
Citi Economist Says It Might Be Time to Abolish Cash - randomname2
http://www.bloomberg.com/news/articles/2015-04-10/citi-economist-says-it-might-be-time-to-abolish-cash
======
stegosaurus
This article is utterly hilarious. It's like a banquet of doublespeak.

Remove cash from me and I will barter.

I refuse to allow the bank to edge in on everything I do. I want to pay my
friend for painting my wall? I do it. I don't ask the bank, I don't deal with
'money laundering' nonsense, I don't pay PayPal fees... I just do it.

Take that ability away and I'll start using gold or silver. Your move...

'Change is resisted'. Really? ... really? Yes, if you plan to change my facial
structure via the mechanism of stamping with a boot I will resist that.

~~~
harryh
What's doublespeak about this? The problem where the Fed can't push interest
rates below zero when the economy is doing especially poorly is well
documented. He's simply proposing a solution to this problem. Sure, the
downsides might outweigh the benefits but it's a fairly straightforward and
obvious solution.

Of course some people will barter or find other ways to store value than money
but it seems to me that would still leave the Fed with more flexibility than
it had before.

Do you disagree that there is ever a need for negative nominal interest rates?
Do you think there is a better solution than this one?

~~~
skywhopper
The better solution is to encourage a higher baseline level of inflation (a 4%
target rather than 2%). Central banks have gotten really good about holding
down inflation, but they put themselves into a situation where they have very
little power against economic slowdowns when they target a 2% inflation rate
(a target which has become a hard cap in many ways).

Of course, the best way to spur some necessary inflation at the moment would
be to raise minimum wages, have governments borrow at these essentially zero
interest rates and spend it on long-term investments that will allow their
economies to grow for the next 70 years like they have for the past 70. But
the powers that be pretend that hyperinflation is just around the corner and
that government debt is sinful, while at the same time articles like this are
published discussing how to facilitate long-term deflation.

~~~
harryh
It's certainly reasonable to argue that the target inflation baseline is too
low but that still doesn't negate the problem that when it falls too low
sometimes the ideal monetary policy might be negative interest rates.

You are also right that fiscal policy is an available tool from the proverbial
tool belt but most people believe that it can't completely replace monetary
policy. It's a fair debate though.

~~~
pjc50
The only reason to want negative interest rates is to discourage "cash
hoarding". This is quite similar to the FDR gold ban reasoning: the economy
has contracted, a small number of people refuse to allow their vast wealth to
decrease, therefore the wealth decrease falls most harshly on those with least
wealth.

Given that most wealth in the present day is in the form of debt-like
instruments or assets, there is another, fairer way to negative interest
rates: tax on bond repayments.

$100 zero-coupon zero-interest treasury bond with 1% tax on repayment has the
same effect as negative interest rates.

~~~
harryh
Why would anyone buy those bonds if they could just keep their money in cash
with no tax?

~~~
pjc50
Cash _in large quantities_ has a carrying cost just like anything else. You
have to have a warehouse with guards. You want to insure it. I think this
works out at a few percent. Certainly there's a cost in trying to settle large
transactions in cash. It's annoying enough if you're a supermarket or other
note-and-coin handling business.

Are Apple really going to construct a $164.5bn Scrooge McDuck money bin?

~~~
harryh
OK yes, this is true. Which is why some people think that the zero lower bound
really isn't exactly at zero. Doing this is a huge pain in the ass:

[http://static2.businessinsider.com/image/521246dbecad045f3b0...](http://static2.businessinsider.com/image/521246dbecad045f3b00001b-960/breaking-
bad-money-pile-1.png)

Estimates vary as to what the de-facto zero lower bound really is, but it's
still there somewhere. You can see this in the data. The Fed REALLY DID have
trouble drumming up inflation through monetary policy over the last several
years.

------
stephenr
Breaking news: An employee of a giant multi national bank, is suggesting we
stop using a form of payment that works without any involvement from a bank.

More at 11.

