Thursday, February 26, 2015

Sweden and peak cash

The Swedes really don't like cash. First, consider that Sweden is the only country in the world that I'm aware of where reliance on paper money is in decline. Second, no country's central bank has produced a nominal deposit rate as negative as Sweden's, for as long. Yet even at -0.85% per year, Swedish banks who own those deposits haven't fled into 0% cash, providing some indication of the degree to which they hold banknotes in disdain.

ABBA won't accept paper

As the chart below shows, cash outstanding continues to grow in almost every country except Sweden. Japan and Denmark are the only countries that come close to pacing the Swedes, although both nations continue to show incremental growth in demand for banknotes. Even Kenya, where m-pesa has taken hold, shows strong cash demand.

Sweden reached "peak-cash" somewhere between 2007 and 2008. The reason for this change of heart is public preferences, not government diktat. The monetary authorities can only indirectly influence the demand for cash, say by introducing/removing various banknote denominations, or altering the quality of its note issue (say by making notes harder to counterfeit). By virtue of deposits being convertible into cash whenever the depositor desires (and vice versa), the allocation between cash and deposits is primarily up to the public, not the monetary authorities.

One theory is that Sweden become more law-abiding in 2008, thus reducing their demand for paper kronor. Cash is typically demanded by criminals and tax evaders to avoid creating a paper trail. That Sweden's underground element suddenly decided to go legit doesn't seem very plausible to me. Demographics is a more likely contributor to peak cash. As a nation's population growth slows, the demand for cash peters off with it. This can't be the entire explanation, however, since other countries that also suffer from poor population growth profiles (like Canada) show rising cash demand. This leaves technology as the most likely culprit. As electronic payment options improve, it makes little sense to endure the hassle of withdrawing and holding a small horde of dirty paper in one's wallet.

According to a MasterCard study, 89% of transactions in Sweden are cashless, compared to 80% in the U.S. Situation Stockholm, the street paper sold by homeless vendors in Sweden's capital, can be purchased with a card rather than cash, and while London's buses went cash-free earlier this year, bus fares disappeared several years ago in Stockholm. Unlike the U.S. and other laggards, Sweden has a near real-time person-to-person payments system called Bankgirot which has been active since 2011. Bank customers can download an app called Swish, which allows them to make immediate mobile payments over the Bankgirot network. In southern Sweden, Vicar Johan Tyrberg has installed a card reader to make it easier for worshipers to make offerings. And finally, despite having a hit song entitled Money, Money, Money, ABBA refuses refuses to accept cash at the ABBA Museum. Apparently ABBA member Bjorn Ulvaeus is leading a crusade against banknotes after his son's apartment was burgled twice.

No zero lower bound, at least not yet

As a second illustration of Swedish cash abhorrence, consider that no other central bank has maintained a negative deposit rate as low as Sweden's central bank, the Riksbank, for as long. The Riksbank reduced its deposit rate to -0.85% this month after having maintained it at -0.75% since October 2014. A few nations come close. The Swiss, for instance, reduced rates to -0.75% in January, as have the Danes—but both are behind the pace set by the Swedes.

The key point here is that with Riksbank deposits being penalized 0.85% per year, one would assume that that they'd be quickly converted into Swedish banknotes. Cash, after all, pays 0% a year, superior to -0.85%. But that hasn't happened. As the chart below shows, cash left on deposit at the Riksbank stands at around 150 million kr, roughly the same level it has been at for the last twelve months (and far above 2008-2012 levels).

Who keeps funds on deposit at the Riksbank? As the business day progresses and Swedes make payments among each other, banks who maintain settlement accounts at the Riksbank will find themselves in a surplus or deficit position. While those in surplus can elect to park their excess at the Riksbank's overnight deposit facility, they'll usually try to lend these positions to deficit banks in the interbank lending market or participate in Riksbank fine-tuning operations at the end of the day, both of which provide superior returns to the deposit rate. For whatever reason, Swedish banks typically leave a small portion of their surplus in the deposit facility, bearing the awful return on deposits for the sake of enjoying whatever conveniences the deposit facility offers.

