
Cashing In: How to Make Negative Interest Rates Work - yasp
https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/
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mikhailfranco
Bitcoin has an inflation rate of 4% at the moment, dropping to 2% at the next
halving in 2020.

Similarly, gold has a vault storage cost of up to 1%, and a mining inflation
rate of about 2% (3 kt/yr on a total stock of ~150 kt), more if you just count
tradable coins and bullion, without including jewelry.

I would also expect a cash warehouse to cost ~1% for storage, security and
insurance.

Bank charges, such as ATM fees, can take the spread and transaction cost for
cash up to 1%.

So NIRP can easily go to -1%, and maybe even -2% before the alternatives make
sense.

However, I would expect a speculative rise in price for BTC and gold in the
initial stages of a globally coordinated policy of NIRP and a War on Cash.

~~~
chewz
This bitcoin/gold fantasy is cute but most people choose real estate. For
millenia the only store of value with positive long term return wasn't gold
but landholding (with it's terrible side effects like unpredictability of
returns, correlation with population growth and the need to tend to the land).
I guess real estate is modern version of landholding.

It seems like XIX/XX century which made the landholding class bancrupt due to
emergence of bonds, rents and industrial investment were just a short term
abberation.

~~~
mikhailfranco
You may be correct, but rent-seeking is neither just nor fair. Some might
argue that gold and BTC are easier to hide from scavenging authoritarian
authorities - don't worry, they will all be authoritarian and scavenging soon.

The US has confiscated gold within living memory. The US taxes everything
earned by its citizens, and forces then to FATCA(T) and F(U)BAR their wealth,
ready for the day. Watch out for capital controls. One could say that the "War
on Drugs" and the "War on Terror" are actually fake initiatives designed to
track individual activities and assets - a "War on Cash" for the purpose of
NIRP.

In many countries the benefit of property is only true because of the tax
treatment, such as tax-exempt mortgage interest relief, including interest-
only mortgages which take interest as a business expense (i.e. speculative BTL
landlords), and exempting capital gains tax on residential property. It is
highly likely that the only tax-exempt capital asset sees speculative demand.

The US still has a tax deduction on debts, for private individuals and
companies. Obviously debt should not be subsidized! In the UK, the mortgage
interest tax relief (MIRAS) was abolished 30 years ago, but only now are they
tightening the rules for BTL landlords. However, they have introduced various
other subsidies (e.g. Help To Buy) and even an exemption of Inheritance Tax
just for property - this is corruption of democracy on behalf of the rent-
seekers.

It also depends on the planning laws and the demographics. Planning laws are
always and everywhere corrupt in favor of existing NIMBY property owners
(often including a select group of mafiosi & oligarchs).

Many western populations are declining as indigenous fertility rates plunge
and the Boomers die off (e.g. Italy, Japan). Only some accommodate immigrants
to make up for the loss, and only some of those actually have public
acceptance for that immigration (let me guess - globalists, employers and ...
property owners).

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testfoobar
Central bankers will keep reducing borrowing costs to extend-and-pretend
forever - they built their own trap over the past 40 years by asymmetrically
lowering rates over and over again. There seems to be no escape from this
global credit bubble.

German 10 year bonds are yielding -0.20%

[https://www.investing.com/rates-bonds/germany-10-year-
bond-y...](https://www.investing.com/rates-bonds/germany-10-year-bond-yield)

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vessenes
I find the glib tone taken at what is essentially a nuclear-weapons grade
policy plan with nearly unbounded power for the central bank very, very
disturbing. Probably more disturbing than the proposal is the idea that some
staffer at the imf wrote this up believing it should have a section labeled
‘pros and cons’.

Maybe the best thing I could say about it is that if it is to be tried,
ideally it will be on a small scale so that the inevitable centralization and
then destruction of the test region’s economy can be absorbed by the rest of
the world.

On a more positive note, I can report that some crypto companies have
experimented with policy like this. It shouldn’t be surprising to learn that
almost nobody likes it, and in general chooses to transact elsewhere.

