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They’re coming for you next: The International Monetary Fund today announced a proposed plan that would allow banks to charge negative interest on any deposited funds, a plan that would essentially allow banks, and governments, to steal money from their customers.
The plan also involves making cash a second-class method of payment, because it is impossible for them to charge negative interest on cash. When banks in Europe have charged negative interest, they have found they have instead created a run on their banks as customers rush to pull their money out.
One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries. To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.
The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.
To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars. [emphasis mine]
I have highlighted the entire last paragraph because it contains the heart of the matter. You deposit $100, but they only give you $97 at the end of the year, keeping the $3 for their own benefit.
Buried deep in the article is this minor point:
Still, implementing such a system is not without challenges. It would require important modifications of the financial and legal system. In particular, fundamental questions pertaining to monetary law would have to be addressed and consistency with the IMF’s legal framework would need to be ensured. Also, it would require an enormous communication effort.
To put this in plain language, charging negative interest in most western nations would be considered outright theft. To do it they need to get the laws changed, while also running an intense propaganda campaign to convince depositors that having their money stolen is a good thing.
Sadly, I think this might happen. We live in dark times, with many people enamored by foolish ideas.