That this 150 million kr in -0.85% yielding deposits hasn't been converted into cash is an indication of just how low Swedish opinion on cash has sunk. Consider the myriad number of costs a bank that wants to cash out its balance will have to incur. A Brinks truck must be hired in order to transport the cash to the bank's vaults. The cash must be counted, requiring a diversion of tellers' resources from other important activities. With the majority of Swedish bank branches having gone cashless, they may need to reinvest in handling infrastructure before they can take delivery of a truck full of banknotes. Next, that cash needs to be vaulted, which means displacing other valuables from being safeguarded (like a client's jewels), forcing the bank to forfeit a vaulting fee. Finally, the cash needs to be insured from theft. No wonder Swedish banks continue to use the Riksbank's deposit facility, even at a -0.85% rate; like the public, banks don't consider cash to be a convenient option.

Could Swedes one day re-embrace cash?

Swedes are proud of their move towards digital payments, but this trend could very rapidly come to an end. In an effort to hit its inflation target, the Riksbank may have to push interest rates even deeper into negative territory. At much lower levels, even the most cash-hating Swedes will have to re-consider their aversion to paper. The consequences could be significant. While only a small quantity of deposits are kept in the Riksbank's deposit facility, much larger amountsaround 30 billion kroneare invested at the Riksbank via overnight fine-tuning repos, which currently pay -0.2%. If the Riksbank reduced the fine-tuning rate much lower (say to around -1.5%), these repos would be rapidly converted into cash by banks. The public holds many hundreds of billions more worth of deposits at Swedish commercial banks. Should Riksbank rate reductions force banks to respond by ratcheting down their own deposit rates to -1 or -2%, how long before Swedes empty out their bank accounts, turning Sweden into a cash-only economy?

To avoid reverting to a cash-only economy at extreme negative rates, the Riksbank would do well to hitch itself to the cashless trend. One way to go about this without calling in all banknotes would be to reign in the number of paper products the central bank currently offers consumers, in particular high denominations of notes. Just stop allowing conversions into the 1000 krona note, and maybe the 500 krona note too, or consider canceling these large denominations outright. Not only would this reduce the central bank's printing costs, but it would provide more room for further rate cuts into negative territorywithout the threat of a mad dash into Swedish cash.

As for the rest of us...

As in Sweden, I'm pretty sure that cash demand in places like Canada and the US will eventually peak as continued advances in payments technology and a more rapid adoption of those technologies lead consumers to demand less of the stuff. Central banks might consider adapting to this trend ahead of time by reducing the number of paper products they offer to the public. Do the Swiss really need a 1000 SFr note? Do Europeans need a €500 note, and Canadians $100 notes? Alternatively, why not do what Bill Woolsey advocates? Let's gradually privatize the issuance of paper currency. If anyone can make cash relevant again, it's innovators in the private sector. And if they can't, then maybe the banknote deserves to die a slow death.

Secondly, Sweden shows that the so-called zero-lower bound isn't actually at zero, but some distance below that. Cash is awfully burdensome, as evidenced by Swedish banks who are willing to hold deposits at -0.85% despite the option to earn 0%. Central bankers at the Federal Reserve, ECB, and elsewhere would do well to heed this Swedish data point. If they need to loosen monetary policy in order to hit their targets, they can go well below -0.5% before having to fear mass conversion into cash. The world's central bankers have much more interest rate ammunition than they let on.


  1. Perhaps there is a business opportunity in Sweden and other countries with interest rates below zero... a company could offer customers allocated or pooled cash deposits (i.e. storage of physical notes). This would reduce the inconvenience and security issues with private citizens storing and managing their own cash and the business could skim a profit, holding cash, buying and selling with customer requests and charging a storage fee (which would obviously need to be below that of the negative interest rates charged by banks). Seems like it would be an easy addition to the services offered by some bullion dealers (i.e. they may already have an online portal/database and storage facilities to add the option easily).

