On Saturday in the press, Czech ex-president Václav Klaus, an economics professor, has attacked a self-evidently dangerous idea floated by the staff of the International Monetary Fund. See e.g.
Ruchir Agarwal (D.C., just 100 Twitter followers!) and Ms Signe Krogstrup (Denmark) is simple. All these people apparently take it for granted that it was great to lower the interest rates and to push them below zero in some cases. However, they are aware of a problem. If the interest rates given to the final consumers are negative, they may simply keep the cash under the mattresses that give them the 0% interest rate – which is better than the negative rates!
So the negative rates don't really work. If you impose them, the actual result is the removal of the cash from the banks. Now, "which interest rates cannot be below zero" is a subtle question and some people have oversimplified views. Some interest rates, like those on the deposits electronically stored in the banks, may indeed be negative. But as long as you can move your money from the bank to the mattresses and vice versa, the mattress solution affects the electronic money in the banks, too.
Agarwal's and Krogstrup's recipe to fight against the "evil savers who have already discovered the magic of the mattresses" is straightforward. They found a loophole in the arguments above. Negative rates may be allowed if you prevent the people from moving their cash from the banks to the mattresses and vice versa – well, if you prevent them from doing so without a significant fee.
So what they propose is to impose negative interest rates on the electronic money you have on your bank account – you can't do anything against it. However, in order to fight against the possibility that you liberate the money, keep them under your mattresses, and protect them against the negative interest rates, they would declare that the
paper-based cash under your mattress and the electronic money in the bank are two different currencies.So when you convert the electronic money to the paper-based cash (when you "withdraw" the money from your banking account), you are really performing a conversion of currencies. And there's some exchange rate that you have to respect.
The exchange rate would be changing with time in such a way that the paper-based cash would be losing value over time. For example, one could have "minus five percent" interest rates. It means that the numerical value of your savings in the bank (electronic money) would drop by 5% each year. The price of bread expressed in the "electronic money" currency would be almost constant – but the price of bread expressed in the paper-based currency would increase by 5% every year!
The fees associated with the deposits and withdrawals – the new "exchange rate" and its change with time – may be adjusted in such a way that it doesn't matter where you keep your money, of course (aside from some differences between the commercial banks' interest rates).
There are several basic problems with that:
* the whole setup really means that banks cannot keep the real paper-based money for the people anymore, so it's a big reduction of the freedom of the savers and the banks
* the sudden existence of two currencies whose exchange rate isn't 1 creates an extra unnecessary numerical mess and confusion in the prices and all financial activities
* this whole paradigm is clearly designed to increase the inflation rate, as expressed in the paper-based money, and this goal is neither terribly helpful for the economy nor necessary (temporary modest deflation isn't that harmful – most of the 10% GDP growth per year in the late 19th century occurred in the deflationary conditions)
* all the legitimate perceived "diseases" can be solved in much less dramatic and more elegant ways
You know, like Klaus, I find the "reduction of freedom" to be the most annoying problem with this whole IMF paradigm – and with related "bold ideas" that are becoming popular among the globalist would-be elites. You might object that they only say that banks must be keeping the savings in some currency but they still have the freedom to do what they were doing so far. However, the forced conversion of the currencies is a place where the government or central bank may enter, adjust the rules for many classes of transactions and even microengineer the individual transactions, and liquidate most of the financial freedom of the individuals, companies, and all other participants of the economic processes.
It is clearly a step towards the legitimization of the government-led or central-bank-led confiscation of finances of the inconvenient citizens. Even the very threat that the government or the central bank could prevent someone from the "conversion" which is important because it's an unavoidable part of the (formerly) simple withdrawal of the money – i.e. they could cut him from his cash – is scary. And this citizens' fear could turn the society into a totalitarian society full of terrified obedient cowards controlled by some new dictators who happened to conquer the power over the governments or central banks.
But even if you made some guarantees that the new tools and mandatory steps aren't abused "politically" by the powerful ones, it's still an extremely misguided idea. You know, I think it's right when the central banks make the future value of the money predictable in some real terms because such "predictable currencies" increase the efficiency of the people's economic planning and that's really what a good currency does. The targeting of the inflation – usually around 2% – is a good enough approach. I think that it works very well.
