Holding cash usually means putting it in a bank account. The banks are going to put a significant portion in their country's central bank; the European central bank and member central banks are currently charging banks to store money; at large balances, those banks will charge customers.

Now, you could put cash into a USD account at a US bank, where interest is still currently positive, but if you were storing Euros, you now have currency risk and jurisdiction risk. Negative rate German bonds have less risk than that.

Of course you could take physical cash and put it in a safe or something, but that doesn't scale well. Although maybe it does suggest a lower limit on negative interest rates, where it would actually be cheaper to store large amounts of physical cash...

You have to buy a safe, you have to have a location to store it, you need to secure the location. You need to ensure that the safe is temperature and humidity controlled, so that the currency doesn't mold, rot etc.

These costs add up. Once you've done all of those things, you're essentially a bank.

+this. As a thought experiment, assume you need three full-time guards to store 100M €. Two physical and one watching the video. (why two? Less likely your guard steals all the money).

Salaries of 30k €/year. 8760 hours/year, one FTE works 2080 hours/year, so that's 4.x times 3x redundant guards, or about 500k €/year with overhead.

That's half a percent negative return.

Presumably, the physical storage cost creates a lower bound on how negative the inflation rates can go, but I'm sure I left off a bunch of other things that would add to the bottom line costs of this proposal, such as insurance.

Instead of having a vault with just 100M euros, it probably makes more sense economically to build a huge vault that can store billions of euros, and then charge people to use the vault.

And call it a bank. And as long as you're charging less than it would cost them to store money themselves at scale, that would work...

It seems absurd that the cost of storing physical notes should have an impact on workable interest rates. Surely if the government wanted to allow you to sock away vast sums of money, they should provide a secure electronic sock and avoid the destruction of wealth that is your security costs.

And conversely, if they didn't want to provide the bed for you to keep your money under because it would defeat their interest rate policies, they should (and might) make putting money under beds illegal.

It just doesn't make sense for the sizes of socks and beds and cash denominations, and the security of locks, and the wages of security guards to determine macroeconomic policy.

Cash is universally considered the most liquid asset because it can most quickly and easily be converted into other assets.

If the amount of physical cash is huge however, say 1 billion euros, it can be less liquid than German government bonds. There is cost of moving, counting, securing it and significant delay for buying and selling. If you try to buy something for 1 billion EUR in cash, it might cost 100k EUR to do so and few days until you can buy anything.

But you are correct, there is probably a limit after wich banks start to convert some part of their assets to cash.

the ECB also removed the 500€ bill, so the cost of storing cash went up, because you need greater storage, at least that was a theory that I heard

Indeed. 500€ bill was known as "Bin Laden" because it was so hard to find one. It was estimated that 90% of the bills were held by drug dealers, money launderers and other criminals.

They're gorgeous though. Because they're so low circulation, when you do get to see one they look brand-new. My father got one from a currency exchange this year and when he mentioned that I had to take a picture of it: https://imgur.com/a/aiaZmP2

Edit: I suppose since it was an exchange outside of Europe, they probably wanna put them in circulation before they lose legal tender status.

They will maintain their legal tender status. ECB just stopped printing more and existing notes will be removed from circulation when they enter the banking system.

The world is different when you're dealing with really large amounts of cash. You can't just store it yourself; your mattress isn't big enough. And if you ask a bank to store it for you, the bank will charge you for the service. (Banks that work in this line of business are known as 'custodian banks'.) Consequently, the effective interest rate on cash for large amounts of cash can be negative.

You can argue safety (bonds you have sovereign default risk vs cash will have bank credit risk) but your math is not incorporating how a transaction in this case would actually take place. It's not as simple as just holding onto $100. You have a deposit rate of -0.40% at the ECB. So instead of -0.40%, you settle for -0.14% which is what these newly issued Bunds are yielding.

Not a safer asset, but possibly a more profitable one, since if interest rates go down even further, you can sell your bond for a capital gain. To see how the numbers look out, go to https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...

Of course if interest rates go up, you have to keep the bond until it matures (earning less interest than you would with a new bond), or sell it for a capital loss. But this is always a risk with long-term bonds, and institutions still hold them.

That's a great link, thanks!

Maybe at certain sums much larger than individual depositors concern themselves with, you can't just "hold the cash".

Like banks might say there is no way we want your $10 billion in cash to look after. Either invest it yourself or pay us to invest it for you.

You really don't want $10 billion in a bank. Laws mostly guarantee a few hundred thousand per account holder if the bank itself has financial issues. You would have to spread that amount over quite a few banks if you wanted it secured.

As some people already mentioned, the problem is the amount of cash you would have to keep safe somewhere. As far as I know, there are companies that use tunnels in mountains to act as huge cash depots. But such a storage also comes at a price. Also to prevent this kind of business, the European Central Bank already considered dismissing the 500 Euro bill. With that the physical amount to store would be even bigger. (The german economics professor Hans-Werner Sinn mentioned this once in a talk)

the 500€ bill is already not produced anymore

A lot of commentators are discussing the drawdowns of storing cash bills. However, who buys bonds by paying with physical cash bills? Most of us have a number in our bank account that reflects some sort of wealth? (Ownership of a security elsewhere or an I Owe You?) People with a salary directly deposited and big companies do not need a bank to store their physical cash bills.

I’m still trying to understand how this all happened.

The ECB charges banks -0.40% to deposit money with them. These bonds are currently yielding -0.14%. Rates are not low enough to the point where physical cash is a thought. Rough estimates are a deposit rate of -0.75% where you would make more by holding physical cash.

OK, so you have a bank balance of $1m, rather than paper bills. Your bank can go bust -- it does happen -- and you'll probably find that the Government only insures/guarantees something like the first $100,000 of that. However, the government here are selling you 30 year storage and guarantee of your balance at a small cost (the negative interest).