Macroeconomia Importantissimo: Tassi d'interesse negativi... (1 Viewer)

[thedreamer]

martedì 26 maggio 2009

Temperatura Polare alla BCE: -5%



Mentre imperversa un caldo africano anomalo, alla BCE tira un'aria polare....un'aria da meno -5.....da -5%...
Infatti la scorsa settimana Wilhem Buiter (un'economista inglese con un curriculum lungo 10 Km, consigliere economico di governi e banche centrali, editorialista di riviste economiche e membro di varie associazioni) ha tenuto un seminario alla BCE dal titolo polare: Il confine del sotto-zero"...
Un seminario su come "tagliare" i tassi d'interesse sotto-zero, a -5%...tanto per incominciare.

Il seminario di "Sotto-zero-Wilhem" è solo l'ultima manifestazione di una tesi a lungo ragionata per esempio in alcuni articoli sul Financial Times dai titoli tra l'ironico ed il minaccioso, per esempio "Tassi d'interesse sotto-zero...quando arriveranno nella Banca Centrale vicina a te?"...od ancora "Il Wonderful Word dei tassi d'interesse negativi"...
Non stiamo parlando di un "isolato fuori di testa": ci sono anche altri che hanno sposato la sua tesi come per esempio G. Mankiw su New York Times con un articolo dal titolo "Forse è tempo per la FED di andare in negativo"...

Vediamo di capirci meglio: il seminario proponeva di portare i tassi d'interesse sotto-zero, per esempio a -5%...
Come a dire che se prendi soldi in prestito TI PAGANO PER FARLO mentre se risparmi dei soldi PAGHI TU PER TENERLI IN BANCA...
Le "salvifiche" teorie ai tempi della Crisi: ti pagano se t'indebiti mentre ti tassano se risparmi...
In pratica "Sotto-zero-Wilhem" propone d'imporre una tassa su chi detiene contanti, cash, liquidità, danè, sghei, dobloni...insomma chiamateli come volete...
Condizione fondamentale di questa tesi è l'abolizione del contante, salvo i biglietti di piccolo taglio massimo da 5 euro per comprasi il gelato od il giornale.
Il denaro dematerializzato ed elettronico può essere facilmente "Tassato" del 5% portando appunto i tassi d'interesse della BCE a -5%...
L'effetto indotto sui risparmiatori, oltre ad uno shock di massa che farebbe la fortuna degli psicologi e degli psicanalisti ed oltre a qualche problemino di ordine pubblico, sarebbe di spingere i risparmiatori stessi a spendere i contanti oppure ad investirli in qualsiasi modo, pompando consumi, immobiliare, borse, bond, titoli di stato, materie prime e borsa dei lupini & lenticchie...
Questi sono i temi di un seminario tenutosi alla BCE... e non in uno scantinato di condominio o in una sessione di psicoterapia di gruppo di recupero schizofrenici...
Queste teorie che girano alla BCE od alla FED mi sembrano un filino in contrasto con l'ottimismo dei Governi o dei Gestori che vedono la ripresa vicina ed hanno occhi solo per i green shoots...oppure no??

In effetti "Sotto-zero-Wilhem" la butta sulla logica...
Infrange il principio Aristotelico di non-contraddizione il fatto che le Banche Centrali possano alzare i tassi d'interessi quanto vogliono in periodi di crescita impetuosa e d'inflazione mentre non possano specularmente abbassarli sotto lo zero in periodi di recessione nera e deflazione.
Questione di simmetria, di semplice simmetria..."Elementare Watson, elementare...ohhh Yesss"...

Per chi volesse approfondire la teoria del sotto-zero, basta seguire i link iper-testuali sopra riportati dotandosi prima di sciarpa e cappello di lana...

