We have heard a lot of chatter about a potential negative interest rate policy, and whilst the general market consensus in the USA is still expecting to see at least two rate hikes by the Federal Reserve before the end of this year, the situation is completely different in Japan and in Europe. The Japanese central bank was the first central bank to openly discuss a potential negative interest rate in an attempt to boost the country’s economy again, but the grand scheme of things seems to be going much further than that.

About six months ago, some European economists started to make a case for a cashless society, referring to some Scandinavian countries where the majority of the payments was conducted through non-cash means. Thus, they argued, there was no need to keep on working with cash, as a cashless society seemed to be working just fine. Technically and theoretically, they are right. It is much easier to just swipe a card or just tap with a cell phone to make a payment, but the real issue at hand is that you’d have to have full confidence in the financial system.

And that’s exactly  where the first issues occur. The financial system in Europe isn’t as safe as one would expect it. After all, we’ve had the Greek banking crisis, a Spanish banking crisis, a Portuguese banking crisis, an Irish banking crisis, … in just the past 8 years, so why would any sane European citizen trust the banks when the entire system was on the verge of a breakdown in the past few years.

Negative Interest Rate 1

Source: voxeu.org

However, as the negative interest rate policy is becoming a serious option, a cashless society might happen faster and earlier than expected as the NIRP might collapse the banking system. In a recent enquiry, the Dutch banking group ING asked 13,000 of its clients (so that’s quite a representative group) what they would do if the interest rate on the savings and chequing accounts would turn negative. This poll was conducted in Belgium and the Netherlands, which have the highest saving rates of Europe (the Belgian banking system for instance has approximately $300B in cash on savings accounts which is quite a substantial amount for a country with a GDP that is less than 50% higher than that).

Negative Interest Rate 2

Source: ibidem

The results of the poll were quite interesting, as approximately 80% of the respondents said they would withdraw cash from the bank and either put it under the mattress (literally) or in vaults. Should this happen, the entire financial system would collapse.

Negative Interest Rate 3

Source: ibidem

Even assuming just 15% of the total amount of cash on the accounts would be withdrawn, this would result in a total cash outflow of $45B, and it’s unlikely the banking system would be able to handle this without having to deal with severe consequences. And we don’t even dare to imagine what would happen if 25% would be withdrawn. Or 40%. The snowball-effect would be huge and devastating, resulting in a deteriorating capital position of almost any bank in the Eurozone as they are all intertwined anyway.

What does this have to do with the recent ‘test balloons’ to bring up the subject of a cashless society? From the (central) banks’ perspective it would be very smart to first push forward to realize a cashless society to close that escape route for the Europeans. If you can’t withdraw any cash, then everybody will be trapped in the system of a negative interest rate and there will be no way to escape it.


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