As documented by FT Alphaville, Willem Buiter has a thing for negative interest rates.
Most recently he’s been touting the idea again, this time in an opinion piece for the Wall Street Journal.
Leaving the economic case for negative interest rates aside for a minute, there is — as one might expect — a major complication in enforcing such a move. How would you collect interest from banknote holders?
That said, it is not impossible. As Buiter argues (emphasis ours):
To restore monetary policy effectiveness in a low interest rate environment when confronted with deflationary or contractionary shocks, it is necessary to get rid of the zlb completely. This can be done in three ways: abolishing currency, taxing currency and ending the fixed exchange rate between currency and bank reserves with the Fed. All three are unorthodox. The third is unorthodox and innovative. All three are conceptually simple. The first and third are administratively easy to implement.
Now, in the event the Fed did choose to go down the negative interest rate route, it would be logical to assume it would opt to transition via the least administratively intensive path.
The problem with the two supposedly easy steps, though, is they’re unlikely to be appealing to the electorate.
For example, we don’t think the world is quite ready for the abolition of banknotes, whatever the benefits in terms of controlling the black economy — since they’re simply far too ingrained in our collective culture and consciousness.
The second option, meanwhile, would could be seen as a restructuring and would hardly appeal to the world’s top dollar reserve holders. After all, as Buiter explains:
The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.
When the Fed wants to set the Federal Funds target rate at minus five per cent, say, it would set the forward exchange rate between the dollar and the rallod, the number of dollars that have to be paid today to receive one rallod tomorrow, at five per cent below the spot exchange rate—the number of dollars paid today for one rallod delivered today.
That way, the rate of return, expressed in a common unit, on dollar reserves is the same as on rallod currency. For the dollar interest rate to remain the relevant one, the dollar has to remain the unit of account for setting prices and wages.
This can be encouraged by the government continuing to denominate all of its contracts in dollars, including the invoicing and payment of taxes and benefits. Imposing the legal restriction that checkable deposits and other private means of payment cannot be denominated in rallod would help.
The most administratively intensive option, of course, is taxing banknotes.
But need such a path really be that challenging? A perusal through some of the patents of every central bank’s favourite banknote printer De La Rue, suggests banknote printing has come a long way in the last decade, incorporating everything from laser to nano-technology.
Fiscal-style stamping — which perhaps dissolves or changes the banknote over time, making it become worth less– could be very easily introduced, from what the technology sounds like it can do.
And as BBVA has already realised, other bits of the cash economy– ATMs themselves — are clearly ripe for redesign. Although under such a scenario, paper specifications would clearly be more important than ever.
So perhaps that’s why central banks are so especially annoyed with De La Rue?
Related links:
Negative interest in cash, or goodbye banknotes – FT Alphaville
How to deal with bank hoarding - FT Alphaville
IMF blueprint for a global currency, yes really – FT Alphaville