It beats money in the bank.

Photographer: Daniel Acker

$100 Bills Aren't Just for Drug Dealers

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Peter Sands, the former chief executive officer of Standard Bank, is among those who want to abolish high-denomination currency notes, "the preferred payment mechanism of those pursuing illicit activities." In the wacky world of negative interest rates, though, pallets of $100 bills and 500-euro notes are poised to become a fashionable store of value for any cash-rich company unwilling to pay for the privilege of keeping its funds in a bank account.

Negative Interest Rates

There are now $7 trillion of government bonds with yields below zero, according to calculations by my Bloomberg News colleague Eshe Nelson. In Japan, even 10-year debt lost its positive yield earlier this week. Investors, meanwhile, are betting that even the Federal Reserve might resort to negative interest rates later this year if the economy stalls. That creates the very real prospect of having to pay your bank to keep cash on account, no matter which developed economy you live in.

So what's the alternative? Japanese bank Nomura calculates that the price of storing gold in a vault, which it calls "a proxy for the cost of holding physical currency," has fallen to almost zero compared with its long-term annual average of 2.4 percent:

Source: Nomura

That got me wondering: If I was in charge of, say, an insurance company in Switzerland with $100 million of cash that I needed to set aside for a rainy day, what are my options? If I put the money into my bank account, it would get whittled down by negative interest rates as low as -0.76 percent for three months (ignore the currency mismatch for the sake of argument).

With central banks all around the world driving borrowing costs even further below zero, that's only going to get worse. If those negative rates leave me worse off than the cost of storing physical currency, the sensible choice is rent a vault.

So how much storage space would $100 million take up as a stack of $100 greenbacks? Less than you might think, according to calculations by the website PageTutor. Taking a pack of $100 bills worth $10,000, you'd assemble a block seven packets wide, 16 packets deep and 90 layers high to get to a bit more than $100 million:

Here's what my pile would look like if I decided to turn my dollars into gold, courtesy of the website Demonocracy:

Whether held in stacks of bills or bars of bullion, it's evident how little storage space is required, making it pretty cheap to avoid the penalty of negative interest rates.

The "paradox of thrift," popularized by John Maynard Keynes, posits that saved money during a recession contributes to a fall in demand and growth, lost jobs and other troubles. The standard rebuttal was that savings is not money withdrawn from the economy, but money that could be lent out. But a world with savings increasingly shut off in vaults would be a different story.

Widespread cash hoarding would mean less intermediation -- the connecting of borrowers and lenders -- since cash on a pallet behind a locked door isn't out in the world funding businesses and promoting investment. Moreover, in a fractional reserve banking system, banks depend upon deposits to support their balance sheets; lower deposits mean weaker banks.

How would central banks respond in an environment where the threat of inflating away the hoarded savings is not credible? Somewhat paradoxically, it might just hasten the disappearance of physical cash altogether as central banks realize that the only way for negative interest rates to influence the economy is to force everyone into virtual currencies that can't be stacked in bundles. That might be great news for central banks; but for those of us who'd prefer to have the option of keeping at least part of our financial affairs as far as possible from snooping government eyes, it would erode just a little bit more of our liberty.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net