Cashing In: How to Make Negative Interest Rates Work
blogs.imf.org
blogs.imf.org
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.
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.
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).
German 10 year bonds are yielding -0.20%
https://www.investing.com/rates-bonds/germany-10-year-bond-y...
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.
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?
QE clearly has "worked" in that the markets were propped back up, for the time being.
Central banks are able to utilize other policies (e.g. helicopter money via TLTROs) to provide economic stimulus at this level.
So in practice, it's no different than spending with concomitant bond issue, which also promises to pay the money back. And is also an inflation pressure if the market decides the promise isn't worth the nominal interest rate.
I meant "how is it more effective stimulus?". The contention upthread was that we shouldn't use government spending for stimulus when monentary policy works better, to which I replied that monentary policy doesn't work at all in this situation, to which the suggestion comes back "well, just helicopter in money from the central bank as stimulus", which is... not monentary policy. It's just the same thing as spending modulo some accounting.
I actually disagreed with this assertion in another comment [0], so I think we're in agreement here.
> monentary policy doesn't work at all in this situation
This is incorrect, though. A central bank may loan money to banks at a negative rate, with the condition that the loan funds non-financial and household spending (TLTROs) [1]. Such policy can provide stimulus at or below 0% interest rates.
> "well, just helicopter in money from the central bank as stimulus", which is... not monentary policy
As stated, whether helicopter money is monetary or fiscal policy is murky, but likely depends on its implementation:
"In other words, fiscal policy is about managing the net financial assets of the non-government sector relative to the state of the economy, and monetary policy is about managing interest rates (and through it, to the best of its abilities, bank lending and deposit creation) relative to the state of the economy." [2]
If, for example, the legislature were to issue a tax rebate to each citizen, it would satisfy Fullwiler's definition of fiscal policy. However, if implemented by directly altering bank lending, as TLTROs attempt to do, it should be considered monetary policy.
[0] https://news.ycombinator.com/item?id=20080372
[1] https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/inde...
[2] http://neweconomicperspectives.org/2015/06/what-is-helicopte...
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).
My understanding was that QE helped, but IOER was a mistake.
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.
But what you call things doesn't really matter. You don't offer any argument for why printing money wouldn't solve the problem, assuming there is one.
the rich would bear the burden if taxation and public spending is used. They don't want that. And guess who has enough resources to lobby and PR it?
They should probably pay more since additional wealth has less value the richer you are (Someone earning $40,000/yr paying $10,000/yr more in tax is catastrophic, for someone earning $200,000/yr it's not)
* Such policy often comes with substantial lag times, as it is implemented via legislation. Monetary policy may be implemented more rapidly.
* Governments are incentivized to provide stimulus during economic slowdowns, but reducing spending and increasing taxes during economic expansions is unpopular and leads to lost elections.
* Public spending is frequently allocated for political purposes, absent consideration of economic impact, potentially leading to malinvestment.
The great inflation of the 1960s to the 1980s was due to such Keynesian policies and was halted by implementation of contractionary monetary policy. Ideally, carefully considered monetary and fiscal policies are implemented and utilized to maximize potential for economic stability.
And because of this we should drop this whole democracy thing ? Parliaments have shown plenty that if the need is high enough, action can be very quick indeed.
You've constructed a straw man argument. Instead of advocating for eliminating democracy, I highlighted some of the issues with relying exclusively on fiscal policy. An independent central bank can help resolve some of these concerns. Afterwards, I stated there was a need for both fiscal and monetary policy:
"Ideally, carefully considered monetary and fiscal policies are implemented and utilized to maximize potential for economic stability."
"The rich" aren't sitting on cash, they're sitting on assets. It's the banks that are supposed to be punished for "sitting on cash" instead of lending out every last nickel twenty times over. The entire economy runs on cheap credit and "the rich" benefit by buying up the assets whose prices inflate as a result of it.
If that cheap credit dries up, the result will be a massive recession. Politically, interest rates must remain low at all costs.
> But the same thing could be accomplished by a much more conventional means: taxation and public spending.
No, it couldn't. The amount of money you can get from taxation is small compared to the money you can make appear magically in the economy through monetary policy. Almost the entire money supply is debt.
Under negative interest rates, people are going to see their bank account balance get smaller periodically. It doesn't matter if their purchasing power is identical to what it would be under a stable balance in a period of inflation. Yes, it would spur some more spending, but I think the cognitive impact of seeing your bank account bleed money will drive a behavioral shift away from traditional currencies to alternative stores of wealth. e.g. precious metals, crypto, real estate, etc.
In other words, the farther you ratchet the wrench, the less effective it will be. I would think after a point, nobody wants your e-cash, and people just continue to use cash among themselves - indifferent to your imposed exchange rate - with secondary markets for wealth storage popping up.
The article didn't really explore whether jurisdictions that introduced NIRP observed an uptick in "black market" currencies or untraditional stores of wealth.
If people end up buying more stock or real estate as a result of lower interest rates, that's "mission accomplished" from a policy point of view. That counts as economic stimulus.
If people end up buying gold to fight inflation, they can just ban owning it (again). The same goes for crypto.
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.
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.
It's also sort of mind boggling to imagine interest being charged on deposits. Completely non-intuitive.
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.
And one of the key reasons for maintaining a positive interest rate on lending is to encourage sound investment decisions by the capitalists borrowing it. Low interest rates beget more and more speculative investments, and more and more of those will go bad. And then you get a debt crisis.
Of course my intuition is now totally different, especially after a college degree in economics, but there is some sort of intuition to be had in negative interest rates. I wonder if there are historical precedents -- maybe in the dark ages, or in historical places without moneylending/investment ecosystems.
I'm stating the obvious here, but they never did keep the money for free. They used deposits as leverage for loans and received 100% of the interest as payment for keeping that money. Even then, for the longest time a lot of banks didn't have a "free" tier account like they do today so they were double dipping so to say.
Negative interest rates aren't a new thing though. I'm more interested in where modern monetary theory will end up taking us and if that will make negative interest rates more common. It seems like a lot of people want to go in that direction. I don't know enough about it yet to know if that's good or bad.
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.
Wouldn't printing money (ie. quantitative easing ), accomplish the same thing, without the hassle of having cash dollars and e-dollars?
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.