~~~
anentropic
exactly...

one important property of cash is it is printed debt-free by the state, which
can profit from the seigniorage

this is the story of latter half of 20th Century, rise of credit cards and
electronic transfers displacing cash

in UK, 1946, fully 46% of the money supply was printed debt-free by the state
(with the profit added to govt bottom line), now it is a pitiful 2-3% with a
corresponding explosion in debt money
[http://www.positivemoney.org/2011/10/debt-free-
money/](http://www.positivemoney.org/2011/10/debt-free-money/)

~~~
nhaehnle
> _one important property of cash is it is printed debt-free by the state,
> which can profit from the seigniorage_

This is actually not true in current typical monetary systems. There may be
exceptions, but the typical setup is that the central bank prints physical
money solely as a reaction to demand by banks (who need it to stock their
ATMs). From an asset point of view it is an entirely neutral operation that is
irrelevant to the state's fiscal position.

In some countries (including the US), _coins_ are minted by the treasury and
then sold to the central bank for distribution. In those countries, the state
does profit from seignorage - but only of coins, so it tends to be irrelevant
in practice (modulo the occasional amusing trillion dollar platinum coin
debate).

------
csense
I see the credit card companies are trying to take a page out of the health
insurance industry's book: Get legislation mandating everyone use our product,
so we can make lots of money...

There is a "theorem" of startups, which states that any business plan which
depends on getting Congress to do something is a bad plan. But if the business
plan is proposed by someone like Citi, who's big enough to actually influence
legislation, it's a little scary...

------
netcan
This guys must be trying to win over public support. How could statements like
this be any less than wildly popular.

 _" Cash therefore gives people an easy and effective way of avoiding negative
nominal rates…(and therefore must go)"_

I think he might be more likely to win support for the more popular position
that banks should be abolished.

------
brothermouzone
It might be time to nationalize every bank that received a "bailout" from
taxpayers. Too Big To Fail means Too Big To Exist. Where's Teddy Roosevelt
when you need him.

~~~
allendoerfer
Didn't they receive the bailout in form of an investment by the government,
effectively nationalizing parts of them?

~~~
aet
They received loans, which they have paid back.

[https://projects.propublica.org/bailout/](https://projects.propublica.org/bailout/)

~~~
allendoerfer
In Germany and Spain Hypo Real Estate and Bankia indeed were nationalized due
to the crisis.

In the US AIG, which is on that list, was nationalized [0]. I thought the
others were as well.

[0]:
[http://en.wikipedia.org/wiki/American_International_Group#Li...](http://en.wikipedia.org/wiki/American_International_Group#Liquidity_crisis_and_government_bailout)

------
skywhopper
... or we could utilize government borrowing or central bank money creation to
soak up the temporary excess capacity in the economy and encourage a more
reasonable level of inflation (say, 4-5% for a few years). The extra spending
would mean more workers with jobs, and the extra inflation would mean that
existing debt loads would shrink, and those would represent positive feedback
loops that would get the world economy growing again.

Eliminating cash in order to allow for deflationary policy only invites a
death spiral of growing real debt loads. Wage stickiness and a century of
economic policies that assume inflation would mire us in an even worse
situation for decades to come.

This is a perfect example of theoretical thinking. The zero-lower-bound is
annoying to someone who wants to construct a perfect mathematical model of the
economy. But in the real world, the ZLB is a real barrier, both
psychologically and in terms of its impact on existing debt loads. Unless
existing debt rated in inflationary terms is either forgiven, refinanced, or
paid off as part of this plan, this is a great way to speed up the path to
utter financial ruin for the middle class.

------
dimitar
[http://blog.supplysideliberal.com/post/62693219358/how-
and-w...](http://blog.supplysideliberal.com/post/62693219358/how-and-why-to-
eliminate-the-zero-lower-bound-a) \- Miles Kimball has also written
extensively about that. There is a huge amount of links on the topic there!

------
sqrt17
I don't see at all why nominal interest rates have to be superior to the
interest that people get through other assets (including cash).

The real problem is that the base of the reserve requirements are based on
demand deposits, which means that customer-centric banks are subject to
reserve requirements while investment banks and (e.g.) bitcoin-based deposits
are not. Which makes sense to some extent, because customer-centric banks are
expected to have some cash on hand, but not to the extent that they would be
the (only) ones who suffer from lower nominal interest rates. Alternatives
would be, e.g.:

a value tax on all investments (don't see how _that_ could be unpopular)

