A sideways look at economics
How much is a safe worth?
Viewers of the hit television show Narcos might have asked themselves that question when Pablo Escobar, a Colombian drug lord, dug up a pile of money buried in the ground years earlier, only to discover that it was rotten and no longer fit for use.
Central Bankers might be asking themselves that question too. After all, safe sales have soared in Germany and Japan, where central banks have adopted negative interest rate policies.
If he were alive, Pablo Escobar would probably value a safe rather highly. But ordinary Colombians may be better off leaving their money in the bank – the key policy rate there is 7.75% and negative deposit rates look unlikely any time soon. But how about in Japan and the euro area, where commercial banks may choose to pass on the cost of negative rates to depositors?
According to our calculations, a 10 litre safe, costing 100 US dollars, can store around 70 million yen (equivalent to 700,000 US dollars) or 3 million euros (more than 3.5 million US dollars). Dividing the cost of the safe by the amount of yen and euros that can fit inside it gives what we might call a ‘safe yield’ of -0.015% in Japan and -0.003% in the euro area. It is, in effect, a breakeven rate. These safe yields are, of course, much higher than the -0.1% and -0.4% the deposit rates that the Bank of Japan (BoJ) and European Central Bank (ECB) charge commercial banks on their excess reserves. On this basis a safe bought in Japan, or in the euro area, and then filled to the gunwales with cash would pay for itself in a year.
Buy the safe then! Buy the safe then?
Hang on. Unless Mr and Mrs Watanabe are incredibly wealthy, they are unlikely to have 70 million yen to hand. With a more realistic amount of savings, say 1 million yen (or 10,000 US dollars), safe yield turns out to be -1.0%, much lower than the deposit rate. Don’t buy the safe!
But if negative rates persist, the cost of the safe should be amortised over a longer period. Amortised over ten years and safe yield turns out to be -0.1%, exactly the same as the current deposit rate on excess reserves in Japan. Perhaps the cunning BoJ Governor Mr Kuroda is on to something after all.
In reality though, there are, of course, additional risks and costs associated with stashing money in a safe at home, such as transporting the cash from the bank to the safe. Armed escort? At 500 US dollars, safe yield on 10,000 US dollars falls to -6.0%. Deposit insurance? In the UK, home insurers will only cover up to £500 worth of cash, even if stored inside a safe. Safe yield for insured deposits is then -15%. Add in an armed escort, and safe yield on insured deposits falls to nearly -100%!
So then, in fact, the BoJ and ECB could cut rates much further into negative territory before it would make economic sense for depositors to store their cash at home. But that’s not the point of negative interest rates, right? Right. It is to stimulate demand. But if not for safes, then for what?
