Negative interest rates
This feels so absurd to me that I don't really know what to make of it. Commentary from Wolfgang Munchau is usually down to earth but this feels preposterous.
All of it feels impractical. Like the kind of 'let's pretend' game you play when you are 7.
Let us assume for argument’s sake that prices will indeed start falling from next year for a sustained period. In such a situation, the central banks would have no choice but to cut interest rates to zero. What then?
There is actually quite a lot central banks can do in such a situation. For starters, they can drive right through the zero boundary and impose negative interest rates. A negative interest rate is like a tax on deposits. People could avoid paying this tax by moving into physical cash.
But there are costs associated with physical storage as well. The mattress is not a safe cash storage device. You might have to invest in a safe deposit box, or pay higher insurance rates against theft. Obviously there will come a point when people may be prepared to do just that. Some lower boundary for interest rates surely exists. But it is minus 1 or minus 2 per cent, not zero.
If you want to push interest rates even lower, you could for instance put expiry dates on banknotes, possibly in electronic form, since modern banknotes are full of technical gizmos. Renewal would be taxed – at a rate at least as high as the interest rate is negative. This would discourage people rushing into hard cash.
All of it feels impractical. Like the kind of 'let's pretend' game you play when you are 7.
Comments
In November 1998, the western bank charged Japanese banks for taking their cash.
http://money.cnn.com/1998/11/06/economy/japan_bank/
It happened in Switzerland too in t he 1970's
Right now, the banks are hoarding cash, and investors prefer to put their money in 1 month t-bills at 0.00% interest rate rather than risk it in a bank.
Of course, the natural arbitrage is to store cash, but you need a place to store it, guards, etc.
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