tag:blogger.com,1999:blog-582368152716771238.post966768196714510400..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: McAndrews on negative nominal rates John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-582368152716771238.post-36631556142126845872015-05-19T11:07:32.581-05:002015-05-19T11:07:32.581-05:00From a political POV it should be interesting to s...From a political POV it should be interesting to see how one reconciles the claim that voter ID is prejudicial with the notion of requiring everyone to have a digital account. If it's discriminatory for the former isn't it discriminatory for the latter? Both entail the allegedly arduous task of getting an ID, plus the non-cash economy places an added burden of setting up a digital bank account. JB McMunnhttps://www.blogger.com/profile/15468282698533043544noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5419609417473150022015-05-18T23:12:30.548-05:002015-05-18T23:12:30.548-05:00Ralph,
Negative interest rates have several conno...Ralph,<br /><br />Negative interest rates have several connotations.<br /><br />1. If someone is willing to pay for a bond more than it's principal and interest payments are worth, then the market interest rate for that bond can be considered negative. In that case, the borrower is still making positive interest payments to the owner of the bond. It's just that the owner of the bond has paid more for the bond than the total of all interest payments and principle payments that will be made.<br /><br />This isn't as crazy as it sounds. In the corporate world, debt is a claim on the liquidation value of a company. If the liquidation value of the company is significantly large compared to it's operating cash flow, bond buyers may push up bond prices to ridiculous levels to gain claim on that liquidation value even while stock holders sell off in droves due to low / negative earnings.<br /><br />2. Under a positive interest rate the flow of interest payments goes from borrower to lender. Under a negative interest rate this would presumably be reversed.<br /><br />3. Destruction of currency. Many "negative interest rate" proposals never address debt and interest at all and instead jump to currency by creating an expiration date or some other means to reduce the amount of currency in circulation.<br /><br />4. Effective interest rates and defaults. Obviously if someone defaults on a loan and never pays it back, the holder of the loan receives a negative return on investment even though the loan agreement was for a positive interest rate.<br /><br />The negative interest rate you describe falls under #2 above - bank (or other lender) lends you money at a negative interest rate. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41876247052008335442015-05-18T04:44:42.124-05:002015-05-18T04:44:42.124-05:00Negative rates are barmy for two reasons. First, t...Negative rates are barmy for two reasons. First, the objective is to impart stimulus, but whence the assumption that stimulus should come JUST IN the form of expanding loan based activity (primarily investment)? I.e. given that extra demand is needed, the most reasonable assumption is that ALL FORMS of activity (public sector AND private sector, investment goods and non-investment goods) should expand.<br /><br />Second, negative interest rates can in theory lead to negative output. E.g. if I borrow at minus 4% and buy some asset which deteriorates in value in real terms by 2% over a year, and then I re-sell it, I make a profit (of 2%).<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15881000737782096992015-05-16T23:09:06.876-05:002015-05-16T23:09:06.876-05:00As it is, contrary to what many economists posit, ...As it is, contrary to what many economists posit, use of paper cash is exploding. <br /><br />There is now about $1.35 billion in U.S. cash in circulation, up about $500 billion since 2008. About $4,200 in circulation for every resident of the U.S. Yes, I know, all that additional paper cash is in suitcases doing drug deals, 'cause we see that in Miami Vice re-runs.<br /><br />But use of cash long ago exploded in deflationary Japan, now running about $6000 (dollar equivalent) in circulation for every resident, and paper Euros in circulation is rising rapidly in Europe, now in deflation. <br /><br />When there is deflation, people save in cash. When they have piles of cash, they start doing cash transactions to avoid Mr. Tax Man. Soon, you have a bifurcated economy, above-ground and underground. The Banana States of America, here we come! <br /><br />Yes, we can make an electronic police state, and outlaw cash. <br /><br />Pre-paid cash cards are an interesting idea, but since one would buy the cash cards using electronic cash, who would really believe it is secret or anonymous? <br /><br />There is even another worry to the cashless society: Blowback for any purchase you make from the PC crowd. There are restaurants in California