Chris Horvat - Polar Oceanographer
Re-discovered an "old" FT piece about the problematic role cash played in fueling the U.S. financial crisis of 2011-onward. For those of us who don't hold this kind of money, for a time, Bank NY Mellon was charging customers .35% interest on deposits worth over $50 million.
Why? Because the decrease in growth of the GDP resulted in what should have been a negative nominal interest rate (according to the Taylor Principle). With federal T-bonds returning no interest, and an astronomical amount of cash being held in banks (nearly 2 trillion in December 2011, relative to a typical (90's era) balance in the hundreds of billions), there became no way to generate returns on large cash deposits. This becomes a problem because, as Izabella Kaminska put it:
Money has to be put to work, or else the system breaks down.
Cash wasn't circulating, money wasn't being put to work, and this compounded the liquidity trap that was the late 2000's economic crisis. Money the Fed put into the system had no effect on interest rates or economic growth.
Why is this relevant today? Because one possible way out of the trap is a tax on large deposits, something that Cyprus recently announced they would commence to great consternation around the European Union, particularly because the minimum dollar value for this added tax was in the $100,000 range.
Why the frustration? Just as if one were to own a few houses, there is an associated expense for physical upkeep. There is now becoming a cost of "asset upkeep" associated with the presence of large sums of cash. Though a bit surprising (we are taking on bank debt with our deposits, after all), this may be a relatively efficient way out of a liquidity trap, especially in a national economy (like the case of Cyprus) where the central bank (E.U.) isn't always playing to national interests.
Oceanographer, Mathemagician, and Interested Party