Negative Nominal Interest Rates (NNIR)
Negative yielding assets currently amount to approximately $13 trillion globally because Central Banks have now taken interest rates into negative territory.
Questions are being to asked about the limits, and unintended consequences, of this unprecedented monetary policy.
As soon as an individual or institution receives a negative nominal interest rate on cash balances they hold on deposit, that individual or institution has an incentive to take their money out of the negative yielding security and, in the absence of no other low risk assets with sufficient yield, they may decide to hold physical cash or low carry commodities.
The European Central Bank announced earlier in the year that production of the €500 note will cease in 2018. This move makes hoarding large quantities of physical cash by the banks much more difficult and costly.
In Japan people are responding to NNIR by increasing the number of safes that provide them with a means of keeping money outside of the banks so the shift to a NNIR environment is challenging the whole notion of national currencies continuing to perform the role of money itself.
Negative Nominal Interest Rates v Store of Value
Money traditionally requires three attributes:
- A store of value.
- A medium of exchange.
- A unit of account for valuing goods and services.
However, negative rates may invalidate the store of value attribute and perhaps even the medium of exchange qualities.
The potential for individuals, merchants, and institutions to begin looking for alternative methods for storing value, or conducting commerce, becomes real in this new digital age.
Negative Nominal Interest Rates Positive Impact
With the onset of NNIR, gold can achieve a positive carry with respect to cash balances that are subject to negative nominal interest rates.
This fundamentally changes the perception of gold as a store of value or indeed as a medium of exchange because normally owning physical gold yields no nominal income and traditionally brings additional charges, with respect to insurance and storage.
Negative Nominal Interest Rates Gresham’s Law
According to Gresham’s Law, digital currencies such as Bitcoin should be attractive to people as a form of currency, a preferred medium of exchange, due to its lack of intrinsic value.
The challenge though is that the cryptocurrencies are fast becoming illiquid, they are volatile, and are stuck in the hands of speculators and exchange traders. (96% in 2017)
People are going to find it easier to buy into the idea of gold as a store of value than Bitcoin, given that gold has been around rather longer and with over $7 trillion of physical gold and only around $12 billion of digital currencies in the system, it shows that digital currencies have a long way to go before they can overtake gold, as a medium of exchange.
Even though gold may have been used as a form of currency in the past, that is no longer the case in today’s society. Not only that, but the cost of storing it is too high for practicality.
Blockchain technology however could hold the answer.
Putting gold on a distributed ledger, Blockchain, means that the ownership of gold can be broken down into small amounts facilitating a reversion back to days gone by when gold really was the most valuable form of money, transacted daily all over the World.
When that happens, and gold can be exchanged in tiny bite size chunks, that’s when the Fiat currencies, debt based fractional financial systems or “Ponzi” schemes will be doomed to fail.
Physical gold and silver are a stable benchmark that cannot be debased and NNIR and the Blockchain are conspiring today to have a huge impact on the value of gold and other precious metals.