Let’s cancel cash. You make life more difficult for criminals if they can no longer hide behind banknotes anonymously. But more importantly, it is much easier for banks to treat their customers with negative interest rates. No longer could savers claim their money and keep it in paper form under their mattress to avoid losses.
Negative interest rates may sound strange to savers, but let’s not forget that the banks themselves still have to pay 0.4% interest to the ECB if they want to store excess cash in Frankfurt. And investors also still give in when they entrust their money up to five years to the Dutch State. So why should savers gain even a little bit while they park their money at the bank – completely risk-free?
No hard limit
A society without cash means that the central bank can bring the money press to the museum. Zero will no longer be a hard limit. If the ECB thinks it is necessary to stimulate the economy for growth and inflation, it can easily lower the policy rate to, for example, -5%, the level monetary models deemed necessary in the wake of the great financial crisis. But if banks had passed on such low interest rates to their sparing customers, they would of course have left quickly.
Because of the hard zero, the central bank had to come up with a trick to push things up when deflation and endless stagnation became a real concern. So they came up with Quantitative Easing (QE), which is nothing more complicated than creating money to buy loans in the market with the aim that the selling parties use the proceeds to buy other, riskier paper. In the process, all lending rates come down, from business loans, swaps, mortgages, consumer credit to insurance premiums. Ultimately there will be a moment when it starts being interesting for companies and households to borrow again. Once investment and consumption get under way, the economy will turn up again.
The idea behind QE is the same as what normally happens when the central bank lowers the policy rate. Then market interest rates go down as well. Recently I have heard more and more people say that the injection of over € 2 trillion of ECB money into the financial system has had no effect in the real economy. But if you say that, you implicitly argue that adjustments to the policy rate have no effect. Which really seems like nonsense to me.
The problem with QE is that a central bank takes on all sorts of market risks when buying loans. For example, the ECB had bonds from South African Steinhoff in its portfolio, on which it suffered millions of losses due to mismanagement at the retail company. Such risks must of course be borne by market parties. The solution? Redeem cash – it’s not that hard. In any case, I hardly pay anything anymore using coins or banknotes.
- This column was first published in Het Financieele Dagblad on Monday, February 12th (in Dutch)