devaluing the currency, by printing more money

~~~
fredkbloggs
> devaluing the currency, by printing more money

What does this actually mean? "Printing money" in modern central banking
doesn't really exist; all "money" has to be created by someone borrowing it.
Reducing lending rates and reserve requirements are intended to stimulate
that. If they don't, central bankers resort to monetising government debt in
order to increase the money supply; i.e., they rely on the government to
borrow the money into existence (QE). If there is limited political will to
increase the size of the public debt, that doesn't work either. Of course,
increasing the size of the money supply isn't effective at all if the money
created is low- or zero-velocity.

The one thing no one has actually tried is breaking the link between debt and
money, literally printing cash and dumping it out of helicopters (or perhaps
more practically, simply adding a fixed amount to every deposit account) with
no corresponding increase in debt. That would in fact be "printing money", but
such an action does not appear to have been seriously contemplated by any
central bank. It would probably be quite effective at increasing velocity,
since it would put found money in the hands of large numbers of people who
otherwise have no surplus. But we should also note that it is essentially the
opposite of negative nominal interest rates (especially if paired with the
abolition of cash), which take money out of circulation and add it to
reserves. Given the large number of people with no surplus money today, every
dollar taken from any of them reduces aggregate demand by one dollar, while
adding that dollar to reserves contributes almost nothing to demand. It's
pushing on a string, but this time with leverage!

It's hard to believe that well-educated economists fall into these mental
traps, but they do, all the time.

------
phkahler
>> Yes, Buiter's solution to cash's ability to allow people to avoid negative
deposit rates is to abolish cash altogether.

In other words he thinks banks should be able to confiscate peoples money at
will.

------
smoorman1024
Even if you abolish cash there are still other ways to avoid negative interest
rates with cash substitutes. If negative interest rates go too high then
people would use their money to buy houses, gold, non perishable goods,
anything that stores value. This is the main problem I see with economists
thinking that abolishing cash is the way to implement widespread negative
interest rates.

~~~
donatj
Can someone explain why some economists would see negative interest as a
positive?

~~~
fredkbloggs
The theory is that negative (real or nominal) interest rates serve as a
continuation of the general purpose of lowering interest rates. That is, they
encourage borrowing and spending, both increasing the size of the money supply
and especially its velocity. The net effect is supposed to be increased
economic activity and higher nominal prices for goods and services. The
essential premise is that negative deposit rates encourage people to spend
money by in effect confiscating it if they do not. It's not obvious that
negative nominal rates are any more effective at this than the negative real
rates that have been imposed in much of the world for the last 7 years.
Perhaps someone could point us at research on that particular topic, if any
has been done.

There are a number of problems with this. Some of them have been mentioned in
passing in other comments, and most of them boil down to the disconnect
between economic models of humans and real humans. Among other discrepancies,
real humans have finite life spans and therefore a limited tolerance for
variance; as such, under less than total economic security they generally
refuse to dispense with saving if it's an option for them, even if the
expected value of spending their savings is greater than not. So the real
effect of progressively lower interest rates on monetary velocity diminishes
as rates decline. A similar effect limits the ability of lower rates to
increase the size of the money supply; people convinced that capital cannot be
usefully employed in the present economic environment are unlikely to borrow
regardless of how low rates are. A stagnant, highly unequal distribution of
capital also limits the effects of lower rates, since the only people likely
to be able to take advantage of them already have plenty of capital available
to invest. Of course, the money supply side of this is somewhat less relevant,
since no one is (yet) proposing negative _lending_ rates, only negative
_deposit_ rates. However, negative deposit rates can actually shrink the
supply of money, because the "confiscated" money ends up at the central bank
where it would simply add to an already-gigantic pool of reserves that could
be lent, but haven't been for the above reasons. That is, the money would
essentially be removed from circulation and destroyed, potentially offsetting
or even dominating any increase in velocity.

You can learn more about the relationships among these quantities by looking
up "modern central banking theory" and basic macroeconomic theory in general.

------
hackercurious
Sweden is currently the most cash free country on earth.

"Welcome to Sweden - the most cash-free society on the planet"

[http://www.theguardian.com/world/2014/nov/11/welcome-
sweden-...](http://www.theguardian.com/world/2014/nov/11/welcome-sweden-
electronic-money-not-so-funny)

------
chrismcb
Is the point of negative interest rates to remove money from the system? Is it
any different than printing more money? Or is it simply to encourage people to
spend more often?

------
higherpurpose
Is he suggesting we use _Zerocash_ instead?

[http://zerocash-project.org/](http://zerocash-project.org/)

------
jokoon
If you nationalize banks, maybe. And even if you do, meh.

