Imagine if the money in your savings account actually decreased, the longer you kept it there. And you can’t withdraw it to store it somewhere else, because physical cash no longer exists. Welcome to negative interest rates — once considered a thought experiment or conspiracy theory, it’s increasingly part of mainstream policy dialog.
The invention and popularity of non-governmental forms of digital money, such as Bitcoin, is raising new questions — such as, who should actually “own” the money supply?
We’ve long talked about the so-called “War on Cash“. That is, the co-ordinated government and media campaign to boost digital cash use and marginalize physical money. It stresses convenience for consumers, and the usefulness of physical cash in crime and tax evasion.
But the War on Cash is only the first step in the process. Once all cash is digital and can’t be separated from the banking/payments system, new options become available.
Professor: Negative Interest Rates Necessary in Next Recession
Prominent Harvard University economics professor Kenneth Rogoff this week reiterated his support for a negative interest rate policy (a.k.a. “NIRP”). In a paper just published in the Journal of Economic Perspectives, Rogoff said negative rates will be a necessity in the next recession, and central banks should start preparing for it.
Although the idea of NIRP has been around for decades, no economist or government ever considered it feasible for ordinary people. Most would simply withdraw their savings, causing bank runs and security problems.
Things are different now, though. In some countries, physical cash represents less than 5-10 percent of the overall money supply. And there are active moves to reduce even that.
Still doubtful? Don’t be. Rogoff laid it out in his paper:
“In any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time.”
He even referred to the “marginalization” of physical cash — which has been at least partly deliberate:
“The growth of electronic payment systems and the increasing marginalization of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”
Echoing media editorials and policy decisions of the past few years, Rogoff suggested countries remove larger-denomination bills and said law enforcement should support the move as a crime-prevention measure.
It’s Your Country’s Money, Not Yours
Years of mainstream economic policy focussed on the “demand” side now views personal savings as wasted resources. Money stored in bank accounts isn’t being used to stimulate the economy, by buying consumer goods or company stocks. Therefore — goes current thinking — the public needs an incentive to spend. What better way to do that, than removing money from their savings accounts if they don’t?
These policymakers see money as central bank property, not yours. Currency is their tool to fulfill their mission of economic growth, so they need to control its use.
There was a time when banks actually paid depositors for the privilege of keeping (and lending out at interest) their money. This concept has gradually worn away over time, as banks reduced interest rates in an attempt to stimulate lending and spending.
But negative rates? Spend it or you’ll lose it? Many thought it mathematically impossible, but in the past decade a few central banks have implemented them in limited form. The European Central Bank, plus central banks in non-eurozone countries like Sweden, Switzerland and Denmark, use NIRP on “excess reserves” to encourage client banks to spend them. Japan followed in 2016.
Analysts are divided on whether NIRP has been successful. Many, including the U.S. Federal Reserve, have debated and balked at the idea — for now. However, many (like Rogoff) remain determined to expand NIRP beyond central banks, and test it on the general public.
Bitcoin and Cryptocurrency Follow Different Money Philosophy
Proponents of non-centralized forms of money, such as precious metals and cryptocurrencies, follow a completely different philosophy. Bitcoin, while 100 percent digital and with all the convenience that offers, still remains the sole property of whoever holds it.
In the digital cash future, that could be Bitcoin’s chief advantage. If the people decide they actually want to own their money after all — and have a real choice over saving or spending it — then that’s what they’ll use.
In the meantime, keep an eye on the media for more negative editorials about large bills and physical cash. Their message aims to change the way you think of money.
Are negative interest rates inevitable? Why or why not? Let’s hear your thoughts.
Images via Wikipedia, Pixabay
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