    1. There's definitely a business opportunity there. Someone brought the idea up in the previous post:

      In fact, the sort of enterprising behavior you describe is the exact reason a lower bound exists in the first place, and why the bound will probably rise the longer rates stay below zero. Innovators will find ever cheaper ways to store the stuff.

  2. Negative interest rates on deposits at banks seems to set up a logical or conceptual trap. Negative rates are intended to result in a reduction of money on deposit in banks but is it safe or even possible?.

    Macro-economist widely accept that bank loans generate money in the sense that a new bank loan is a simple deposit entry for the borrower. Each new loan, when spent, results in a transfer of deposit ownership. The clear result of this sequence is that original seed money will begin to have the appearance of becoming 'owned' by several depositors.

    It is also widely accepted that this money on deposit will remain available until the loan is repaid. Upon loan repayment, the money supply (deposits) is reduced by the amount of loan paid off.

    If this later observation is correct, the minimum amount of money that should reside in the banking system AS DEPOSITS should be AT LEAST the amount of active bank loans. This would ensure that all bank loans could be paid at one time with money-on-hand-as-deposits in the banking system. Upon all bank loans being paid off, the original money owners would be fully covered to the limit of their deposits.

    Central Banks that charge negative interest on deposits are providing incentive to reduce deposits to a lower amount. Here is the question. It it safe to reduce bank deposits below the value of active loans?

    It is not hard to lower total bank deposits.

    I think that bank deposits can be easily lowered by private lending to government. Then, the amount of remaining deposits can be as small as needed for deposit transfers by government. This can be a small number if the speed of transfer is very fast. (Smaller pipes can be used to carry the same amount of water if the water can be made to move faster.)

    We can take this concept to it's logical maximum. All deposits in the banks are not deposits. They are the amount of government bonds owned by account holders. All bank money has now been converted into government bonds and there are no deposits of money.

    Hmmm. I guess we would need to allow loan repayment with government bonds. No, we just convert bonds to money very quickly, almost no money is really needed.

    Do you see the logical conflict here?

    1. Roger, I'm not sure if I follow you.

      You said: "Negative rates are intended to result in a reduction of money on deposit in banks"

      The goal of negative interest rates is to create higher nominal GDP. An unintended result is to create mass flight from deposits into cash. This unintended result is not a healthy one, as you point out, which is why I mentioned a few fixes in this post and the previous one. You ask if it is possible to reduce the quantity of deposits below loans? It is, since one funding source - deposits - is simply being swapped for another funding source - paper currency.

    2. Yes, the unintended consequence of negative rates is the reduction in deposits.

      Let's assume that each deposit was spent once rather than saved (or pulled from saving and spent once). A single round of spending would result in a GDP increase of amount equal to deposits spent. Government would get a tax increase so deposits would return to the banks in amount 'original spending less tax extracted'.

      Hmmm. How would we measure the start and stop points? I can't think of a way to do that.

      Instead, large and increasing amounts of bank deposits OF MONEY is a direct result of increased government money issue. The only way to reduce bank deposits OF MONEY is to make the bank deposits deposits of GOVERNMENT BONDS.

    3. JP wrote: "The goal of negative interest rates is to create higher nominal GDP"
      That is mostly nonsense. The primary task of the Swedish central bank is to make the payment system work safely and efficiently. (look at their web site and see for yourself) Sure if the payment system malfunctions then GDP and employment and price stability all go into the toilet so in that sense the Riksbank is promoting higher GDP, but that doesn't justify your claim that higher GDP is the goal of monetary policy.

    4. Sorry Roger, I'm not following you.

      Anon: Of course the Riksbank needs to ensure the integrity of the payments system. But it also needs to determine at what price to set the value of clearing balances. It might set them equal to an ounce of gold (a gold standard), it might let them equal a consumption basket that declines at 2% each year (an inflation target), or it might loosely target inflation so as to allow for real effects (dirty inflation targeting, or NGDP targeting). But it can't just let the value of clearing balances flutter around. And that is monetary policy. In the specific case I mentioned, negative interest rates may be necessary to ensure that an NGDP target doesn't undershoot.

