Wednesday, 7 November 2012

Dispose of physical money so that we can have negative interest rates?

Miles Kimball points out that if it were not for physical cash (banknotes and coins), central banks could much more easily impose NEGATIVE interest rates.

Reason is that given any appreciable negative rate, it would pay those with significant amounts deposited in banks to withdraw it in the form of physical cash, and store it under the proverbial mattress.

And the advantage of negative rates according to Kimball is that “In an economic situation like the one we are now in, we would like to encourage a company thinking about building a factory in a couple of years to build that factory now instead. If someone would lend to them at an interest rate of -3.33% per year, the company could borrow $1 million to build the factory now, and pay back something like $900,000 on the loan three years later.”

My answer is thus.

OK, but we shouldn’t forget the sheer silliness that is stimulus organised by a central bank. Cutting interest rates skews spending towards investment, and there is no good reason for that “skewing”. For more on the silliness that is monetary stimulus, see here:

Central bank organised stimulus makes some sort of sense in the U.S.  Reason is that as Former Defense Secretary Robert Gates rightly pointed out in reference to members of Congress, “Too many are more concerned with winning elections and scoring ideological points than with saving the country.” I.e Congress won’t do enough fiscal stimulus, so the least bad alternative is Fed implimeneted stimulus.

But why the U.K. does monetary stimulus (e.g. Q.E.) has got me beat. Oh no  - I think I’ve got it figured: the British elite hasn’t a clue whether it’s coming or  going:-)

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