 

[thedreamer]

The Wonderful World of Negative Nominal Interest Rates, Again

May 19, 2009 7:27pm

I spent yesterday in Frankfurt at the European Central Bank to meet people and give a presentation on negative nominal interest rates (the ‘zero lower bound problem’). For reasons I don’t understand, this topic generates almost as much heat and emotion as a critical piece on Obama. Some of the reactions to my previous post on the issue made me consider starting further posts on this issue with a health warning. Because the heat and emotion are based on heart-stopping ignorance and lack of elementary logic, I will have another go at explaining the basics.
The purpose of the exercise is to eliminate a silly asymmetry in the monetary policy arsenal. Because of the existence of currency with a zero nominal interest rate, the interest nominal rate on all financial assets is constrained to be no lower than zero (actually, because of high carrying costs for currency, nominal interest rates on things like bank accounts could be slightly negative, but that’s a second-order issue). So when inflation threatens, our monetary masters can raise the official policy rate (OPR) to any level they deem appropriate. When deflation and recession threaten, they can only cut the official policy rate to zero. After that, it’s quantitative easing, credit easing and other unconventional monetary policy measures.
It helps not to confuse nominal and real interest rates in this discussion. Real interest rates (inflation-corrected interest rates), on nominal instruments have been negative (ex-post) on many occasions in our inflationary past. They will be so again in our inflationary future, especially if we live in the USA.
It may also help that neither this post nor the previous one advocates permanently negative nominal or real interest rates on currency or anything else. The purpose of the exercise is to describe three ways to eliminate an asymmetry in the ability of the monetary authority’s ability to set the short-term risk-free nominal interest rate. Adoption of any of these proposals makes negative nominal interest rates possible. Whether the pursuit of sensible monetary policy would ever drive the OPR into the negative range is an empirical issue. Some exercises by Federal Reserve Board staff with an econometric model of the US economy and a Taylor rule for the OPR (a rule that causes the OPR to be raised when the output gap increases and causes it to be raised more than one-for-one when the (expected) inflation rate increases) suggests that, but for the zero lower bound, the Federal Funds target rate would today be at minus five percent. I believe that, before this contraction is over, all leading monetary authorities (Fed, ECB, Bank of England and Bank of Japan) would have set their OPRs at negative levels, if they had been able to.
My earlier post described three ways of removing the zero lower bound on nominal interest rates:
(1) Abolish currency
(2) Tax currency holdings
(3) De-couple the numéraire/unit of account from the currency/medium of exchange/means of payment by introducing a new currency (the rallod) and abolishing the dollar currency. The dollar would remain the numéraire. The authorities would set the exchange rate between the dollar and the rallod. There would no longer be a zero lower bound on dollar nominal interest rates because there is no longer any dollar currency. There would be a zero lower bound on rallod nominal interest rates, because of the existence of rallod currency. If the dollar interest rate set by the monetary authority has to be negative (say - 5%) to achieve the objectives of the monetary authority, the rallod interest rate could remain zero, provided the monetary authority announced a credible appreciation of the value of the dollar in terms of the rallod (by 5%).
As regards proposal (1) - the abolition of government-issued currency - other private means of payment (cheques drawn on bank accounts, credit cards, debit cards, cash-on-a-chip and other forms of e-money) could perform most of the legitimate/legal transactions role of currency. The monetary authority could also offer every citizen an account with the central bank, which could be administered through existing commercial banks, savings banks or post offices. These accounts, which would have to have non-negative balances, could pay positive or negative interest, as the situation demanded.
As regards proposal (2), taxing the holding of money balances, the key issue is, if the desired interest rate on currency is negative, to get the holder (bearer) to come forward to pay the interest due (the tax) to the central bank. If currency notes have an issue date on them, as most do, it would be very easy to announce an expiry date for currency as legal tender. The holder of the currency note would have to come forward to pay the interest due to the central bank before the expiry date. The currency would be stamped or marked in some way, to show it is current on interest due.
A particularly cute example of such an expiry model was described recently in a blog post by Greg Mankiw. He attributes it to a student of his. I was reminded at the ECB, that Charles Goodhart has been offering this example for years. It works as follows:

• All currency notes have serial number ending in integer from 0 t0 9.
• Currency notes also should have a year printed on them.
• Once a year, on a fixed date, the central bank randomly selects integer from 0 to 9.
• All currency notes ending in that integer, printed in that year or earlier, lose their legal tender status and are no longer redeemable/exchangeable at central bank for anything else.
• The expected nominal interest rate on currency is therefore -10%, enough to give even the most determined deflation-fighting monetary authority a lot of room for manoeuvre.

