I referred this morning to Bank of England chief economist Andy Haldane's idea that the Bank of England abolish cash to enforce negative interest rates in the event of a future economic downturn.
There are some notable problems with doing so, some of which are mentioned in this infographic issued by the Bank of England this week:
Demand for notes and coins has risen in the economy of late. I will discuss the implications of that in another blog. But for now note that in the era of electronic money and swipe card payment the demand for cash is rising.
Some reasons are discussed in this Bank of England video, also out this week:
The chance that Andy Haldane will persuade anyone to abandon cash is remote in the extreme.
In that case what he is effectively saying is that monetary policy is dead.
And that might leave People's Quantitative Easing as the only game in town.
Fiscal policy is what is needed now.
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I am thinking about UK PQE in context of an imagined global initiative of infrastructure investment arising from, for instance, the Un climate treaty discussions ongoing. How proposed UK PQE would function in a global ecology of various strategies.
Assuming that PQE is a rather lucky possibility due to particular circumstances of UK (deflationary pressures failure of monetary pressures to produce investment – much less infrastructure investment)
Could you comment on
-how widely applicable this could be to for example European Union,
-multiplier effects or counter productive effects from wider application
-how it might work with /support/ undermine a strategy suited to strategies for infrastructure investment arising from conditions of high inflation etc.
?
Thank you kindly,
H
1) Widely applicable in EU
2) See S&P report earlier this year
3) PQE and high inflation are counter indicative
I hope your right and that cash won’t be abolished. But this isn’t the first time I’ve seen this silly argument argument from so-called “New Keynesians”. That they need to make it shows they still haven’t really grasped that interest rates can’t have the effect they think they have on the wider economy.
It all sounds fine – superficially. When times are good interest rates are increased to slow the economy down. When times are bad they are lowered to stimulate lending and get it moving again. There’s no need for govt to be involved at all. They can concentrate on balancing the books like any good business should.
Except that every stimulus leads to the build up of private debt in the economy. That build up slows things down and so we later have to another reduction in interest rates. Then another. If we get it all wrong then there can even be a giant crash in the economy when those who’ve taken on too much private debt go bust and cause their creditors to go bust too.
So, eventually we arrive at the situation where interest rates are close to zero and they need to go negative according to the theory to stimulate the economy again. Economists with more intelligence are saying “Whoa there must be something wrong with the theory”. Others with less insight are saying “But this is just the special case of the zero bound” and those with no insight at all are ploughing on regardless and calling for the abolition of cash.
Leaving aside the argument that many of us quite like the convenience of cash, it’s much quicker than messing about with credit cards at the petrol station for example, it’s a genuinely bad idea to go down the road of negative interest rates which will lead to an ever increasing build up of private debt in the economy.
Greetings Richard
Australian latest media player, The New Daily, began publishing online less than two years ago when three Australian industry superannuation funds: Australian Super, Cbus and Industry Super Holdings provided $2 million each to kick start the venture.
The language and dictionary of Corbynomics are spreading throughout a number of political fiefdoms such as Canberra … I am pretty sure that Former Czech President Vaclav Havel would be partial to many of the ideas …
http://m.thenewdaily.com.au/money/2015/08/21/pushing-kids-towards-shonky-economics/
Regards
Jozef
CODA
http://theconversation.com/why-corbynomics-could-actually-be-good-for-business-47614
Is no one in the media bubble willing to consider a mandatory negative rate on deposits may incentivize more saving, faster? The opposite of the intended effect?
Explain
The notion is that eliminating cash will give the central bank power to compel spending by causing one’s balance to slowly deteriorate (use it or lose it). But this is based on the assumption that spending is the rational response and actors will behave in a manner consistent with that assumption.
I look at this from Keynes’ theory of uncertainty. Fear of the unknown incentivizes us to spend less than our incomes, to buy and invest at sub-optimal levels and conversely to do the opposite when confidence is high. In an environment like the present one in which fear is at an elevated level (and I think that borne out by a continued, worsening slump) it is conceivable that this action being proposed may provoke a further drop in confidence and greater determination to net save so as to overcome the gradual decline in household and business balance sheets.
I can certainly conceive of the possibility I personally would behave in such a manner under those circumstances.
I think that a plausible behavioural response
Thanks
Umm! Have you been taking a peep at Osborne’s “Economics for wishful thinkers”?
