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Cashing In: How to Make Negative Interest Rates Work
- crediblewitness 7y agoSam Altman has written about a US Digital Currency (http://blog.samaltman.com/us-digital-currency http://blog.samaltman.com/us-digital-currency), and considers the idea that it's issued as a "second" legal tender. This IMF article also considers the idea of a "second" currency, but for other practical reasons (negative rates). I think it's actually somewhat inevitable that this happens. Whether or not it would have any cryptographic properties is up for debate, but there is certainly exists enough existing experimentation in this area for the Fed to study such an approach.
- gruez 7y ago>The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). Wouldn't printing money (ie. quantitative easing ), accomplish the same thing, without the hassle of having cash dollars and e-dollars?
- crediblewitness 7y agoQE is just buying bonds. With that approach rates do have a floor at zero.
- abernard1 7y agoQE has a nominal rate of zero, but it has an arbitrarily large negative delta in terms of real rate of return lost when holding cash. Both heavily advertised QE and negative interest rates are the same thing: the central authority is stealing your future money in hopes you will realize this and spend money in the present to raise "demand." As an aside, the fact that anyone could possibly confuse this immediate, poorly thought-out consumption (eating your seed crop) with actual capital investment (under-consumption of your seed corn to grow more in the future) is beyond me.
- cinquemb 7y agoWe'll I for one find this as a great opportunity to speculate where its cheapest to do so with max payoff on this not ending well :P
- SopaDeMacaco 7y agoTL;DR Hey, so we have this wonderful thing to treat radiation sickness, and all it takes are homepathic doses of plutonium!
- tcarn 7y agoYou truly would need a totally cashless economy, Bitcoin would skyrocket if negative rates became the normal. Credit cards would beg you to carry a balance.
- RickJWagner 7y agoI think a significant portion of America is not going to like a cashless society. It's also sort of mind boggling to imagine interest being charged on deposits. Completely non-intuitive.
- pishpash 7y agoIt's only mind-boggling if, in the reserve banking world of today, you think money is anything but a social accounting ledger, rather than something concrete like a potato. As others have said, real rates can already be arbitrarily negative. It is only in the false belief that the numbers mean something intrinsically that you have such attachment to their not decreasing nominally. People will get used to anything. Airline miles expire. Fruits rot. Buildings decay. It's not such a leap to see money exponentially "expire", too.
- ericd 7y agoThe thing is, people generally do view currency as something concrete, and its value is largely based on faith in that concreteness. Once they stop having faith in that, it seems likely that they’ll stop valuing it.
- pishpash 7y agoI'm not saying it should be completely unhinged, but something like a -1% interest rate, is that so much more shocking than a +1% interest rate? I don't think so. People can deal with airline miles, hotel points, credit card rewards rationally; heck some are even paid in stocks or options which are much more volatile and uncertain. They seem to do fine.
- PopePompus 7y agoThere is a huge psychological difference between 1% and -1% interest. People do not react logically to loss (https://en.wikipedia.org/wiki/Loss_aversion https://en.wikipedia.org/wiki/Loss_aversion). Even though regular bank accounts have provided negative real interest for years, once they actually switch to explicitly "paying" negative interest, accounts will empty fast.
- ericd 7y agoWe really need to stop this insanity and just take our medicine before the credit bubble gets even more extreme.
- dev_dull 7y agoBe careful what you wish for. Most government programs are built on nothing but growth predictions that are... maybe not possible and probably dishonest.
- ericd 7y agoI know it will be painful, but it’s going to get more and more painful when it does crash if we keep pumping more cheap credit into the system.
- burlesona 7y agoWhen I read stuff like this I can’t help thinking something about the world economy and financial system has got to be horribly broken. How have we reached the point that banning traditional currency so that we can drive interest rates negative can be seen as a rational response to our problems? At risk of stating the obvious, the entire point of such interest rates would be to strongly prod the market (mostly the very wealthy) to spend and/or invest their cash rather than sit on it. But the same thing could be accomplished by a much more conventional means: taxation and public spending. If you’re a government seeking to stimulate the economy, why wouldn’t that be a saner option?