The proposal amounts to a negative interest rate version of the British Premium Bond, a government bond that bears no interest and earns no capital gains but enters the holder into lotteries.
There is one problem with this proposal, not recognised by Mankiw or Goodhart: taking away legal tender status from currency notes need not have any effect on their value. The value of fiat money is what people think it is. Taking away legal tender status may provide a nice focal point for the currency notes involved, on the value that Mankiw and Goodhart expect - zero. But legal tender status is not necessary for fiat currencies to have any particular value. The currency notes stripped of their legal tender status could continue to exchange at par with the equal denomination currency notes that were not stripped of legal tender status by the annual lottery.
It may therefore be necessary to reinforce the loss of legal tender status with the threat of confiscation, or some other fine or penalty. Taxing currency will, I am afraid, remain rather intrusive and administratively cumbersome. This may of course recommend it to some of our leaders.
The most uninformed comments on the earlier post were all variants on the statement that “if nominal interest rates were negative, people would all hold some other store of value instead”. One answer to this is: “that is actually what we are trying to achieve - getting people to dump currency and other assets bearing a negative short nominal interest rate and inducing them to acquire other assets, preferably real assets and commodities instead.” That would be almost right, but not quite.
Under none of the proposals would people switch into currency if the nominal rate of interest were negative. Under proposal 1, there is no currency. Under proposal 2, currency has a negative nominal interest rate; under proposal 3, rallod currency has a zero interest rate but is not a better store of value than negative interest dollar bonds because the dollar appreciates vis-a-vis the rallod. There is no dollar currency.
Would they switch into commodities as a store of value? If the commodity is non-durable, consumption has been boosted. If the commodity is durable and, for simplicity, has a constant marginal real use value over time, a simple arbitrage argument shows that the money price of the commodity would fall by X percent per period if the period nominal interest rate is -X percent.
There would be nowhere to go that would dominate the bond with the negative nominal interest rate as a store of value. Banks could still make money - that depends not on the level of interest rates but on the spreads between their borrowing and lending rates. If a bank borrows from the central bank at minus five percent and lends at minus two percent, it will make the same amount of profit on a loan of a give size as it would if it borrowed at 5 percent and lent at 8 percent.
How would people living off their savings manage with negative nominal interest rates? First check what real interest rates are. If deflation were strong enough, savers could still be making out like bandits, even with negative nominal rates. If real rates are negative, you live by consuming your capital. If that means poverty for some and creates social problems, go to the Treasury or the Ministry of Social Affairs. Don’t bother the central bank.
To a better future with negative nominal interest rates as part of the central bank’s asset menu.

 

[thedreamer]

Comments

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• 1. I doubt anyone implementing this theft will being singing "A Wonderful World" as they dangle kicking feebly from a lamppost.
  Posted by: User3097064 | May 19 08:01pm | Report this comment
  
  
• 2. There we have it, by User3097064, who clearly regards an end of usury as akin to Wat Tyler trying to end Feudalism. Usury is dead my friend; the despicable waste of human potential that this economic crisis has wrought, is its death knell. You want to maintain your relative wealth? Invest in productive assets, like blue chip shares if you are risk averse. Blue chip shares seem rather risky today? That is because twenty years of excessive real interest rates have destroyed the potential of prime wealth producing assets. Usury - the risk free maintenance of relative wealth - is as incompatible with social justice as Feudalism. In fact, it is Feudalism by other means. It is incompatible with world peace, social justice, and any concept of morality.
  
  "If real rates are negative, you live by consuming your capital." What is your problem with that User3097064? When real rates are positive, your absolute capital rebuilds. In absolute terms over the cycle you are no worse off. Not good enough, eh? You want to cream off the earnings of workers and risk takers to maintain your relative wealth. Well tough, we want equal opportunity, peace and prosperity, not this garbage of usurious Gold Standards, exchange rate fixes, and world inflation target agreements, that pass for macroeconomics when they are in fact monetary theft.
  
  Perhaps you could point me to the theoretical treatise that justifies long term real interest rates at 2.5% or thereabout? There isn't one. All there is, is the empirical, and circular, we have practiced usury, therefore interest rates have been usurious (spare capacity taken out by war and revolution!).
  Posted by: David Goldsby | May 19 10:38pm | Report this comment
  
  
• 3. I love this idea!
  
  "If a bank borrows from the central bank at minus five percent and lends at minus two percent, it will make the same amount of profit on a loan of a give size as it would if it borrowed at 5 percent and lent at 8 percent."
  
