Fed Should Use Negative Interest Rates to Force Savers to Spend Their Money
April 21st, 2009Via: New York Times:
In many ways today, the Fed is in uncharted waters.
So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?
At that interest rate, you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand.
The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less.
Unless, that is, we figure out a way to make holding money less attractive.
At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. (I will let the student remain anonymous. In case he ever wants to pursue a career as a central banker, having his name associated with this idea probably won’t help.)
Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.
Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw—it’s a benefit.
N. Gregory Mankiw, the world’s 22nd most influential economist, wishes there was some way a dollar bill could be worth less a year from now?
Is he sharing a sick joke with his fellow economists? Or are all academic economists the product of a secret breeding programme to place precocious ten year-olds in the bodies of grown men?
This is just to show you how stupid are those attending Harvard.
Declaring all currency with a serial number ending with a randomly picked number to no longer being a legal tender would force a mass shunning of this currency. An immediate loss of control to the central bank in question. Indeed it’s a good idea to withhold the student’ name as stupidity tends to backfire.
One can keep printing at twice the official rate as all African countries do, inflate at 24% and set government bond rates at 12%. This is in essence –2% better than that stupid random number idea.
If the desire is to deflate (as what is going on now) while at the same time discouraging saving then one can discount the currency based on issuing date by 10% per year and achieve that desired effect. Just make sure to call it a patriotic yearly renewal stamp.
How are you going to explain this to people who don’t understand a positive interest rate? Oh, I now remember, that didn’t matter either.
My Mom’s tax return was a picture of a negative interest rate in action.
The Fed is in uncharted waters. That’s a saying you can take to the bank and have them spit on. Just like they do savings.
Savings have been discouraged since Reagan in the U.S. Is there really another country in the world who dis-incentivizes savings as does the U.S.? Taxing interest on savings? That is a freaking joke right there and shows that SAVING money is something the FEDS have not wanted us sheeples to do all along.
But spend, as per George Bush, spend. Have your country bombed, but go out and shop.
Morons. All of these spend promoters are MORONS and IGNORAMUSES.
Of course, announcing the abandonment of the dollar would achieve a similar effect 🙂
Hey Kevin, do you remember all those stories about funny coloured hundred dollar bills being supposedly shipped out around the world back in the Saddam era? The idea supposedly was that ‘foreign dictators’ hoarded cash dollars in the form of millions and billions of hundred dollar bills, and so one way to hurt them fast was to announce a swapover to a new colour of money? Remember? The idea was that Joe and Jane Sixpack would be able to queue up to swap their money with little trouble proving it was legally theirs, but Saddam would have a problem turning up at the bank with half a billion and proving how he legitimately came by it.
Or at least, that’s what I remember. I think the idea of the pinkback just stuck in my mind for some reason 🙂