Negative saving: the paradox is here

Is it still ‘saving’ if you’re losing money at the bank? Negative interest rates are currently the ‘privilege’ of the wealthy, but for how long?

Here’s a question: Is it still ‘saving’ if you’re losing money at the bank?

Swiss banking group UBS will start charging customers a negative interest rate of 0.6%. The measure will apply to customers with deposits worth one million euros or more.

That’s quite chunky, especially if you consider that positive interest rates (it still feels a bit weird that we have to clarify this now) haven’t been at 0.6% for a while now.

As a reason for imposing the charge, UBS names the “continuing extraordinarily low interest rates in the euro area” combined with “increased liquidity regulations”.

It’s a direct consequence of steps by the European Central Bank asking private banks to pay a small percentage for storing their money with them instead of lending it out or investing it.

For the moment negative interest rates charged by UBS, and also Credit Suisse, only affect wealthy individuals. It therefore almost sounds like governments are getting the private sector to do their dirty work.

Governments look to central banks for help with the economy.

Central banks first cut interest rates and later charge private banks for parking their money with them.

Then private banks pass on those costs to their richest customers.

There’s no reason to believe negative interest rates will remain the ‘privilege’ of the wealthy, though. A precedent has been set.

Banks may categorically state that the policy won’t apply to all their customers, but, surely, we’re now one step closer to the moment where ordinary savers will be hit by negative rates.

In short, the move by the Swiss banks is signal. It is a warning sign that ultimately we could all be affected by negative interest rates.

It’s one thing that we’re living in times of low yields where it’s hard to grow your money. It’s quite another to be entering an era where you actively start losing money when you hand it to banks for safe-keeping.

It may be just a matter of time before banks turn to more of their customers to help them recover the costs of central bank policies.

Admittedly, this still might take a while. For the moment banks won’t be able to charge these fees to their wider customer base because people would simply take their money out.

Before banks can effectively impose negative interest rates on ordinary savings accounts, savers would have to have a reason to keep their money in the banks regardless.

It may be why central banks have started nudging society towards a world without cash. The discontinuation of high denomination banknotes seems to be a testament of that.

According to financial expert Jim Rickards, policymakers have even been looking into various other ways to restrict cash transactions. He names instruments like ‘microchip’ banknotes which could devalue currency as you hold it in your hands.

All of it is intended to further disincentivise people to pay with cash and make people more inclined to keep all their money locked up in banks. More control for the banks and more chance of otherwise unthinkable policies like negative interest on savings being introduced.

Even if it doesn’t come to this anytime soon, people will still find it hard to keep the value of their assets the same with interest rates close to zero and growing inflation.

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