  I'll be at the front of the queue at my bank when it starts paying me to take out a loan. Put me down for a million - what the heck, make it a billion. At -2% that should bring me in 20M interest, enough to live on each year. Use my house as collateral. Given the bank is making even more out of this than I am they wont have any incentive to check too thoroughly. We'll all pretend that my house is worth a billion. And then the good times will truly be back!
  Posted by: User4415760 | May 19 11:11pm | Report this comment
  
  
• 4. Now I'm really surprised. How is it better when people hold bullion coins instead of the legal currency?
  Posted by: User3151142 | May 19 11:57pm | Report this comment
  
  
• 5. Professor, I thought the most interesting comment on your previous post was this one : "I'm not sure how this additional inducement to flee from liquidity would encourage the liquidity to find something usefully illiquid to do. Pour it into tech stocks, I suppose ? And if that doesn't stand up under its own weight there's always real estate !".
  
  I was disappointed that you didn't address this issue.
  
  About your comment : "That is actually what we are trying to achieve", I think most people got this point the first time. I think the reason people are outraged at your proposals is that "you are trying to force ordinary people's behaviours into a behaviour they don't want to have" ; which has nothing to do with your "economics" (that nobody is disputing).
  
  When the central banks do crazy things (like blowing a worldwide housing bubble after a stock market bubble), when governments go along and dig crazy budget deficits (with unforeseeable consequences) ; the people want something more or less reliable to protect themselves. To a certain degree, the currency offers this safety and you're trying to remove it by forcing ordinary people into "joining the dance" where people would - if no force were to guide their actions - refuse to dance.
  
  I humbly think most of the negative responses you got were not geared towards your "math" but rather to a sort of "moral" aspect of your proposal.
  Posted by: Some User | May 20 06:10am | Report this comment
  
  
• 6. A silly asymmetry worth eliminating for sure! Negative nominal interest rates would effectively double the opportunities for central banks to screw up setting appropriate rates - and history suggests such opportunities are seldom squandered!
  Posted by: erikawonka | May 20 07:43am | Report this comment
  
  
• 7. Given that nominal interest rates are not going to be allowed to be negative any time soon, and taking your point that Fed gurus have calculated that minus 5% real interest rates are currently required, then that minus 5% can only be achieved by keeping interest rates at 0% and pushing inflation up to 5%. And it seems to me, that if we are not to end up with long term mass unemployment, real interest rates are going to need to be held at about -5% for several years.
  
  Unfortunately, we are lumbered by another ludicrous bound, the 2% upper bound on CPI inflation throughout the developed world. How can we ever get real interest rates to minus 5% unless we get rid of the 2% inflation target? And how can we get rid of the 2% inflation target when it is set in the granite of EU law and German political anti-inflation paranoia, not to mention the bondholding classes aversion to any economic arrangement that robs them of their birthright of risk free maintenance of the relative purchasing power of idle capital?
  Posted by: David Goldsby | May 20 08:53am | Report this comment
  
  
• 8. @ User4415760.
  You wrote: "I'll be at the front of the queue at my bank when it starts paying me to take out a loan. Put me down for a million - what the heck, make it a billion. At -2% that should bring me in 20M interest, enough to live on each year."
  
  In my view this will not happen given one of the 3 ways of removing the lower zero bound mentioned in the post will be applied.
  
  Let's assume, option 2 "taxing currency holdings" will be applied. If the central bank has a nominal interest rate of -5%, you get tyour billion from your local bank at - 2%, then you will still have "to pay" 3% interest if you hold the money, since the money at you bank account will depreciate with -5%. You will have to invest the money instead in "real assets" or bonds or to consume it as fast as possible. That's seems to me to be the goal behind the whole thing. Giving incentives to consume and to invest.
  Still I am skeptical how successful this policy can be in the long-term, since the main reason of the crisis, the over-indeptedness of the economy, is not reduced by this monetary policy. But yes, in a short-term perspective there might be positive impacts.
  
  The whole thing seems to be very similar to the "Freigeld"-theory of Silio Gesell and to the "Wörgl"-experiment in Austria in 1932/33..
  Posted by: User4634644 | May 20 10:11am | Report this comment
  
  
• 9. This is Keynesian nonsense by any other name dressed up in the clothes of economics.
  
  If monetary authorities get it wrong and expand credit to the extent they have the answer is not to reduce interest rates in order to encourage spending and investment.
  