- projektfu 7y agoYes, you're right. There's been a real difficulty getting central governments to invest to turn around a recession, so the monetary angle is the main direction allowed.
- ikeboy 7y agoBecause monetary policy is more effective than fiscal policy?
- nickles 7y ago> Because monetary policy is more effective than fiscal policy? It’s difficult to justify such a broad statement. Consider that the Fed likely deepened and lengthened the Great Recession by reducing the availability of liquid assets (QE) and simultaneously encouraging banks not to lend out the bank reserves they received in the process (IOER).
- ikeboy 7y agoThe Fed making mistakes doesn't mean the claim is wrong. My understanding was that QE helped, but IOER was a mistake.
- nickles 7y ago> The Fed making mistakes doesn't mean the claim is wrong. I was trying to highlight that policy missteps are damaging and can occur with either monetary or fiscal policy. > My understanding was that QE helped, but IOER was a mistake. I’m familiar with an argument that QE1 was effective while QE2 and QE3 failed to provide the same degree of stimulus, but I can’t recall the substance at the moment. Comparing the QE responses of US, Eurozone, and Chinese central banks indicates QE did stabilize economies, but it also drained liquid, fungible assets from the market at a time where liquidity was most needed.
- apo 7y ago> Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy. Or... it would spawn the mother of all asset bubbles in Bitcoin and to a lesser extent gold. Watch for anti-Bitcoin legislation as a canary in the coal mine signaling that the exits are about to slam shut.
- chillacy 7y agoPretty much... bitcoin/gold are not particularly productive assets either (verses investing in businesses) so I don't see how that helps the economy recover.
- NTDF9 7y agoWow. Just wow. Having already penalized savings (by way of inflation) for so long, now they want to actively penalize savings? They're coming up with strategies to prevent a bank run for taking people's money? Have your cake and eat it too? If this is ever announced, US dollar will just have to collapse. There's no way any country will accept this.
- Donald 7y agoEuropean bond rates have recently turned negative again, and they were negative for large chunks of the last decade: https://europe.pimco.com/en-eu/insights/viewpoints/why-the-bond-market-is-yielding-negative-and-what-negative-yields-mean-for-you https://europe.pimco.com/en-eu/insights/viewpoints/why-the-b...
- NTDF9 7y agoNo prize for guessing why European capital has been flowing into the US for a decade.
- testfoobar 7y agoCentral bankers will keep reducing borrowing costs to extend-and-pretend forever - they built their own trap over the past 40 years by asymmetrically lowering rates over and over again. There seems to be no escape from this global credit bubble. German 10 year bonds are yielding -0.20% https://www.investing.com/rates-bonds/germany-10-year-bond-yield https://www.investing.com/rates-bonds/germany-10-year-bond-y...
- mikhailfranco 7y agoBitcoin has an inflation rate of 4% at the moment, dropping to 2% at the next halving in 2020. Similarly, gold has a vault storage cost of up to 1%, and a mining inflation rate of about 2% (3 kt/yr on a total stock of ~150 kt), more if you just count tradable coins and bullion, without including jewelry. I would also expect a cash warehouse to cost ~1% for storage, security and insurance. Bank charges, such as ATM fees, can take the spread and transaction cost for cash up to 1%. So NIRP can easily go to -1%, and maybe even -2% before the alternatives make sense. However, I would expect a speculative rise in price for BTC and gold in the initial stages of a globally coordinated policy of NIRP and a War on Cash.
- chewz 7y agoThis bitcoin/gold fantasy is cute but most people choose real estate. For millenia the only store of value with positive long term return wasn't gold but landholding (with it's terrible side effects like unpredictability of returns, correlation with population growth and the need to tend to the land). I guess real estate is modern version of landholding. It seems like XIX/XX century which made the landholding class bancrupt due to emergence of bonds, rents and industrial investment were just a short term abberation.
- fastball 7y agoIt's a lot easier to buy bitcoin than property.