    5. "Of course the Riksbank needs to ensure the integrity of the payments system. But it also needs to determine at what price to set the value of clearing balances."

      I am saying those are one and the same. As I understand it the European countries that currently have low bank interest rates are trying to protect their payment system from the destabilizing effects of external currency traders.

      The countries that have low cash currency growth reflect the fact that the non-cash payment system is perceived to be functioning in a safe, sound and efficient manner. The countries with high cash growth reflect a much lower level of confidence in the safety, soundness and efficiency of non-cash money.

  3. Probably because Sweden had their banking crisis early, in 1992, and were farther ahead reining in banking sector leverage. The reliability of Swedish banks has been better for longer, and the need for currency has probably been lower as a result. Still, bank leverage and regulation has been known to change. Sweden is also already a high-tax nation. So if your banks are nearly counterparty-risk-free, and you are already being taxed heavily, perhaps cashless works for you. But it’s pretty laughable for other countries, including the US.

    Despite deleveraged banks and high taxes, most Swedes still want currency as an option, and do not want currency to disappear. Two-thirds of Swedes think carrying cash is a “human right”.

    Banks and governments, of course, are thrilled by the prospect of a cashless society: imagine every single transaction monitored and judged, with taxes and fees extracted at every step.

    If you’re so thrilled by this prospect, JP, would you mind reporting all your transactions to us on your blog, and also tack on an additional greater tax-and-fee % of your total spending? We can keep the tax/fees for charity, for fun’s sake. Also, you can only hold your savings in stock in one large bank – still, you can choose which one.

    Come on, put your money where your cashless mouth is. I’m sure you can trust us, pay more in taxes and fees, and place all your financial trust in a private bank. This is a great deal for you, really.

    1. The specific ideas mentioned in this post and the previous one take a more balanced approach than the all-out abolition of cash. Specifically, remove high denomination notes, stop printing them, or penalize them. That way those who want cash can still use it while interest rates can be guided to negative levels should monetary policy require that eventuality.

      For those concerned about monitoring and fees, there are cryptocurrency alternatives.

      Since you asked, my transactions so far today: Paid $1.35 for a blueberry muffin, using coins.

    2. JP, cash is more than a irrational quasi-criminal want. Currency - not reserves - is the ultimate deliverable for all financial contracts, including demand deposits. Everything else is derivative debt.

      Low interest rates and enormous excess reserves suggests that the supply of debt is enormous, and demand for borrowing is slack. Exactly how are reserves supposed to stimulate NGDP under these conditions? More currency would boost NGDP more reliably than this no-cash all-reserve system you're flirting with.

      Let alone ineffective for monetary stimulus of NGDP space, no-cash economics are oligarchical. Do you realize how much power you are glibly handing over to the state and its bank cronies? How much money and power they will extract from you in this bargain?

      Most of the western world is woefully understimulated. What the world needs is more cash and higher NGDP, not less cash and lower interest rates.

    3. "Exactly how are reserves supposed to stimulate NGDP under these conditions? More currency would boost NGDP more reliably than this no-cash all-reserve system you're flirting with."

      I repeat, neither this post nor the previous one talk about not no-cash systems. Please reread my post and comments. By reducing the return on reserves to negative levels, anyone holding reserves (or instruments redeemable in reserves, like deposits) will try to offload them, driving NGDP higher. You suggest that more currency would boost NGDP, but central banks do not have any control over the amount of currency in circulation.

    4. JP, I read and understood from the beginning. I'm pointing out that your premise may be misguided. All the data I see says that more & free-er use of currency would be a better stimulus to NGDP than negative rates and less currency.

      Instead of further restricting currency, entertain the notion that currency usage needs to be liberalized. US citizens should be able to withdraw $50,000 in cash at the bank, walk over and pay for a car. The fact that the banking system de facto makes this impossible is a major problem. You can cut out all these fee-demanding middlemen, and get a 5-10% discount on prices by using no-counterparty/no-fee cash.