  Apart from the fact that the entire process risks the loss of confidence in paper money, which in any event exists as a fragile concept, all money placed in bank accounts, and that comprises almost all of the money in circulation, is available for investment and consumption through the medium of bank lending.
  
  When you reduce interest rates to the levels that prevail today you simply shift wealth from the savers, of whom the pensioners are a large part, to the spenders, of whom the young workers with mortgages are a large part, and all this is being done in the name of monetary mismanagment by the government . In short you impoverish the pensioners in order to get us out of ****** dug by an incompetent economic model.
  
  Low interest rates are not going to either incentivise or disincentivise invertment nor will it increase the consumption of spenders particularly in an economy that is shedding its workforce at an alarming rate.
  
  How much more consumption will low interest rates encourage from three million unemployed and how will low interest rates impact on the consequential default rate banks experience on mortgages.
  
  No Mr Buiter and Mr Goldsby, this policy is as bankrupt and immoral as the teachings of Keynes himself.
  
  Gold is not the perfect answer to the mismanagement of paper money but its a darn sight better and honest than attempting the process through interest rates and so called quantative easing
  Posted by: User3199868 | May 20 10:50am | Report this comment
  
  
• 10. I have some further “heart-stopping ignorance and lack of elementary logic” for you. Have you ever, even for one minute, stopped to consider how we got into the position where you deem negative interest rates to be appropriate? We have never needed it in the last 300 years, so what has changed recently? The answer is that the central banks are continuing to keep malinvestments in place with inflationary monetary policy. The interest rate should never have gone down in 2002 to 1% and now we are facing twice as much pain because we would not take the pain then by liquidating the malinvestments. To the extent we “print money” and keep the malinvestments in place now, we will simply face twice as much pain in the future.
  
  Inflation is a chronic problem now. Gold prices have quintupled since 2002; Oil is up over 50% in the last few weeks alone; agriculturals are up a similar amount. This is not a “deflationary environment”; far from it, it is a reply of the 1970’s. And how did we get out of the stagflationary 1970’s? By raising interest rates and taking the pain in 1980: that is the only answer. All the rest is overindulgent spin from professional Economists who, due to a lack of basic common sense, understand less about economics than the average man on the street.
  Posted by: Chris Riley | May 20 11:01am | Report this comment
  
  
• 11. Will you please test this out on a small scale (the size of Estonia or Latvia) for ten years, with someone on the outside taking the full risk, before full scale implementation in the UK or US? All this writing the last twelve months about financial innovations back firing has made me a little cautious. Comes to mind; you have written on such topics yourself.
  Posted by: Gaute Solheim | May 20 11:17am | Report this comment
  
  
• 12. @Users 4415760 & 4634644
  
  A mortgage is not a currency transaction, it is a ledger transaction, and so negative nominal interest rates create no difficulties.
  
  At the end of the year your mortgage statement would read. Principal £1,000,000 less interest £20,000, balance £980,000. It would produce no income to live on, being effectively a capital adjustment, which in a way is what all interest is.
  
  Nevertheless, it is a profit of £20,000 which could be realised when your house was sold and the mortgage closed. Unfortunately, the only reason nominal interest rates would be likely to be negative is that the world’s primary asset, house prices, are falling fast, as they are now, at say 20% per annum, so your £20,000 nominal profit on your mortgage would be offset by a £200,000 nominal loss on your house.
  
  In fact it would be worse than that. Right now the bank would only lend you £1m if you had £1m of equity to put down as a deposit, and so in fact you would only be borrowing £1m on mortgage if you bought a £2m house, so gearing kicks in and you lose £400,000 on the house and still only make £20,000 from the negative interest rate on the mortgage.
  
