Below the Zero Bound in the Cashless Economy
As you’ve probably heard, one important reason that policy options under conditions of a severe downturn get controversial is that the uncontroversial recession-fighting measure—lower interest rates—stops working when the interest rate gets down to zero. When you’re at the legal bound, there are things you can do with monetary policy, but they’re controversial. And there are things you can do with fiscal policy, but they’re also controversial. Under the circumstances, doing away with the zero bound might be useful. And in Japan, they’re considering the possibility that negative interest rates would be possible if only you did away with cash:
He said that all the proposals were radical but worth consideration for Japan. Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.
A cashless economy would also presumably reduce the possibilities of tax evasion and criminal activity. More for those kind of reasons, I suspect that more countries will start looking at this option in the decades to come.
36 Responses to “Below the Zero Bound in the Cashless Economy”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
June 20th, 2009 at 11:17 am
A cashless society? Oh, Lordy. The End Times wingnuts and the gold bugs will just go out of their minds.
June 20th, 2009 at 11:22 am
A cashless economy would also presumably reduce the possibilities of tax evasion and criminal activity
Won’t it also remove the last vestiges of anonymity/privacy in financial transactions? True, most of our financial trasactions aren’t anonymous but at least there’s the option.
June 20th, 2009 at 11:31 am
DJ:
You are correct. How would you pay for stuff if cash goes the way of the doo-doo bird? Credit cards? You’d be able to be tracked anywhere. It might work in Japan, but it would never fly here. It would represent too much government/private business intrusiveness.
June 21st, 2009 at 10:05 am
Matt, do you actually think that doing away with cash would somehow be less controversial than unconventional monetary/fiscal policy?
June 21st, 2009 at 10:12 am
Hmm, so we have to start using credit cards for:
• Vending machines
• Parking meters
• Toll booths
• 25¢ library fines
• Leaving a tip
• Laundromats
• A last-minute rubber in the truck stop lavatory
• Under-$1 small items (nuts, bolts, tiny electrical/plumbing doodads) at the hardware store
Not to mention this makes the traditional coin-flip impossible.
Yeah, this sounds workable.
June 21st, 2009 at 10:12 am
Agree with @4.
Actually, isn’t cash a lot less problematic than hard, storable assets like gold? I understand that it’s difficult to commit yourself to inflationary policy for sufficiently long periods of time, but if you can do it, you can effectively impose an interest rate on cash (actually, I guess you effectively solve the problem by pushing real interest rates into negative territory while maintaining a zero nominal interest rate). What you can’t do is impose an interest rate on gold, etc. However, I should admit that I don’t know what I’m talking about and could be missing something obvious.
June 21st, 2009 at 10:48 am
I’m sorry but the idea of the govt paying a bank to borrow money from it is not going to be less controversial by doing away with cash and calling it “negative interest”
June 21st, 2009 at 10:50 am
I don’t think a cashless economy would actually be possible. Even if the government somehow confiscated all the dollars, credit card companies would start selling disposable, transferrable pre-paid cards that would function as cash. And if those were prohibited, people would move on to commodities; gold/silver, Walmart gift cards, cigarettes, etc. Or, you would start to see the paper currency of some other country that hasn’t prohibited cash.
June 21st, 2009 at 11:00 am
General Motors gave away what amounts to negative interest for years. Now they are bankrupt.
June 21st, 2009 at 11:00 am
I’d like to know how things like panhandling, lemon stands, bake sales, and tag sales would work in this scenario. Barter? Would the government have to issue debit cards and facilitate electronic transactions? If they’re issuing the cards, how about the accounts?
June 21st, 2009 at 11:17 am
This is a pointless argument.
At this point interest rates don’t matter because aggregate demand is insufficient. Why would anyone invest in a business that can’t sell enough to cover costs, regardless of interest rate?
We are awash in capital but the demand for labor and materials is too low. So to avoid deflation, demand for labor and materials must increase.
So the right policies entail putting more people to work. Stimulus is the answer, but at a greatly elevated rate. Higher tax rates at top incomes is also required to prevent hoarding of wealth.
June 21st, 2009 at 11:19 am
Well the Japanese are better than Americans at math. And this proposal reminds me of advanced algebra class, when they rolled out the imaginary numbers. The whole class was like, WTF! You invented the square root of negative one, just for the sake of solving more equations???
June 21st, 2009 at 11:29 am
To address the panhandling-tips-lemonade stand issue, you could put a ceiling on the largest denomination of circulating currency, and time the larger denominations out, a la occupation currency in Japan during the late ’40’s-early 50’s, either on a one-time basis or periodically.
(This came up periodically in HS debate circles a while ago as a tool to get at the drug trade, since the US $100 bill was the ubiquitous medium of exchange in that industry.)
June 21st, 2009 at 11:34 am
A cashless economy would finalize the tyranny of bankers. That said we are almost there anyway. The final few percent would be a battle no smart American politician would dare support.
I hate to go all logical here but all your cash in a cash or cash equivalent account is not there. Not even close. Which everyone knows on some level but ignores on another. Trying to take the last physical money away would focus peoples minds on the former and would likely be causal of a massive crisis.
Not to mention that an economy dependent upon negative interest rates is around the bend insane.
Too low interest rates were the father and mother of this crisis and will not fix it.
June 21st, 2009 at 11:39 am
Currency does have dates printed on it, so a country could legislate that the value of a dollar to go down by 1% a year (i.e. a 2009 dollar is worth $1, a 2008 dollar is worth 0.99). Seems a bit unwieldy though. Certainly it’d be a huge incentive to embrace the paperless system.
