Cashing In: How to Make Negative Interest Rates Work

https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/

by yasp • 7 years ago

43 69 7 years ago

blogs.imf.org

Sam Altman has written about a 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• 7 years 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?

crediblewitness2• 7 years ago

QE is just buying bonds. With that approach rates do have a floor at zero.

abernard1• 7 years ago

QE 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.

tcarn• 7 years ago

You 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• 7 years ago

I 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.

pishpash2• 7 years ago

It'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.

ericd5• 7 years ago

The 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.

mushufasa• 7 years ago

It would be crazy. As for intuition, I actually thought it was counterintuitive as a kid that banks would safeguard your money for free. I had the naive intuition that banks were providing a service of keeping money safe and accessible via debit cards, so you should be paying them.

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.

chank• 7 years ago

safeguard your money for free.

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.

flukus• 7 years ago

It seems mind boggling that you'd punish people for being fiscally responsible and living within their means. There are so many people today living paycheck to paycheck and who could be ruined by a minor financial shock, negative interest would encourage this behavior. In this scenario wouldn't you also be better off hoarding cash instead of putting money in a bank?

andrenth• 7 years ago

The next step would be to abolish cash, only allowing digital transactions.

ericd5• 7 years ago

We really need to stop this insanity and just take our medicine before the credit bubble gets even more extreme.

dev_dull2• 7 years ago

Be careful what you wish for. Most government programs are built on nothing but growth predictions that are... maybe not possible and probably dishonest.

ericd5• 7 years ago

I 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• 7 years ago

When 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• 7 years ago

Yes, 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.

ikeboy5• 7 years ago

Because monetary policy is more effective than fiscal policy?

klipt• 7 years ago

Except it stops working when you can't go below 0?

nickles7• 7 years 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).

ajross5• 7 years ago

When interest rates are negative, monetary policy has literally zero effectiveness. That's the whole problem being discussed.

chii2• 7 years ago

taxation and public spending

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?

dev_dull2• 7 years ago

The top 20% of earners pay 87% of the tax burden. Is there something unreasonable about that amount?

nickles7• 7 years ago

But the same thing could be accomplished by a much more conventional means: taxation and public spending.

* 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.

candiodari3• 7 years ago

Such policy often comes with substantial lag times, as it is implemented via legislation. Monetary policy may be implemented more rapidly.

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.

gridlockd3• 7 years ago

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.

"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.

rkagerer• 7 years ago

I tend to agree. Here's my opinionated point of view: The reason governments get away with printing too much money is the negative effects are subtle.

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.

gridlockd3• 7 years ago

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.

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.

apo• 7 years 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• 7 years ago

Pretty much... bitcoin/gold are not particularly productive assets either (verses investing in businesses) so I don't see how that helps the economy recover.

NTDF92• 7 years ago

Wow. 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• 7 years ago

European 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-b...

NTDF92• 7 years ago

No prize for guessing why European capital has been flowing into the US for a decade.

testfoobar• 7 years ago

Central 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-y...

mikhailfranco2• 7 years ago

Bitcoin 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• 7 years ago

This 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• 7 years ago

It's a lot easier to buy bitcoin than property.

mikhailfranco2• 7 years ago

You 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).

chii2• 7 years ago

I 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• 7 years ago

I 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• 7 years ago

Playing 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• 7 years ago

Unstable countries use USD as a stable currency.

candiodari3• 7 years ago

And in the US the CHF (and Gold) was popular for the same purpose at times.

radford-neal3• 7 years ago

This 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.

Cashing In: How to Make Negative Interest Rates Work

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