  Which illustrates the scale of the problem of turning this world economy around, when real interest rates on a mortgage are currently still 5% or so.
  Posted by: David Goldsby | May 20 11:48am | Report this comment
  
  
• 13. Willem,
  you still do not get it:
  - the guillotine cooled off some heads in france floating the very same brilliant idea of yours: loot savings of people, just to make debtors better off.
  - fiat money systems are based on confidence. change the rules of the game too often and to the detriment of the majority and you lose the confidence.
  - every government regime that loots and plunders its subjects has failed.
  
  how do your academically sensible suggestions fit into a common sense world?
  Posted by: baychev | May 20 01:46pm | Report this comment
  
  
• 14. @ Gaute Solheim,
  
  Yes it would be nice to make an experiment during 10 years in a small country. It would also be nice to be able to test flu vaccines during 10 years to be absolutely sure that they are harmless.
  Indeed, when swine flu is going to strike this winter, you won't get yourself vaccinated because of all these unknown consequences of inoculation, right ?
  This example is just to show that sometimes, one doesn't have the luxury of small scale trials
  Posted by: charles monneron | May 20 02:41pm | Report this comment
  
  
• 15. "For reasons I don’t understand, this topic generates almost as much heat and emotion as a critical piece on Obama."
  The reason is that questioning the legitimacy or even the existence of an unconditional store of value is touching something sacred. It is not for nothing that there is "In God we trust" written on every Federal Reserve note or the portrait of the Queen on every Bank of England note. Check "Alan Greenspan" together with "priest" on Google and you get 35,000 answers !
  You are indeed an iconoclast, in the purest meaning of the term, and it is therefore natural that you face " heart-stopping ignorance and lack of elementary logic" not only from the numerically illiterate but also from established academic constituencies.
  
  Courageous fight indeed, in other times, one could get burned or crucified for less than that.
  Posted by: charles monneron | May 20 03:13pm | Report this comment
  
  
• 16. I will happily admit I hardly understand economics (of the monetary kind or any other), but I was reading the various proposals to regulate OTC derivatives. All this stuff I think has been used as a kind of paper money, sort of privately issued bank notes. Wouldn't that "naturally" favor 1) abolish currency, since there already is a rallod? I just don't get why people rather start a row over "Keynesianism" then get creative to move asap out a crisis in paper money.
  Posted by: rikkiklaver | May 20 05:25pm | Report this comment
  
  
• 17. I took Sterling real interest rates from 1970 to 2007 and put them in a spreadsheet to find the real value at 1970 prices of £1,000,000. By 1979 the real value had fallen to £751,000, as most savers of a certain age are all too quick to recognise and lament.
  
  If you carry on the series, the real value had recovered to £1,052,476, as soon as 1986, after Mrs Thatcher introduced monetarism to economic policy. Quite right, and quite necessary.
  
  By the middle of the early nineties recession in 1993, the real value of that £1,000,000 had become £1,519,284, and at about that time Christopher Fildes memorably described it as ‘payback time’ for the debasement of the currency in the seventies. And some!!! At about the same time Edward Luttwak commented in an article in the Telegraph that, ‘the Pound had long been a currency from which the City could profit and of which the unemployed could be proud’.
  
  With the adoption of the 2% inflation target as part of the Maastricht Treaty convergence criteria in 1992, real interest rates were held at obscene levels to drive down inflation still further, with the effect that by 2007 the real value of that £1,000,000, banked as a risk free deposit in 1970, had increased to £2,506,819. Quite a return on bone idle capital. Why bother investing in productive assets? Why take risks?
  
  In fact, all this risk free real gain by wealthy entities produced a massive increase in bank deposits and bank capital, which was multiplied into the BRIC investment boom, which led to the commodities boom. It also fed into various housing booms. Later the booms became speculative bubbles.
  
  The gain in the real value of £1,000,000 invested risk free to £2,506,819 was balanced by a massive increase in real debt taken on by developed world borrowers, as they were forced to borrow ever greater sums to buy a suitable family home, and as the only way to maintain consumption, wage growth having being kept moribund by the high real interest rates. They were able to do this because high real interest rates drove down nominal interest rates ever lower, making the initial nominal payments on loans manageable even as the real borrowing soared.
  
  That was how the boom and bust happened. I happen to think it was due to genuine belief on behalf of the elites that German like post-war low inflation was the route for the whole world to post-war Germany like productivity growth, which became a madness of crowds, chanting, ‘Keep inflation low and all will be well with sustainable growth and no more boom and bust’. Then again, I always was naive.
  
  What is for sure, is that savers think they deserve a risk free long term real return, are infuriated by any suggestion that they don’t, and become incandescent at the idea that it caused the boom and bust. And yet, even though I have infuriated enough savers these last two years with comments such as these, none of them have ever put forward any theory why long term real interest rates can be positive without a geometric progression to deflation.
  
