My previous post on storage costs, negative interest rates and how some macroeconomists are detached from reality was, without a doubt, excessively snarky and probably even rude. First, I very unfairly generalized about “economists” when I should have said that SOME macroeconomists appear detached from reality at times. Second, I should have been more productive in my criticism. As I’ve explained in the past, I don’t mind a little criticism, but when I engage in it I should try to make it constructive criticism so that there is something learned from the discussion. Nothing positive comes from just saying “you’re wrong” if you can’t explain why and help move the discussion forward.
There’s a good lesson from this though. And I think that the lesson is to connect the dots properly between economic theory and economic reality. After all, if the experiments we run in economic theory cannot be translated to economic reality then they are of little use. And here’s the thing – in reality storage costs just can’t have much of an impact on the floor on negative rates as some economists argued. I am not just theorizing here. I have actually heard from several empirical sources.
First, several readers from Europe wrote me to inform me that they have factual evidence that their storage costs of cash at a bank are less expensive than the negative rate their deposits are earning right now. But I went even further. While I don’t use a bank to store cash I did recall an offer that my bank made when I first opened my account – FREE safe deposit boxes. So, I called my bank this morning (one of the largest banks in the world) and they informed me that my account qualifies for free storage. So, storage at some banks is actually free to start with. And my guess is if the Fed started charging negative interest rates then the bank would charge me fees in other ways rather than suddenly charging me to use a safe deposit box. I did some further sleuthing and I discovered that a free safe deposit box is actually quite common if you have a high account balance.
My guess is that free storage on high account balances wouldn’t magically disappear across the entire industry if interest rates went negative because this might actually be a legitimate source of sticky account balances from some high account balanceholders and banks don’t do things that make accounts less sticky. That is, some bank would likely use this as a tool to attract cash and deposits from high account balance holders. And that just means that people with high account balances who want storage for their cash will transfer funds from costly storage account to free storage account. That is, negative rates would always be lower than the cost of storing cash. Therefore, I think it’s highly unrealistic to assume that the theoretical floor on negative interest rates has anything to do with the cost of storing cash….Economic theory just doesn’t mesh with economic reality.
Anyway, I think I’ve made my peace on this. Sorry for the snark in the previous post.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.