Less than Zero. Could negative interest rates create an existential crisis for money itself?

JPMorgan Chase recently sent a letter to some of its large depositors telling them it didn’t want their stinking money anymore. Well, not in those words. The bank coined a euphemism: Beginning on May 1, it said, it will charge certain customers a “balance sheet utilization fee” of 1 percent a year on deposits in excess of the money they need for their operations. That amounts to a negative interest rate on deposits. The targeted customers—mostly other financial institutions—are already snatching their money out of the bank. Which is exactly what Chief Executive Officer Jamie Dimon wants. The goal is to shed $100 billion in deposits, and he’s about 20 percent of the way there so far. Pause for a second and marvel at how strange this is. Banks have always paid interest to depositors. We’ve entered a new era of surplus in which banks—some, anyway—are deigning to accept money only if customers are willing to pay for the privilege. Nick Bunker, a policy analyst at the Washington Center for Equitable Growth, was so dazzled by interest rates’ falling into negative territory that he headlined his analysis after a Doors song, Break on Through (to the Other Side).

In recent months, negative rates have become widespread in Europe’s financial capitals. The European Central Bank, struggling to ignite growth, has a deposit rate of –0.2 percent. The Swiss National Bank, which worries that a rise of the Swiss franc will hurt trade, has a deposit rate of –0.75 percent. On April 21 the cost for banks to borrow from each other in euros (the euro interbank offered rate, or Euribor) tipped negative for the first time. And as of April 17, bonds comprising 31 percent of the value of the Bloomberg Eurozone Sovereign Bond Index—€1.8 trillion ($1.93 trillion) worth—were trading with negative yields. (Although dollar interest rates are higher, JPMorgan Chase’s balance sheet utilization fee fits the pattern: In today’s low-rate world, the only way it can shed deposits in response to new regulations is to go all the way to less than zero.)

What is rarer is for interest rates to go negative on a nominal basis—i.e., even before accounting for inflation. The theory was always that if you tried to impose a negative nominal rate, people would just take their money from the bank and store cash in a private vault or under a mattress to escape the penalty of paying interest on their own money. When the Federal Reserve slashed the federal funds rate in 2008 to combat the worst financial crisis since the Great Depression, it stopped cutting at zero to 0.25 percent, which it assumed to be the absolute floor, the zero lower bound. It turned to buying bonds (“quantitative easing”) to lower long-term rates and give the economy more juice. Over the past year or so, however, zero has turned out to be a permeable boundary. Several central banks have discovered that depositors will tolerate some rates below zero if withdrawing cash and storing it themselves is costly and inconvenient. Investors will buy bonds with negative yields if they believe rates will fall further, allowing them to sell the bonds at a profit. (Bond prices rise when rates fall.) Global investors are also willing to put money into a nation’s negative-yielding securities if they expect its currency to rise in value. Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.

The idea of abolishing or even constraining physical bank notes is anathema to a lot of people. If there’s one thing that militias and Tea Partiers hate more than “fiat money” that’s not backed by gold, it’s fiat money that exists only in electronic form, where it can be easily tracked and controlled by the government. “The anonymity of paper money is liberating,” says Stephen Cecchetti, a professor at Brandeis International Business School and former economic adviser to the Bank for International Settlements in Basel, Switzerland. “The bottom line is, you have to decide how you want to run your society.” As long as paper money is available as an alternative for customers who want to withdraw their deposits, there’s a limit to how low central banks can push rates.

Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save. “Over time, market disequilibria are dangerous

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