Saturday, 16 May 2015
Abolish cash so as to make negative interest rates easier?
One flaw in the “let’s abolish cash” argument is thus.
One motive for doing so is to make the imposition of negative interest rates easier, which in turn makes it easier to impart stimulus in a recession. I.e. the argument is that if zero interest rates don’t solve the problem, then negative rates might.
One problem with that idea is that interest rate adjustments are an inherently illogical way of imparting stimulus. That is, if there’s a recession, there is no prima facie reason to assume it’s caused by lack of investment or borrowing based activity, rather than a drop in demand for ice cream, cars, condoms, you name it. Ergo the logical response to a recession is simply to raise ALL FORMS of demand - unless there’s VERY SPECIFIC evidence that lack of investment spending is the culprit. And even there, a drop in borrowing and debts does not necessarily prove that potential borrowers have got it wrong: there may be good reasons for reducing investment, borrowing and debts.
And having raised demand GENERALLY, employers (public and private sector) are quite capable of working out for themselves how much of their increased cash flow should be devoted to more borrowing and investment - no need for nanny state to tell them.
A second flaw in negative interest rates is that they can, at least in theory, result in negative output.
So the conclusion is: “down with negative interest rates” - although that could be interpreted the wrong way...:-)