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How negative interest rates change the game. How one safely stores and insures cash privately. How safely stored cash can be a better investment than negative interest rate bonds. We are experiencing an unusual phenomenon in the financial world at present, that being negative interest rates. Professors in economics and finance were teaching students as late as 2007 that the absolute bottom for interest rates would be 0%. Yet at the height of the 2008 financial crisis, interest rates on 1-month T-bills fell below 0% for the first time in history. Now, negative interest rates are becoming more common. The extreme case as of the time of this writing is the 10-year Swiss bond, which peaked at -0.28%. Some bond investors are comfortable with these negative rates because they feel interest rates will go even lower, enabling them to sell the bonds at a higher price. However, an average investor seeking no risk is unlikely to accept a bond with a negative interest rate. With safe haven investment now costing the investor, options outside the conventional financial system become a viable option. When people think of storing cash outside of the financial system, it brings to mind images of storing cash in a mattress, cookie jar or other home hiding places. Having known someone who left a large amount of silver in an attic after selling a house, I’m not advocating this approach. Assuming an investor exhausts the $250,000 FDIC insurance deposit limit (or mistrusts the FDIC’s ability to pay), one alternative worth considering is a safe deposit box. A box large enough to hold $1 million in $100 bills can be rented for about $200/yr. While banks themselves will not insure the contents of a safe deposit box, insurance on a box’s contents can be purchased for up to $1 million in valuables. This $1 million in insurance can be purchased for as little as $2,000/yr. Hence, having a fully insured $1 million in a safety deposit box costs about $2,200, the equivalent of an interest rate of -0.22%. This cost compares favorably to the 10-year Swiss bond at -0.28% mentioned earlier. And unlike this Swiss bond, whose principal is locked away for 10 years, the assets in a safe deposit box are only locked away until the time the box holder decides to remove them. Today’s unique financial environment of negative interest rates creates both the temptation and the opportunity for cash hoarding outside of the conventional financial system. Admittedly, in just about any other time in history, this would be an unwise financial strategy. Even now, this approach best fits those who need to protect amounts that are insurable by private insurance but not the FDIC. However, if these negative interest rates are the indicator of a bond bubble, and some of the more dire predictions about the world’s financial state come to pass, cash in a safe deposit box protected by private insurance might prove to be a critical and secure asset. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague Scalper1 News
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