  I have no more time for debasement of the currency by reduction in its long term absolute purchasing power than you, but they are not satisfied by that, they want to maintain its relative purchasing power, without work and without risk, and it is not possible without the world economic disaster we are witnessing.
  Posted by: David Goldsby | May 20 06:49pm | Report this comment
  
  

 

[thedreamer]

<LI class=" " id=infernoitem278904 style="MARGIN-LEFT: 0px" sortindex="1242845413">18. This proposal is poorly thought out.

By the most basic economic logic a lender must be compensated in terms of purchasing power for the act of lending which incurs risk and sacrifice.

Therefore lending at negative rate r is only rational if prices deflate at a rate > -r.
Consequently your proposal aims to bring about price deflation.

It does not matter if there is a currency or not I will not lend at rate r < 0 unless prices deflate at rate
-r > 0.

I like it though.
I hope this idea gets some publicity as it is the obvious declaration of the intellectual bankruptcy of
monetary policy.
The monetary authorities believed themselves capable of steering the economy.
Based on this believe they intervened in and massively distorted the free market.
As a result the financial system is on the brink of insolvency.
Confidence is fragile.

We should let the free market set all prices including the rate of interest.
Then, in a time of heightened uncertainty, we would have the natural outcome of higher rates of interest as the act of lending becomes more risky.
Higher interest rates would have the beneficial effect of making marginal economic enterprise uneconomical and focus investment into more promising areas.
It would also lead to the much needed bankruptcies which clean the rot out of the system as it is.

These bankruptcies much like forest fires are healthy for new growth.
Capitalism and the free market do work if you let them.
Posted by: holomorphic | May 20 07:50pm | Report this comment


<LI class=" " id=infernoitem278913 style="MARGIN-LEFT: 0px" sortindex="1242849273">19. @Holomorphic

If I have a spare £50,000 I have no immediate use for, and I put it in a bank for a year, I take no risk. In fact, my option is to keep it under my mattress – try to insure that!

If at the start of the year that £50,000 buys me a boat I don’t want to buy yet, and if nominal interest rates are -5% and so I get £47,500 back at the end of the year, I have made no sacrifice if the boat costs me £47,500 at the end of the year.

So much for risk and sacrifice of the man with spare money.

Let us say I am a bit more entrepreneurial, and think I ought to put my money in property. But house prices are falling at 20%, so if I have a choice between buying property and putting my money in the bank at -5%, I am 15% better off putting my money in the bank.

So we have under the mattress at a possible 100% loss, or into property at a 20% loss, or in the bank at 5% loss. The bank seems a good deal to me, because I like to sleep well at night.
Posted by: David Goldsby | May 20 08:54pm | Report this comment


<LI class=" " id=infernoitem278917 style="MARGIN-LEFT: 0px" sortindex="1242850585">20. @ David,

If things get rough your money won't be safe in the bank (limits on monthly withdrawals while inflationary monetary policy is at work).
I can think of schemes to store (hide) wealth safely.
I am sure you can too and it won't involve insurance.
Posted by: holomorphic | May 20 09:16pm | Report this comment


<LI class=" " id=infernoitem278918 style="MARGIN-LEFT: 0px" sortindex="1242850877">21. One thing should be stated clearly:

There is nothing magic about zero as a bound for interest rates.
The only thing that matters is the difference between nominal rates and the rate of inflation.

The only thing that distinguishes negative nominal rates is the publicity value.
It might induce the people to start thinking at last.
Posted by: holomorphic | May 20 09:21pm | Report this comment


<LI class=" " id=infernoitem278923 style="MARGIN-LEFT: 0px" sortindex="1242854826">22. I think I remember seeing some very large Zimbabwe notes with expiration dates on them. You did not happen to do any consulting work with their central bank, did you?
Posted by: User4358514 | May 20 10:27pm | Report this comment


