Here's another one.
As I'm free-associating my way through the intro to "As TIPS Tumble, Maybe We Won't Have to Go To Electronic Money to Enforce Negative Rates!" someone over at Business insider is putting together the headline story. Here's more:
The United States has been marred in slow economic growth and a weak recovery for years now. Unemployment remains high. This is despite extraordinary efforts by the Federal Reserve to stimulate the economy. This drawn out period of low inflation and high unemployment has gotten more and more people talking about a "new normal" of mediocre growth.
Economists have been looking for ways to give central banks more power to combat recessions and prevent these long, drawn out recoveries. Larry Summers laid out this major impending economic challenge in his recent speech at the IMF. Normally, when a recession hits, central banks cut interest rates to incentivize firms to invest and to spur economic growth. But when interest rates hit zero, those banks lose one of their most important tools to combat recessions. This is called the zero lower bound.
Hitting the zero-lower bound means that interest rates cannot reach their natural equilibrium where desired investment equals desired savings. Instead, even at zero, interest rates are too high, leading to too much saving and a lack of demand. Thus we get the slow recovery.
Until recently, we hadn't hit that bound. But since the Great Recession, we've been stuck up against it and the Fed has been forced to use unconventional policy tools instead. What Summers warned of is that this may become the new normal. When the next recession hits, interest rates are likely to be barely above zero. The Fed will cut them and we'll find ourselves up against the zero lower bound yet again and face yet another slow recovery.
So what's the answer?
University of Michigan economist Miles Kimball has developed a theoretical solution to this problem in the form of an electronic currency that would allow the Fed to bring nominal rates below zero to combat recessions. He's been presenting his plan to different economists and central bankers around the world. Kimball has also written repeatedly about it and was recently interviewed by Wonkblog's Dylan Matthews.
"If you have a bad recession, then firms are afraid to invest," he told Business Insider. "You have to give people a pretty good deal to make them willing to invest and that good deal means that the borrowers actually have to be paid to tend the money for the savers."It musta been in the air or something. I know that if something has a one-in-a-million chance of happening to someone it will happen, on average, 7,0000 times per day.
But paper currency makes this impossible.
"You have this tradition that as it is now is enshrined in law in various ways that the government is going to guarantee to all savers that they will get [at least] a zero interest," Kimball said.
If the Fed lowered rates below zero in our current financial system, savers would simply withdraw their money from the bank and sit on it instead of letting it incur negative returns. The paper currency itself — because it's something that can be physically withdrawn from the financial system — prevents rates from going negative.
This is where Kimball's idea for an electronic currency comes in. However, unlike Bitcoin, which prides itself on its decentralization and anonymity, Kimball's digital currency would be centralized and widely used. He would effectively set up two different types of currencies: dollars and e-dollars. Right now, your $100 bill is equal to the $100 in the bank. If you're bank account has a 5% interest rate, you earn $5 of interest in a year and that $100 bill is still worth $100. But what would happen if that interest were -5%? Then you would lose $5 over the course of the year. Knowing this, you would rationally withdraw the $100 ahead of time and keep it out of the bank. This is where the separate currencies come in.
"You have to do something a little bit more to get the negative rate on the paper currency," Kimball said. "You have to have the $100 bill be worth $95 a year later in order to have a -5% interest rate. The idea is to arrange things so let’s say $100 in the bank equals $100 in paper currency now, but in a year, $95 in the bank is equal to $100 in paper currency. You have an exchange rate between them."...MORE
Still, it feels weird.