      You blithely state that banks don't have control over the amount of currency in circulation? Perhaps it is bank regulation, then. Try withdrawing $10,000 in cash sometime and find out whether banks have control over currency formation. Guess what? You can't, and this $10,000 gets smaller in real terms with every passing day.

      Note that currency is the best predictor of NGDP price levels.

      High excess reserves and lower rates do not work to stimulate NGDP: deposits get hoarded, while cash flows are starved. In fact, high reserves and low rates are symptoms of a high-debt, understimulated NGDP economy. This is an unconscionable outcome for the populace, but a great low-NGDP, high-asset-present-value outcome for owners of capital (debt, equity) and their bank/state handmaidens.

      Nearly 80% of all the growth in the currency base over the past 10 years has been in your $100 bills. $100 bills are already 90% of the currency base. Please understand that you are not proposing "cash lite". I call a 90% reduction pretty well a no-cash outcome.

    5. JP:

      "By reducing the return on reserves to negative levels, anyone holding reserves (or instruments redeemable in reserves, like deposits) will try to offload them, driving NGDP higher."

      I think you're invoking the hot-potato argument here, right? Here's what seems to be implicit in that, and it's the thing I don't understand:

      "anyone holding reserves...will try to offload them [by purchasing more newly-produced goods and services than they would otherwise], driving NGDP higher."

      But that assumption is not safe, is it? Agents could respond strictly through portfolio rebalancing (swapping previously-produced assets among themselves), and through balance-sheet adjustments (increasing or decreasing debt/lending).


    6. Yes, it's the hot potato argument.

      You're right that agents could respond by swapping previously-produced assets among themselves, say in equity markets. But only initially. Secondary markets are not black holes; the effects of monetary loosening can not stay bottled up in them:

    7. Ah, you very much cut to the crux.

      Q: If the value of existing assets increases by $1 trillion, is there more "money" out there? Are there more "loanable funds"?

      When you see a report that in a crash, "$1 trillion disappeared," what do you make of that?

      I say that previously-existing asset markets do indeed create (and destroy) money out of thin air, not even counting endogenous gov and bank debt issuance/retirement. Like a magic black hole in the ground that money appears from and disappears into.

      I think directly related, I would very much like to hear your thoughts on this:

      (More lines here:

      Which emerged from this:

      The graph in the first post greatly befuddles me, and despite many requests to knowledgeable folks, nobody has even essayed an explanation. Seems v weird to me...

  4. I suspect Swedes have other interest paying liquid investment vehicles.
    The deposits in banks are essentially transaction accounts (i.e. money you expect to spend soon)
    At -0.85% the negative interest on $10000 is 17 cents a week. That is pretty cheap insurance that the $10000 won't be lost, stolen or burned in a fire. If you want to hold the money for long periods there must be some place you can put it that pays interest and you can get your money pretty quickly is you need to spend it.

  5. It is no doubt interesting that Swedes prefer one form factor of money ( electronic ) to paper, however you make the mistake of conflating this with wider monitory policy.

    The Swedish Krona is issued by fiat just like all currencies around the world. The central bank controls the economy with the levers they have at their disposal for example, issuing currency through creation of public debt, creating liquidity, controlling interest rates, etc. Their currency is not completely backed by any precious metal or commodity and notwithstanding that they are not part of the EU monetary union, the central bank does in fact hold EUR ( and also USD ) as a reserve to their currency. The Krone has the same inherent weakness that all government issued currencies have by design i.e. they depend upon public debt with the ability to extract future taxes in order to keep it afloat. In some time the Krona will collapse just like all government issued currencies will, until it is replaced by another form of fiat.

    How consumers prefer to transact to purchase goods and services ( i.e. with bank notes or electronic asset tags or coupons ) has no bearing at all whatsoever on the structural parts of the economy.

