote: So if they had to "break the buck", and if my bank also had to break the buck, what would I do with non-invested funds? Just sit there and get nibbled away at?
Right. But even in the absence of that, why would someone in Germany keep money in a "savings" account, let alone park it in a bond yielding -0.55% for a 2 year and +0.14 for a 10 year? And what would happen to the economy and financial system when/if it became the norm for people to pull large sums of cash out regularly?
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Re: Hoarding Cash

Post by Ad Orientem » Mon Feb 29, 2016 1:46 pm

For the very wealthy the logistics of holding a significant percentage of cash in physical form can be challenging. Bear in mind that most countries don't issue thousand dollar/pound/euro/franc bills anymore. Of course in the case of the PP we are cash heavy. Not only do we hold 25% in dollar denominated cash, but we also hold gold which is the ultimate form of cash.
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dualstow
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Re: Hoarding Cash

Post by dualstow » Mon Feb 29, 2016 1:59 pm

ochotona wrote: The funny thing about tabloid journalism is... there is always a seed of truth in it.
Oh, it's certainly possible that there's some truth in it. I like zerohedge.
ethnic: "pagan, heathen," Greek ethnikos ".. national," from ethnos "band of people living together, nation, people, tribe, caste,"..Earlier in English as a noun, "a heathen, pagan, one who is not a Christian or Jew" (c. 1400)
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BearBones
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Re: Hoarding Cash

Post by BearBones » Mon Feb 29, 2016 2:15 pm

Ad Orientem wrote: For the very wealthy the logistics of holding a significant percentage of cash in physical form can be challenging. Bear in mind that most countries don't issue thousand dollar/pound/euro/franc bills anymore. Of course in the case of the PP we are cash heavy. Not only do we hold 25% in dollar denominated cash, but we also hold gold which is the ultimate form of cash.
Doesn't have to be just the wealthy. Lets say citizens in Germany have an average of 20k euro (about $22k equivalent) in their local banks, and lots of people started to move cash out of accounts and in to safe deposit boxes. What would happen to banks in a fractional reserve system (I believe around 12% reserve in Germany)? I guess the government would decrease the reserve requirement to protect banks and all would be ok?
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Re: Hoarding Cash

Post by Tortoise » Mon Feb 29, 2016 4:21 pm

If a lot of people start withdrawing cash from their accounts, it seems to me like the banks would need to either (a) raise the interest rates they're offering in order to bring in more deposits, (b) reduce their lending activity in order not to violate their reserve requirements, or (c) a combination of both.

Seems like that would basically have the effect of raising interest rates and thus keeping them from going "too negative."

But maybe not, because logic often doesn't apply in the wacky Alice In Wonderland world of fractional-reserve banking.
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Re: Hoarding Cash

Post by tennpaga » Tue Mar 01, 2016 7:38 am

Dualstow posted this in a thread on the Cash board:

WSJ: Everything You Need to Know About Negative Rates
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
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Re: Hoarding Cash

Post by PP67 » Tue Mar 01, 2016 10:10 am

This may have been discussed elsewhere but it appears there is not only the a risk in keeping 25% of your assets in dollar-dominated currency or equivalent but now that "currency" is being increasingly pushed to 100% digital.  Bad for the bad guys but also bad for those who may not want to pay a bank to hold it for you if negative interest rates come to the US.  It seems akin to the risk between keeping physical gold in your possession/control and "digital" gold in the form of ETFs or GTU or other forms that you must go through the approved (and potentially government controlled) system to access.
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Re: Hoarding Cash

Post by WildAboutHarry » Tue Mar 01, 2016 3:20 pm

I am going to put my tinfoil hat on and say that if you are truly worried about the demise of paper cash, holding paper cash makes no sense.  The government could call all of it in and issue you an EBT card.  After such-and-such date, paper cash would no longer be legal tender, etc.

This is essentially what happened to silver certificates.  You could redeem a $1 silver certificate for one silver dollar, then some silver drippings, then nothing after a specified date (well, the silver certificate became the equivalent of a Federal Reserve Note).

If you want to hoard cash (and who doesn't!) hoard real US copper pennies (prior to 1982 and some 1982s) or real US nickels (ok, 75% copper, 25% nickel).  At least those have some intrinsic value over paper and in the case of the penny a metal value over face value.  Face value of a ton of real pennies, in case you are wondering, is about $3,000.

Tinfoil hat off.
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