John Cochrane makes interesting points about the ubiquity of risk-free, zero-interest stores of value in a modern economy.
Such multitudes mean that it would be more complicated than at least I had earlier thought to generate a negative nominal interest rate, a reform urged by Miles Kimball most recently and others before him.
In economies with only cash serving this purpose, a negative nominal interest rate will not arise in private markets because investors can leave their money in cash and get a zero return, which dominates a negative number. The solution – abolish cash (discussed and encouraged in the working paper by Ken Rogoff that prompted the Cochrane post). Or tax it, by requiring currency to be stamped every so often (Buiter, and before that I think actually tried in Alberta, Canada?).
However, these solutions won’t work [at least not nearly as well] if there are other ways to achieve zero interest rates, using subway cards, gift cards, prepayment deals, whatever. The ensuing discussion debates whether laws could be enacted to outlaw or tax these storage devices too. Cochrane suggests that in the US, enacting those laws would be messy.
Originally, the idea was to be able to have a variable ‘tax’ so allow for variable negative nominal interest rates. More stimulus needed? Increase the tax and lower the nominal interest rate. The alternative, having a large tax of say 5% and then varying negative rates down to that floor as the business cycle demanded, imposes a cost on the economy, identical to the cost of inflation (it erodes the value of stores of wealth). But enacting a variable tax – variable so that it is tailored to the business cycle, the particular negative normal rate required in any month, that covers these many different kinds of zero interest rate storage devices strikes me as tricky, to say the least.
Doubtless if cash and close substitutes were abolished, or taxed, there would be pressure to evolve a replacement, swelling the issue of already-existing near substitutes. [Speculative examples can be found in the comments to Cochrane’s post].
Recall the example of Kurdish controlled Iraq when NATO was enforcing the no-fly-zone, and before toppling Saddam. Saddam tried to debase and then abolish the cash circulating in the Kurdish zone. But even with no central bank, formal government, or even legal system, these notes held their value anyway. That could have been because holders speculated that an eventual NATO sponsored government that toppled Saddam would reward them with an exchange for new ‘legal’ notes. (A pretty brave forecast back then.) Analogously, it is not hard to imagine holders of multifarious outlawed private stores of value speculating on a new government overturning the ‘ban on cash’, especially if the economy where to head back to a point where the zero bound did not seem like such a constraint, and the political cost of enforcing the ban did not have such an immediate benefit.