The Stress of Carrying Cash

Can too much cash possibly be a bad thing? Right now the answer is yes. In the U.S., individuals, banks, and the Federal Reserve find themselves locked in a vicious cycle of retrenchment. It plays out like this: Households worried about the economy and gyrating markets are piling into cash. That puts a strain on banks, which have few opportunities to put that money profitably to work, but still have to pay interest and maintenance fees on the funds they take in. The conundrum drove Bank of New York Mellon, the world’s largest custody bank, to announce plans in early August to begin charging clients for cash balances above $50 million “to pass on costs incurred from sudden and significant increases in U.S. dollar deposits.” All of this is frustrating the Federal Reserve, which to revive the economy has kept its target rate at near zero for 32 months while throwing hundreds of billions at quantitative easing—all to little apparent avail.

“We’re all drowning in cash,” says Rick Ashburn, chief investment officer at Creekside Partners, a Lafayette (Calif.) investment firm. He calculates that after taxes, a 10-year Treasury bond, whose yield had plummeted to 2.2 percent on Aug. 9 from 3.75 percent earlier this year, now provides a negative return 1.5 percent to 2.5 percent below expected inflation.