Ben. I’m sorry but I just cannot see this happening, it’s all very well to theorise about negative interest rates and a few may think the Boe/gov could carry such a move off, but what happens when after a while when slight negative rates don’t work what then? Minus 1%? then 2%? 5%? 10%? Where next? Remember prescriptiom charges started at 10p, but at least a prescription is something tangable. Its no good thinking higher negative rates are imposible I can remember positive rates in the teens.
Which brings me to another point the one about (and I sorry Richard) money does not belong to the poeple, here again in theory this is true but just try and explain that not in the confines of a discussion between people who may be willing to learn but explain it to the population as a whole, I don’t think you would convince many in the time available.
Couple these 2 things together and I really fear for the future stabillity of our society, After people look back at 2008 and remember we bailed out the banks, had nothing in return and have been struggling since, now there are suggestions that what money we have saved will be eroded and by force if Haldane has his way, sorry this nation is pretty passive were not as volatile as some BUT!!
I cannot believe this path will be taken before testing all other options, which is why Haldane’s “kite” should be shot down at once.
A few hundred bassis points into negative would be more likely to increase the savings rate than spur additional spending. Most don’t invest so they’ll reduce consumption to bolster their accounts, treating the rate like just another tax. The BoE will never be able to increase the negative rate to the point it achieves the stated goal because they’ll end up with a voter revolt against thr policy and it’s back to square one.
It would of course be more appropriate to tax in that case
And the BoE does not have the right to tax
Correct. And so, enacting a policy with the net effect of pissing everyone off, the BoE will have shot itself in the face by damaging the argument for its own independence.
Ben;
I just do not see that interest rates going negative would suddenly inspire anyone to save more enthusiastically than they are at present, and any suggestion that they may is very dangerous as certain groups need no encouragement.
If your sense of security is based in your liquidity anything government does to diminish it will likely lead to counterpressure from savers. In a society of abundance with a universally accepted currency, hoarding is the ultimate defense against economic shocks.
That may be so but the abundance to which you refer will be deminishing so I say again I do not feel that in a negative interest rate situation people will suddenly feel the erge to save more than they do at the moment.( sorry Richard I know you hate repetition).
Cliff, You’re right in that negative interest rates are designed to reduce saving. The idea is to encourage a use-it-or-lose-it mentality.
But, Ben may have a point too. When people get scared they cut back and save anyway to protect themselves against possible future threats.
When intelligent people have these silly ideas, political ideology is usually to blame. The main argument for banning cash, other than to hinder criminals and tax-dodgers, which is no stronger an argument now than it has ever been, is to facilitate sharply negative interest rates. But if we want to stimulate the economy, as we do right now, there’s an obvious and much easier alternative: ie loosen fiscal policy. Increase government spending and reduce levels of taxation.
The only reason to suggest something as outlandish as banning printed currency is that you believe this alternative to be impossible. Or, rather impossible according to one’s own political ideology.
Right on all fronts Peter
I do think Ben has a point
And fiscal is the answer
PQE is fiscal
I see no reason to expect the productive capacity of the U.K. to collapse. If you do then please explain, otherwise this conversation isn’t going anywhere.
It will not collapse
We may face a significant period in the doldrums on the basis of the current situation and policies
Thankyou Richard and Peter for your valued comments.
I believe I need to clarify, if the financial situation worsens certainly people will be more cautious with there spending but I still do not see that it can be assumed it will result in greater bank deposits why would you allow it to erode in the bank rather than hoard the cash? and if I may add neither does Andy Haldane hence the suggestion of banning cash. This is my final post on this subject as I have made my thoughts on this whole matter quite clear.
Andy Haldane has said “A more radical proposal still would be to remove the ZLB (zero lower bound) constraint entirely by abolishing paper currency.”
which is at least a hint in that direction.
Prof Ken Roggoff has been more direct on the matter: http://www.smh.com.au/business/markets/currencies/its-time-to-kill-cash-says-harvard-professor-kenneth-rogoff-20140530-398ot.html
The idea looks a non starter and would require a simultaneous move to abolish dollars, euros, and swiss francs in paper form too. So why did Andy Haldane even mention the “radical proposal”? Having thought about it a little more, I think he was just trying to provoke a reaction and demonstrate the absurdity of conventional economic thinking.
He can’t be as direct as he might like to be though. Not if he wants to keep his job!
Agreed entirely
It was a pretty blatant attack on his boss
And even the BoE mandate
Must just say Peter I hadn’t given that aspect a thought well done. Finnished now.
“it’s much quicker than messing about with credit cards”
Really. You sit in the queue at the till, I’ll pay at the pump.