Also worth noting that cryptographically secure digital currency is an active area of research. The idea here is that you go to a “bank” withdraw some big numbers (that act as currency), and then if I give you the numbers I withdrew you can deposit them without the bank being able to tell where they came from (i.e. it’s privacy preserving). If, however, I “double spend” and give multiple people the same number, when they both deposit said number, the bank can detect my identity. In this system, it’s like your using cash, but since it’s all electronic, having it’s value degrade over time isn’t necessarily as cumbersome.
June 21st, 2009 at 11:47 am
Nothing stops some creative private citizens from devising their own currency system if they don’t like the government’s.
June 21st, 2009 at 11:52 am
Will monkeys still be able to pay for sex in a cashless society?
June 21st, 2009 at 11:53 am
Aatos:
Why single out GM? They were far from the only ones with that problem.
June 21st, 2009 at 12:06 pm
Greg Mankiw proposed a similar idea awhile back in the NY Times and his blog. The Fed could simply announce that dollars with the last serial number of 8 or whatever will no longer have value after x amount of time.
June 21st, 2009 at 12:10 pm
Currency does have dates printed on it, so a country could legislate that the value of a dollar to go down by 1% a year
Stamp scrip? Hm.
June 21st, 2009 at 12:18 pm
So do we really think that the fed can remove money from the Congress during periods of negative interest rate? What would Yglesias say when Single Payer health was taxed at rate X, but the interest went negative, so the Executive branch had to ratio health care based on an allocation of .97 * X?
I think the concept misses the basic point about negative interest rates, they cannot exist by the very definition of money. Money works only during periods of expansion. When rates go negative, even if done electronically, the result is the same; some people have to go bankrupt.
June 21st, 2009 at 1:39 pm
It’s kind of amazing the degree to which liberals will conspire to steal more and more wealth from the citizenry.
June 21st, 2009 at 1:43 pm
I believe the standard observation is that cell phones could be used for casual microtransactions.
June 21st, 2009 at 1:55 pm
David Houghton: I think that this plan would inevitably require having the government provide free checking accounts with debit cards to anyone who wants it (so free that you could just walk into a post office and grab a card with zero balance on it) and that these debit cards would be “smart” in such a way that two people meeting in the middle of nowhere would be able to just tap their cards and exchange money. Which is not at all impossible, (and with the encrypting technology that EERac describes) but requires a fair amount of infrastructure.
June 21st, 2009 at 2:37 pm
RON PAUL warned us about this.
June 21st, 2009 at 3:22 pm
24 – I agree. I think we’re already fairly close to there, given the popularity of debit cards over cash (most people I know under the age of 30, including myself, use debit cards for most transactions…I haven’t used cash at all this week), and the use of prepaid cash cards for people who don’t have checking accounts.
Actually, creating free checking accounts would be good on its own. A lot of working poor people are dependent on chedk-cashing and similar institutions, which charge them high fees for what are very low incomes to begin with, because they can’t afford to wait three days for their paycheck to clear, and they often don’t have a big enough paycheck to get over the minimum deposit standards at most banks.
June 21st, 2009 at 4:00 pm
I am using this post and thread as a contrary indicator. Thus this is an extremely good time to be holding cash. With interest rates on cash equivalent accounts essentially zero and with price deflation there is actually no disincentive to holding cash.
Instead it has reached the point that nobody can even think of a reason why you want to hold cash. This despite the fact that several money market funds were locked down last fall and the entire money fund complex is existing on the ‘confidence’ supplied by the fact that the Treasury is guaranteeing the funds with money they don’t have. The fact that hundreds of banks are insolvent waiting their turn to be taken over and liquidated by the FDIC.
It’s weird.
June 21st, 2009 at 4:15 pm
The digital eCash that EERac describes does solve the problem of anonymity, though the protections against double-spending are totally inadequate.
More to the point, though, how does transitioning to a digital, anonymous bearer-bond make the situation any better than using a non-digital one?
June 21st, 2009 at 6:38 pm
I read The Handmaid’s Tale. This is not a good idea.
June 21st, 2009 at 6:39 pm
(Quick explanation: One of the first things the Christotaliban did when they went into power was deactivate all female citizens’ bank accounts – and since there was no non-electronic money in circulation, this made all women economically dependent on men.)
June 21st, 2009 at 10:40 pm
“that these debit cards would be “smart” in such a way that two people meeting in the middle of nowhere would be able to just tap their cards and exchange money.”
Golden Age for muggers?
June 22nd, 2009 at 8:39 am
Alternatively, you could just get everyone freaked out about inflation. Oh wait.
June 22nd, 2009 at 9:39 am
I’m curious about why we can’t do this now. How much actual, physical U.S. cash is floating around, right now, in coins and paper money? It’s got to be a very small piece of what we (or the economists) would regard as ‘money.’
And if we got rid of the zero bound on money other than physical cash, how many people would actually run out and turn their savings into a stack of $100 bills that they’d put in a safe somewhere?
Seems to me that we could effectively get rid of the zero bound tomorrow if Bernanke got the itch to do so.
June 22nd, 2009 at 11:10 am
Won’t work. People will just hold checking accounts, which are the same as cash.
June 22nd, 2009 at 1:28 pm
DTM:
Indeed. So I can finally get rid of my wallet and carry only an iphone – once I get an iphone.
June 22nd, 2009 at 4:22 pm
RON PAUL warned us about this.
Has Michelle Bachmann heard about this yet? I tremble at the thought of her fury.
My take is that we should get a bar code tattooed/stamped on our wrist or forehead.