Negative interest rates: The cost of monetary saturation?

I have banged on many times about the drastic collapse in the velocity of circulation of money. This is a fancy way of saying that banks and individuals don’t want to hold the money that the Central Banks have been throwing at them for a decade. Despite the attempts of the Central Banks to ‘reignite inflation’, the fact is that they cannot force the private sector to spend it. Money demand for transactions purposes is dead and with it dies the ability for Central Banks to influence inflation and/or anything for that matter…

Negative interest rate policies have been adopted by many Central Banks. The popular press argues that this is an attempt at ‘stimulus’ but who benefits from negative interest rates? Does Herr Schmidt in Germany or Ms Watanabe-san in Tokyo actually get paid to borrow money from a bank? Nope. The main beneficiaries are the Governments who issue short term securities to fund their deficits that they have built up over many years and still cannot repay.

So what are negative interest rates all about? I view it more as an argument over how the trillions in UNUSED liquidity that has been created over the last decade gets stored and accounted for. The storage question arises because, while we talk of money as being ‘paper’, the reality is that the money balances held by the financial sector are electronic entries in deposit accounts with the Central monetary authority. Negative interest rates in theory violate an arbitrage condition which holds that it is optimal to simply let paper money sit in a vault earning nothing than to pay the Central Bank to hold the money for you. In an electronic world, however, what is the equivalent of putting paper in a vault? The paper doesn’t exist, asking for it could be difficult politically if you are priveleged enough to deal with the Central Bank, and its physical security could be easily compromised by bandits and corrupt officials. Accordingly, it’s probably better to leave it at the CB earning a negative return than try to take delivery of the stuff and store it in a vault. The liquidity is just hanging around and nobody can get rid of it…

In introductory microeconomics we learn that goods and services that are valued have a positive price. Pollution, on the other hand, imposes a cost and just hangs around and nobody can get rid of it. Could this serve as an analogy for the existence of negative interest rates?