I think we can safely assume rational actors in this test region will spend at
least rational and probably irrational energy to avoid such a system; nobody
anywhere in the world wants money removed from their accounts by a central
banker. The corollary is that this will be done only at the point of a gun.

Upshot: venezuela and Zimbabwe would be envious at the speed and richness of
black market economies created in the wake of implementing such a plan.

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ericd
We really need to stop this insanity and just take our medicine before the
credit bubble gets even more extreme.

~~~
dev_dull
Be careful what you wish for. Most government programs are built on nothing
but growth predictions that are... maybe not possible and probably dishonest.

~~~
ericd
I know it will be painful, but it’s going to get more and more painful when it
does crash if we keep pumping more cheap credit into the system.

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burlesona
When I read stuff like this I can’t help thinking something about the world
economy and financial system has got to be horribly broken. How have we
reached the point that banning traditional currency so that we can drive
interest rates negative can be seen as a rational response to our problems?

At risk of stating the obvious, the entire point of such interest rates would
be to strongly prod the market (mostly the very wealthy) to spend and/or
invest their cash rather than sit on it.

But the same thing could be accomplished by a much more conventional means:
taxation and public spending.

If you’re a government seeking to stimulate the economy, why wouldn’t that be
a saner option?

~~~
ikeboy
Because monetary policy is more effective than fiscal policy?

~~~
ajross
When interest rates are negative, monetary policy has literally zero
effectiveness. That's the whole problem being discussed.

~~~
radford-neal
No. The central bank can stilll create money. Create enough money and
inflation will result. There is no doubt about this. None at all.

~~~
ajross
Sort of misses the point. Despite the name, printing money isn't normally
something one considers as "monentary policy", which is about interest rate
setting and bank balance regulation. Yes, you can print your way out of a
negative interest rate trap, because at its core printing money is exactly the
same thing as deficit spending in the immediate term. So I don't see that's
responsive: this is isomorphic to "just spend your way out".

~~~
radford-neal
I think common terminology would say that printing money is about as core a
function of "monetary policy" as is imaginable. If the government has
outstanding bonds, "printing money" by having the central bank buy them does
not seem like "deficit spending". If the government has no outstanding bonds,
and isn't running a deficit, it would be necessary to cut taxes to create a
deficit (and hence bonds for the central bank to buy), or for the central bank
to buy non-government assests. But this hypothetical is entirely unrealistic
in present circumstances anyway.

But what you call things doesn't really matter. You don't offer any argument
for why printing money wouldn't solve the problem, assuming there is one.

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darkkindness
Playing with video game economies tells me that any tax on owning
money/e-money would simply lead people to deal with an alternative,
unpenalized store of wealth. I don't know how plausible that move is for the
real world, since we can't all suddenly start pricing things in terms of
potions and scrolls, but what's stopping this from making Bitcoin, or any coin
as the people's de facto currency?

~~~
imtringued
Unstable countries use USD as a stable currency.

~~~
candiodari
And in the US the CHF (and Gold) was popular for the same purpose at times.

------
apo
> Without cash, depositors would have to pay the negative interest rate to
> keep their money with the bank, making consumption and investment more
> attractive. This would jolt lending, boost demand, and stimulate the
> economy.

Or... it would spawn the mother of all asset bubbles in Bitcoin and to a
lesser extent gold. Watch for anti-Bitcoin legislation as a canary in the coal
mine signaling that the exits are about to slam shut.

~~~
chillacy
Pretty much... bitcoin/gold are not particularly productive assets either
(verses investing in businesses) so I don't see how that helps the economy
recover.

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NTDF9
Wow. Just wow. Having already penalized savings (by way of inflation) for so
long, now they want to actively penalize savings? They're coming up with
strategies to prevent a bank run for taking people's money?

Have your cake and eat it too? If this is ever announced, US dollar will just
have to collapse. There's no way any country will accept this.

~~~
Donald
European bond rates have recently turned negative again, and they were
negative for large chunks of the last decade: [https://europe.pimco.com/en-
eu/insights/viewpoints/why-the-b...](https://europe.pimco.com/en-
eu/insights/viewpoints/why-the-bond-market-is-yielding-negative-and-what-
negative-yields-mean-for-you)

~~~
NTDF9
No prize for guessing why European capital has been flowing into the US for a
decade.

