This Way Up?
Things start to look and feel very strange when the world is turned upside down.
Negative interest rates are now a reality, and they might soon start to impact on our own cash planning.
We have all got used to some very strange things over the past 12 months. Things that were literally unthinkable have become commonplace, even to the extent that we might struggle to let go of them, as and when we are told that we can. Use of the word ‘unprecedented’ has been, well, unprecedented and the world of finance has not escaped.
Our understanding of what is normal is constantly being challenged by things such as cryptocurrency of which Bitcoin is the prime example. Why would you pay several thousand pounds of “real” money for a string of digits and why would you expect anyone to accept that as payment for anything “real”?
Get ready to hear a lot more about “Non-Fungible Tokens” which are allowing people to guarantee the authenticity of a unique digital asset and therefore sell it for large amounts of money.
You might be quite happy to let others grapple with these 21st century inventions but another unthinkable event might be of more relevance to all of us; negative interest rates!
Yes, a belief held throughout our lifetimes that cash is an asset that you should be paid at least a nominal amount for holding with an institution such as a bank has already been swept away in several locations around the world.
In Switzerland for example, UBS recently announced plans to charge clients with cash balances above £200,000 a 0.75% per annum interest rate fee.
You can see from this example that, at least for the moment, you will need a reasonable level of wealth before you might be charged in this way but, as the idea becomes more widespread, expect to see the thresholds falling.
Rather than calling it a negative interest rate, we can expect to see retail banks adopting a twin-track approach of setting interest rates to zero and at the same time introducing a charge on the account that will cover the cost of the charge made to them for holding your cash.
If your immediate thought is that you should reduce your cash balances then of course this is exactly what the policy makers would like you to do. They are hoping that, in some form or another, you will transfer your passive cash holdings back into the economy providing it with yet another shot in the arm to assist in recovery from the pandemic but also from the financial crash of a decade ago, the aftermath of which we are still dealing with.
We might also think twice about withdrawing tax free cash from our pensions or holding cash balances to draw on in retirement in the event of significant market falls.
Our “Snow Globe” world is being given a really good shake and we are being asked to re-think a lot of what we thought we knew for sure, including our relationship and understanding of good old-fashioned, simple cash.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
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