It could still be improved. One should really target not the rate itself but the actual integrated price of the inflation basket. That would be a recipe to make sure that the "overshot" or "undershot" inflation aren't going systematically in the same direction. Also, the inflation basket may have a better composition. In my opinion, it should include some real estate as well as stocks. The real money should at least partly include a "mixture of stocks from the stock markets". In effect, the stock market indices would be more stable if expressed in the money and I think that the central banks should actually help this stability.
Most of the economic downturns are accompanied by drops of the stock market. Such drops are both precursors to the recession as well as later symptoms of a recession. When fear spreads, people leave the stocks etc. Because the link between falling stocks and recession seems so direct (more direct than most other links), I think it is right for central banks to fight against recession by fighting against the falling stock market drops themselves. And it's straightforward: they may just buy stocks – or promise to do so when the collapse gets bad.
A decade ago, central banks began to buy bonds (Quantitative Easing), a new – and then very controversial – way to pump more money to the economy when the interest rates are already zero and cannot be pushed lower too well. Why bonds and why just bonds? Even in terms of fairness, there are other kinds of assets whose value should be pushed up by some central banks' purchases, in particular stocks. When the banks only bought the stocks, they selectively helped the bondholders – and they also helped the debtors (mostly governments) and made it easier for them to borrow the money. Such a Quantitative Easing was therefore a "not quite neutral manipulation of the markets".
So I think it would be right, if the situation like in 2008-2009 gets repeated, for the central banks to buy not just bonds but also stocks – or perhaps only stocks. When the prosperity returns, and I think that it returned a few years after 2009, and there is the time for "Quantitative Tightening" just like now, they would be gradually selling the stocks again. You could add other things that the central banks buy. Maybe even land and real estate, especially if the prices of those start to plummet. It's not hard to design "automatic rules and algorithms" how many stocks of which companies are bought in various conditions.
I think that it makes sense for central banks to protect the system against excessive volatility of the prices of all these asset classes, even individually. If central banks were committed to buying a certain amount of stocks on every day when a stock market index is more than 25% where it was one year earlier, it would assure the investors that there's almost no reason to be afraid of really big problems, it would stabilize the markets, remove some exponentially growing hysterias whose impact looks like a pure negative to me (they don't play any helpful role in the market's mechanism to find the right relative prices and to allocate the capital), and it would have other positive consequences.
Also, I think it could actually be helpful for countries to have two or more currencies – e.g. one currency optimized for the poor people's planning, one optimized for the rich people's planning, to put it simply. The poor men's currency could be linked to the inflation basket with food and other basic enough things. The rich men's currency could be pegged to a (total return) stock market index, perhaps with some annual discount rate on top of that. When things go wrong, it's immediately "mainly the rich folks" who would get poorer and the governments and companies could avoid ad hoc moves to reduce the luxurious spending and/or premiums for VIPs' salaries etc.
Many of the perceived problems also have a simpler solution. In the example involving bread above, you saw that there was a 5% inflation if expressed in terms of the paper-based money. It's a very high number – and it was a "solution" to a "problem" according to the IMF folks. Well, I think that a similar effect to the negative interest rates could simply be achieved by central banks' promise to increase the inflation target in the future. If there is a 2% deflation, the central bank may simply change the long-term planned inflation target from plus 2% to 3%, for example. That would increase the inflation expectations and I think that it would increase the inflation, too. There's a risk of some volatility because no one would know for sure for how much time the inflation remained undershot. But we're solving a relatively simple problem with the money supply. One doesn't need to build Orwell's 1984 to solve such problems.
There exist absolutely wonderful ways how the monetary systems of the world's countries could be improved and I could speak for hours about the optimum approaches but to prevent the banks from simply keeping the people's cash means to make the whole system more creepy and easy to abuse by the governments and central banks with dictatorial tendencies, and it shouldn't be allowed.
And that's the memo.