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RickJWagner
I think a significant portion of America is not going to like a cashless
society.

It's also sort of mind boggling to imagine interest being _charged_ on
deposits. Completely non-intuitive.

~~~
mushufasa
It would be crazy. As for intuition, I actually thought it was
counterintuitive as a kid that banks would safeguard your money for free. I
had the naive intuition that banks were providing a service of keeping money
safe and accessible via debit cards, so you should be paying them.

Of course my intuition is now totally different, especially after a college
degree in economics, but there is some sort of intuition to be had in negative
interest rates. I wonder if there are historical precedents -- maybe in the
dark ages, or in historical places without moneylending/investment ecosystems.

~~~
chank
> safeguard your money for free.

I'm stating the obvious here, but they never did keep the money for free. They
used deposits as leverage for loans and received 100% of the interest as
payment for keeping that money. Even then, for the longest time a lot of banks
didn't have a "free" tier account like they do today so they were double
dipping so to say.

Negative interest rates aren't a new thing though. I'm more interested in
where modern monetary theory will end up taking us and if that will make
negative interest rates more common. It seems like a lot of people want to go
in that direction. I don't know enough about it yet to know if that's good or
bad.

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tcarn
You truly would need a totally cashless economy, Bitcoin would skyrocket if
negative rates became the normal. Credit cards would beg you to carry a
balance.

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chii
I don't understand the need for negative interest rate. Having the rate set at
zero is already bad (it means that your savings erode at the maximum rate).
People who are in a position to borrow would do so, and make gains when there
is a recovery, while people who can't will be left behind (but i guess this is
where the crux of the inequality comes from in the world).

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radford-neal
This proposal is ridiculous, if honest, or it is instead a dishonest attempt
to add to the power of governments.

To deal with a recession, it's plausible that the central bank might want to
produce some inflation - if you think that "sticky wages" are an issue (ie,
that people don't want their pay cut even if deflation means that its
purchasing power would be maintained, making it difficult for employers to
address unemployment by cutting wages and then hiring more people).

But a central bank can easily (very easily) cause inflation without needing to
impose any particular interest rate. The central bank simply needs to buy
assets using money it creates. This is standard practice. The assests are
typically government debt, but they can be anything, if necessary. There is no
doubt whatsoever that buying sufficient assets with newly-created money will
cause inflation.

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gruez
>The proposal is for a central bank to divide the monetary base into two
separate local currencies—cash and electronic money (e-money).

Wouldn't printing money (ie. quantitative easing ), accomplish the same thing,
without the hassle of having cash dollars and e-dollars?

~~~
crediblewitness
QE is just buying bonds. With that approach rates do have a floor at zero.

~~~
abernard1
QE has a nominal rate of zero, but it has an arbitrarily large negative delta
in terms of real rate of return lost when holding cash.

Both heavily advertised QE and negative interest rates are the same thing: the
central authority is stealing your future money in hopes you will realize this
and spend money in the present to raise "demand."

As an aside, the fact that anyone could possibly confuse this immediate,
poorly thought-out consumption (eating your seed crop) with actual capital
investment (under-consumption of your seed corn to grow more in the future) is
beyond me.

~~~
cinquemb
We'll I for one find this as a great opportunity to speculate where its
cheapest to do so with max payoff on this not ending well :P

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crediblewitness
Sam Altman has written about a US Digital Currency
([http://blog.samaltman.com/us-digital-currency](http://blog.samaltman.com/us-
digital-currency)), and considers the idea that it's issued as a "second"
legal tender. This IMF article also considers the idea of a "second" currency,
but for other practical reasons (negative rates). I think it's actually
somewhat inevitable that this happens. Whether or not it would have any
cryptographic properties is up for debate, but there is certainly exists
enough existing experimentation in this area for the Fed to study such an
approach.