- mikhailfranco 7y agoYou may be correct, but rent-seeking is neither just nor fair. Some might argue that gold and BTC are easier to hide from scavenging authoritarian authorities - don't worry, they will all be authoritarian and scavenging soon. The US has confiscated gold within living memory. The US taxes everything earned by its citizens, and forces then to FATCA(T) and F(U)BAR their wealth, ready for the day. Watch out for capital controls. One could say that the "War on Drugs" and the "War on Terror" are actually fake initiatives designed to track individual activities and assets - a "War on Cash" for the purpose of NIRP. In many countries the benefit of property is only true because of the tax treatment, such as tax-exempt mortgage interest relief, including interest-only mortgages which take interest as a business expense (i.e. speculative BTL landlords), and exempting capital gains tax on residential property. It is highly likely that the only tax-exempt capital asset sees speculative demand. The US still has a tax deduction on debts, for private individuals and companies. Obviously debt should not be subsidized! In the UK, the mortgage interest tax relief (MIRAS) was abolished 30 years ago, but only now are they tightening the rules for BTL landlords. However, they have introduced various other subsidies (e.g. Help To Buy) and even an exemption of Inheritance Tax just for property - this is corruption of democracy on behalf of the rent-seekers. It also depends on the planning laws and the demographics. Planning laws are always and everywhere corrupt in favor of existing NIMBY property owners (often including a select group of mafiosi & oligarchs). Many western populations are declining as indigenous fertility rates plunge and the Boomers die off (e.g. Italy, Japan). Only some accommodate immigrants to make up for the loss, and only some of those actually have public acceptance for that immigration (let me guess - globalists, employers and ... property owners).
- chii 7y agoI don't understand the need for negative interest rate. Having the rate set at zero is already bad (it means that your savings erode at the maximum rate). People who are in a position to borrow would do so, and make gains when there is a recovery, while people who can't will be left behind (but i guess this is where the crux of the inequality comes from in the world).
- vessenes 7y agoI find the glib tone taken at what is essentially a nuclear-weapons grade policy plan with nearly unbounded power for the central bank very, very disturbing. Probably more disturbing than the proposal is the idea that some staffer at the imf wrote this up believing it should have a section labeled ‘pros and cons’. Maybe the best thing I could say about it is that if it is to be tried, ideally it will be on a small scale so that the inevitable centralization and then destruction of the test region’s economy can be absorbed by the rest of the world. On a more positive note, I can report that some crypto companies have experimented with policy like this. It shouldn’t be surprising to learn that almost nobody likes it, and in general chooses to transact elsewhere. I think we can safely assume rational actors in this test region will spend at least rational and probably irrational energy to avoid such a system; nobody anywhere in the world wants money removed from their accounts by a central banker. The corollary is that this will be done only at the point of a gun. Upshot: venezuela and Zimbabwe would be envious at the speed and richness of black market economies created in the wake of implementing such a plan.
- darkkindness 7y agoPlaying with video game economies tells me that any tax on owning money/e-money would simply lead people to deal with an alternative, unpenalized store of wealth. I don't know how plausible that move is for the real world, since we can't all suddenly start pricing things in terms of potions and scrolls, but what's stopping this from making Bitcoin, or any coin as the people's de facto currency?
- imtringued 7y agoUnstable countries use USD as a stable currency.
- candiodari 7y agoAnd in the US the CHF (and Gold) was popular for the same purpose at times.
- radford-neal 7y agoThis proposal is ridiculous, if honest, or it is instead a dishonest attempt to add to the power of governments. To deal with a recession, it's plausible that the central bank might want to produce some inflation - if you think that "sticky wages" are an issue (ie, that people don't want their pay cut even if deflation means that its purchasing power would be maintained, making it difficult for employers to address unemployment by cutting wages and then hiring more people). But a central bank can easily (very easily) cause inflation without needing to impose any particular interest rate. The central bank simply needs to buy assets using money it creates. This is standard practice. The assests are typically government debt, but they can be anything, if necessary. There is no doubt whatsoever that buying sufficient assets with newly-created money will cause inflation.