    1. What do you mean by 'structural parts of the economy'. Do you mean the real economy; jobs, factories, production, etc?

    2. This comment has been removed by the author.

    3. Specifically I meant interest rates, etc that you cited.

    4. If an economy hits some turbulence, and the central bank chooses not to reduce rates, this will cause employment to fall by more than if the central bank had chosen to reduce rates.

      Sometimes a central bank may have to reduce interest rates to negative levels in order to ensure that employment doesn't fall. But as interest rates fall below 0%, consumer will all prefer to transact with cash rather than deposits, since cash can never yield less than 0%. Deposits cease to exist as everyone converts them into cash. The result is that interest rates fall less then they should, and employment rises by more than it should.

      Ipso facto, how consumers prefer to transact to purchase goods and services ( i.e. with bank notes or electronic asset tags or coupons ) does have a bearing on the structural parts of the economy.

    5. >But as interest rates fall below 0%, consumer will all prefer to transact with cash rather than deposits

      What do you mean by 'by transacting with deposits' ? Paying out of checking / savings accounts ?

    6. >consumer will all prefer to transact with cash rather than deposits
      Also banks all around the world practice fractional reserve banking. I am sure Swedish banks are no exception. If consumers pull out their cash ( in notes ) from the bank, it will be a 'run in' and the banking system will collapse.

    7. "What do you mean by 'by transacting with deposits' ? Paying out of checking / savings accounts ?"


      "If consumers pull out their cash ( in notes ) from the bank, it will be a 'run in' and the banking system will collapse."

      Yes, it will be something like a run. That's why a central bank needs to alter the institution of cash in order to prevent a run from happening as interest rates fall below zero. Otherwise a central bank will keep interest rates too high out of fear of creating a run.

  6. In our effort to increase economic activity, we make a base assumption that more money will increase activity and inflation. Then, having increased the money supply, we see total deposits in banks increase but no corresponding increase in economic activity.

    Now we have more money but without increased economic activity so something else must be an economic drag. Maybe people have too much preference for holding money. If so, discourage them from holding money by decreasing interest rates and making money less attractive as a store of wealth.

    This is effectively done by placing a tax on the use of money. Your proposal to discourage cash as an alternative to deposits fits into the same tax category.

    I was trying to point out that the amount of money in the economy is the result of government issuing money, not the result of how fast people spend their money.

  7. A little error in your text: the Bankgirot has been around for decades a a network for transferring funds between companies and from individuals to companies instead of using checks. They are however the owners of Swish.

    1. Thanks. The thing I am trying to explain in the post is when Payments in Real Time, Bankgirot's new payment system, went live:

    2. I realize that, the error was just that Bankgirot is not the name of the system. The system, owned by BG is called Swish and came in 2011.

  8. I'd say the by far most important reason that Sweden has stopped using cash is a concerted effort by the banks and merchants to promote cashless payments. This has been done for at least 20 years now in order to reduce handling costs and lower the risk for robberies, once very common especially against money couriers.

  9. Interesting post. But the relevant deposit rate in Sweden, called the fine tuning rate, is currently -0.2%. It's true that Riksbanken charges 0.85% on a different deposit facility. But the amount deposited on this facility is very small, as banks, when the market is open, have the option to use the fine tuning facility. As of February 23, 145 million SEK was deposited at the facility that pays an interest of -0.85% while 16,319 billion SEK was deposited at the facility that pays an interest of -0.2%.

    1. I'm sorry, I wrote my comment without having read all of your post. You do mention the fine tuning rate and the amount deposited there. My point is the fine tuning facility for all practical purposes is a deposit facility and that the effective floor on overnight deposits with Riksbanken is -0.2%.

    2. Yes, I agree with you.

      I focus on the deposit rate in this post because even though it isn't the Riskbank's key interest rate, it is probably the most negative interest rate in the world, and even then depositors choose to bear that negative rate rather than holding cash.

  10. Great post. I think the vertical axis marks on your first graph is in bUSD?

  11. You should to use this template for your blog