<LI class=" " id=infernoitem279902 style="MARGIN-LEFT: 0px" sortindex="1242997684">23. There's nothing wrong with the remorseless logic of Mr. Buiter's proposals, and few of the original opposing posts questioned his logic. Nor is it a question of morality. It's only that the proposals are impractical in an irrational world of human beings. There is no logical reason why our sophisticated and technological society should be using physical money at all today, but still we are. It would have already happened, of course, if we lived in the fictional world portrayed in the film Logan's Run. The reason why we hang on to notes and coin to a degree is that the human being is an emotional creature with irrational fears, and we attach huge mystical importance to concepts like treasure. Elias Canetti observed that the brutal destruction of treasure experienced in the Weimar Republic inflation contributed to the willingness to contemplate the brutal destruction of human beings in the Nazi holocaust. A quick glance at the world today shows that the human spirit has not undergone a transforming advancement from those days. Removing high denomination notes from the system (but a lot higher than the absurd five dollar maximum proposal) is not going to be a problem. But messing around with people's value systems is. Quantitative easing is already a valid alternative to imposing negative interest rates by diktat, without these dangers. So, ten out of ten for logic, and in terms of the merit of the proposal, once again, nul points. I fear that a third post on this topic will still elicit the same response from his readership.
Posted by: firbankfell | May 22 02:08pm | Report this comment


<LI class=" " id=infernoitem279937 style="MARGIN-LEFT: 0px" sortindex="1243003522">24. @firbankfall

It is indeed a question of morality.
Prof. Buiter proposes coercive action.
He proposes to take away some freedoms which I still have, namely the freedom to circumvent
his schemes by sitting on my cash.
By what right does he believe he may force individuals to divest themselves of their savings and become risk taking speculators.
Is the ordinary individual well equipped to invest in stocks, real estate or commodities?
More likely this individual will be the victim of the crooks of finance of which there seems to be a never ending supply.
Posted by: holomorphic | May 22 03:45pm | Report this comment


<LI class=" " id=infernoitem280008 style="MARGIN-LEFT: 0px" sortindex="1243045801">25. Of course interest rates can be negative. That is something evident (I sent a letter about that 15 years ago) If tenants pay their rents according to the inflation rate and this year thanks to deflation they will pay a lower rent than last year, then Banks can do the same...
Posted by: Enrique | May 23 03:30am | Report this comment


<LI class=" " id=infernoitem280109 style="MARGIN-LEFT: 0px" sortindex="1243180997">26. This is the kind of nonsense thinking that lead to the current crisis. And to think that these people are still in charge.

What will happen if people switch to another store of value? If the good is non-durable, there will be only a limited and temporary supply of it . As people will try to hedge into hard assets, commerce and investment will cease. No more non-durable goods come to the market(no way to make a profit by investing currency only to get less purchasing power later), prices skyrocket, political pressure leads to price controls causing even less supply, welcome to Zimbabwe.
If people flee to durable stores of value, again commerce will cease. The focus becomes wealth preservation , not production and investment. People/companies will refuse to enter contracts denominated in currency. After all, if the govt. will tax or expire currency, what else will they do?(it's the what else question that will cause panic) Remaining commerce will be barter or based on hard assets, division of labor will shrink, a disaster.
In general, professor, people will resist when forced to do what they don't really want to do. No matter how many hare-brained schemes you come up with, you will be surprised at their ingenuity to circumvent them.
Posted by: User3634535 | May 24 05:03pm | Report this comment


<LI class=" " id=infernoitem280129 style="MARGIN-LEFT: 0px" sortindex="1243204050">27. Mr Buitler : as you can publish in FT , please read Silvio Gesell.

Your ideas are good but Gesell explained them 100 years ago, 100 times better than you just did.
You only gave the impression to everyone that your system would rip off our poor savers whereas it would challenge for the first time in history the dictature of money.

If you can read French :
http://revolution-monetaire.blogspot.com/2009/01/plaidoyer-pour-une-rvolution-montaire.html
Posted by: User4172848 | May 24 11:27pm | Report this comment

 

[thedreamer]

DOBBIAMO SCRIVERE QUALCOSA A QUESTO PAZZO, C'è QUALCHE PROFESSORE DI ECONOMIA CHE SI PRENDA LA BRIGA DI SPIEGARE A QUESTO SIGNORE PERCHè LA SUA IDEA SARà DELETERIA PER LA FIDUCIA NEL "FIAT MONEY", RENDENDO LE PERSONE ANCORA PIù SCHIAVE DEL SISTEMA BANCARIO, OLTRE A CREARE LE PREMESSE PER BOOM & BUST AL CONFRONTO DELLE QUALI QUELLE DI QUESTI ULTIMI ANNI APPARIRANNO COME TEMPORALI PASSEGGERI?

http://www.nber.org/~wbuiter/
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