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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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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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!
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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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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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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.
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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 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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Re: Hoarding Cash

Post by BearBones » Tue Mar 01, 2016 9:08 pm

TennPaGa wrote: Dualstow posted this in a thread on the Cash board:
WSJ: Everything You Need to Know About Negative Rates
Not a subscriber. What's the conclusion?
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Re: Hoarding Cash

Post by BearBones » Tue Mar 01, 2016 9:15 pm

WildAboutHarry wrote: 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.
I, for one, am not really as concerned about the demise of cash. More wondering what happens if their is a shortage of it when/if lots of people come to convert their digital money into paper because it is more likely to retain value. This would occur in a deflationary environment. Demise of cash (currency) altogether would seem to be more probable in a hyper inflationary environment.
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Re: Hoarding Cash

Post by WildAboutHarry » Wed Mar 02, 2016 10:23 am

[quote=BearBones]I, for one, am not really as concerned about the demise of cash. More wondering what happens if their is a shortage of it when/if lots of people come to convert their digital money into paper because it is more likely to retain value. This would occur in a deflationary environment. Demise of cash (currency) altogether would seem to be more probable in a hyper inflationary environment.[/quote]

During the Great Depression scrip was issued by a variety of entities to substitute for cash shortages (bank holiday, general lack of cash, hoarding of cash, etc.).  Atticus Finch was paid with hickory nuts in To Kill A Mockingbird.

I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
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Re: Hoarding Cash

Post by dualstow » Wed Mar 02, 2016 6:31 pm

WildAboutHarry wrote: I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
It's amazing how you can buy a $2 coffee with a credit card these days without making the clerks groan. Some places still have a $10 minimum for cards, but many don't.
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Re: Hoarding Cash

Post by BearBones » Wed Mar 02, 2016 7:14 pm

WildAboutHarry wrote: I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.
Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?
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Re: Hoarding Cash

Post by MediumTex » Wed Mar 02, 2016 7:54 pm

I'm ready for negative loan rates.

Buy a car for $20k.  60 months at -1%, and your total payments come out to around $19,000.
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Re: Hoarding Cash

Post by WildAboutHarry » Wed Mar 02, 2016 8:51 pm

[quote='BearBones']Not talking about cash going away. Just that stored in deposit accounts. [/quote]

Ok, I see the distinction.  In a negative-interest-rate world, leaving "cash" in deposit accounts paying negative interest makes no sense, and could result in a run on such deposit accounts, and a shortage of physical cash (notes and coins).

Even in that scenario I could see currency controls in the form of electronic payment systems.  Again, most of this is already in place.  All that is required is some control (like the bank holiday of old, only permanent) on cash withdrawals from deposit accounts.

Although, in the case of a physical cash shortage, wouldn't notes and coins then command a premium?
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Re: Hoarding Cash

Post by barrett » Thu Mar 03, 2016 6:51 am

BearBones wrote: Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?
I'd be curious even with the fractional system in place, how much banks actually lend out when economic activity is still kinda slow as it is now. But my guess is that large-scale cash hoarding (as in greenbacks under the mattress) would be deflationary because it would tend to slow down economic activity. Looks like there are roughly 1.2 trillion actual dollars in circulation which translates into each American holding maybe $4,000 in deposits (pulled these figures from the Internet so trust them at will). So my guess is that hoarding would be deflationary.
WildAboutHarry wrote: Although, in the case of a physical cash shortage, wouldn't notes and coins then command a premium?
Could be, but this complicates my simple analysis! ;) Although each dollar being worth more is deflationary.

Someone please slow me down!
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Re: Hoarding Cash

Post by barrett » Thu Mar 03, 2016 8:26 am

Tenn,

At a certain point though, hoarding of actual cash would have an economic impact, right? I think Bear Bones is just trying to explore what that might be. Por ejemplo, if everyone in the US had $2,000 in cash under a mattress, what would the effect be? I know we are talking about an extremely unlikely scenario but the question is interesting at least in a theoretical sense.
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Re: Hoarding Cash

Post by jafs » Thu Mar 03, 2016 9:47 am

My understanding is that your money in bank accounts isn't just sitting there, waiting for you to collect it whenever you like.  It's being used, and moved around in the system to generate income for the banks.

If that's true, and money held in deposit accounts gets low, then the banks wouldn't have that source of income, so it would definitely affect them, right?
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Re: Hoarding Cash

Post by barrett » Thu Mar 03, 2016 11:21 am

jafs wrote: My understanding is that your money in bank accounts isn't just sitting there, waiting for you to collect it whenever you like.  It's being used, and moved around in the system to generate income for the banks.

If that's true, and money held in deposit accounts gets low, then the banks wouldn't have that source of income, so it would definitely affect them, right?
My understanding is that currently they are only required to keep about 3% of your money on hand. The rest can be lent out. If you deposit $100, the bank has to keep $3 on hand and can lend out $97. If that $97 then gets redeposited with them, they've now made a loan of $97, only have to keep $5.91 on hand, and can lend out another $91.09, etc.

There's really quite little cash in the banking system which is why you see, for example, Greeks limited to withdrawals of 50 Euros a day when people fear their money is not there. They fear it's not there because, well, it isn't.

But Tenn or someone else will shoot this full of holes in the next hour or so. ;)
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Re: Hoarding Cash

Post by jafs » Thu Mar 03, 2016 4:35 pm

I'm almost certain that banks don't just let the deposits sit there - they do all sorts of inter-bank short term loans, etc. with it.

A quick google search suggests that barrett is correct, reserve requirements are low, and banks don't lend reserves.  So, they're probably lending deposits.

I looked at pragcap, but didn't see anything easily there.  If/when I have time, I may call our bank and ask them what they do with the money - that should be fun  :D
Last edited by jafs on Thu Mar 03, 2016 4:41 pm, edited 1 time in total.
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Re: Hoarding Cash

Post by Pointedstick » Thu Mar 03, 2016 4:48 pm

Banks don't lend reserves or deposits. They just lend. They lend out of thin air. Poof! Deposits become their reserves, but the quantity of reserves on hand is in no way connected to their lending activity. They'll lend if they're cash rich or cash poor, depending on their management's goals and the legal requirements they are subject to. And if they're feeling too cash rich, they'll get rid of their cash by parking it at the Fed! They actually get paid interest on that money these days.
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Re: Hoarding Cash

Post by jafs » Thu Mar 03, 2016 5:13 pm

That's hard to believe - they can't create/print money, can they?

Let's use a simple example, because those are easiest for me - you go to a bank and get a mortgage.  That means the bank gives the sellers a check for their house, and then you owe the bank that money plus interest.  When the sellers go to their bank, they can cash that check if they want, so it's real money.

That money has to come from somewhere, I would think.

It goes from your bank to their bank, and then to them, doesn't it?

I know this new electronic era makes things less concrete, but the digital deposits can be withdrawn as actual cash, unless I'm missing something.
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