that have lost business as their owners or high-ranking employees made un-PC political donations. <br /><br />In a cashless society, if could become known where you spend your money. Did you do some un-PC shopping? Order too much liquor? Go to a skin bar? Buy Chevron products? "Support" DoW Chemical when you bought some cleaning products? Buy some pot? <br /><br />Egads, so every conversation, e-mail and purchase you make, there is a record. The makes the old Eastern European oil ice states look like amateurs. <br /><br />Wouldn't it be better to 1) Get rid of the NSA, and 2) use cash and "endure" moderate inflation (which actually has some benefits as well as costs). <br /><br /><br /><br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64132097279816244742015-05-13T21:35:44.371-05:002015-05-13T21:35:44.371-05:00Douglas,
"Overnight deposits at the central ...Douglas,<br /><br />"Overnight deposits at the central bank? In which case there a whole lot of rates well above 0, and one rate below 0."<br /><br />If both the overnight deposit rate is the same as the discount window rate (both negative) then it's a wash - whatever negative rate the central bank assesses on a bank's deposits can be recovered by the bank by borrowing funds from the Fed's discount window at the same negative rate.<br /><br /><br /><br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46178847721038190542015-05-13T16:57:11.709-05:002015-05-13T16:57:11.709-05:00No need to get rid of currency, unless the rate ge...No need to get rid of currency, unless the rate gets extremely negative. There are storage costs and liquidity that must be taken into consideration. It is not a free transaction to take your money out of the bank and put it into crates and keep those crates safe. And if there is something expensive to buy to take those crates of money back to the bank to make an electronic transaction.<br /><br />Also, when a person says "negative rates", which rates? Overnight deposits at the central bank? In which case there a whole lot of rates well above 0, and one rate below 0.<br /><br /><br /><br />Anonymoushttps://www.blogger.com/profile/06862418730092856369noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16266333410673477622015-05-10T18:57:17.756-05:002015-05-10T18:57:17.756-05:00In principle you can always push up central bank i...In principle you can always push up central bank interest rates by increasing inflation, and/or by making inflation less predictable. Negative rates give the CB the luxury of more options.<br /><br />Regarding the cost of adapting to negative rates (e.g. modifying software), it depends on how quickly it's done. With enough advance warning the cost approaches zero, since everything gets replaced anyway.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58729717678040366232015-05-10T13:02:46.244-05:002015-05-10T13:02:46.244-05:00JP,
"The problem right now is that the yield...JP,<br /><br />"The problem right now is that the yield on cash and central bank deposits is too high, thus deflation. We need to reduce that yield somehow, whether it be the various lite techniques above or something else. I really don't think asset price bubbles should be used as a bogey man to prevent a basic CPI target from being hit."<br /><br />If the problem is that the yield on cash and bank deposits is too high, then government should sell securities that have a much higher yield to get people out of cash and bank deposits.<br /><br />If the problem is bubbles in market prices, then government should issue securities of the non-marketable variety.<br /><br />If the problem is one of incentives - government offering a risk free rate of return by selling bonds - then government should sell equity instead.<br /><br />Finally, destruction of currency will not benefit either the creditor or borrower.<br /><br />Do you have a link for the Buiter / Kimball proposal?<br /><br /> FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6121837988960479012015-05-09T19:35:41.013-05:002015-05-09T19:35:41.013-05:00"Negative rate proposals call for the elimina..."Negative rate proposals call for the elimination of currency."<br /><br />Some do, but most don't. For instance, Buiter and Kimball propose imposing an exchange rate between currency and central bank deposits. Paper currency would stay in circulation. It's also possible to allow for negative rates by making changes to the algorithm that governs the <a href="http://jpkoning.blogspot.ca/2015/02/a-lazy-central-bankers-guide-to.html" rel="nofollow">issuance of high denomination notes</a>.<br /><br />The elimination of currency really isn't a policy worth debating because it isn't in the cards. If there is a negative rate policy waiting in the wings, it is the Buiter/Kimball proposal. It would be more interesting to read your thoughts on the latter than the highly unlikely banning of cash.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.com