Martin Sandbu and Silvio Gessel

Here Martin picks up on the Haldane speech about negative rates, and some of us that criticised him for supporting that option to escape the confines of the zero bound.

MS rightly points out that one would not need to abolish cash altogether, describing a scheme that goes back to the originator, Sylvio Gesell, where cash has to be ‘exchanged’ or as originally envisaged ‘stamped’, to show that the relevant tax has been paid on it.

However, under such a system, if I understand it correctly, we would carry around portfolios of notes that were all worth something different from their par/face value, prorportional to the time elapsed since the last ‘exchange’.

So cash’s usefulness as a medium of exchange would be sorely tested for all except those endowed with exceptional ability in the mental arithmetic of compound interest.  There would also be another verification needed, not just to check that the note is not a forgery, but that the time until next exchange is what the bearer claims it to be.

Those in favour of negative rates might not balk at such a problem.  The bound on rates would be the average mandated tax on cash, plus something that quantified the extra inconvenience of managing cash balances coming from the difficulty in evaluating their worth.  More bang for your negative rates buck.

However, when we have such simple alternatives as proper forward guidance, credit easing, and disciplined use of discretionary fiscal policy, my inclination is to confine a cash reform like this to academic discussion for now.


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9 Responses to Martin Sandbu and Silvio Gessel

  1. Costas Milas says:

    Hi Tony,
    Let me return to the issue of abolishing cash. Correct me if I am wrong but, among other things, cash has a very nice and indeed “pedagogic use”. Don’t we all, as parents, “love” giving pocket money to our little ones in an attempt to stimulate their maths understanding via e.g. the simple transaction of buying an ice-cream? This has arguably worked. If cash is abolished how are we going to replace its pedagogic use mentioned above?

  2. eric says:

    It would appear that negative interest rates are just an increase in the effort by the govern-
    ment to transfer income (and wealth) from savers (sources of funds) to users of funds,
    and, in some cases, make those savers bear the risks involved in doing so. I’m betting that
    the strategy will fail (as it has with ZIRP) and actually result in even weaker C and I as
    savers retrench.

  3. mrkemail2 says:

    “and disciplined use of discretionary fiscal policy”
    Why is fiscal policy signalled out to be “disciplined”? What does this mean?
    Why not ” discipline ” monetary policy?

  4. eurogate101 says:

    “However, when we have such simple alternatives as proper forward guidance, credit easing, and disciplined use of discretionary fiscal policy, my inclination is to confine a cash reform like this to academic discussion for now”

    LOL, very simple and very ineffective.

    What this is coming down to, the monetary warriors have run out of tools, and it is time to admit as as much.

    Time for some fiscal policies, like PQE, and enshrine that, at say, £10bn a year, for the next 5 years, to get NGDP to 4% growth. Adjust PQE up and down as required. Proper “disciplined fiscal policy”. Everybody happy, crisis over.

  5. Max says:

    Miles Kimball’s scheme is more elegant. You just need to know today’s exchange rate between paper money and electronic money (which differs from yesterday’s exchange rate by one day’s interest earned on paper money).

    Although offered as a way to pay negative interest, the same system works to pay positive interest. It’s at least possible that (positive) interest could overall increase the popularity of paper money rather than decrease it, even with the cost of having to consult a smartphone.

  6. mrkemail2 says:

    Essentially you tend not to be able to save real things over time, and the rate of interest paid to excess savers is a policy variable. Set it to zero, adjust taxes and spending to make the auto-stabilisiers take up the slack, and policy limit the types of bank lending. Problem solved.

    All of the issues are down to believing monetary policy and fiscal policy are somehow separate and deal with different things. They are not and don’t. Time to get used to that idea. Occams Razor requires it.

    If you don’t have enough jobs and income then create jobs and income.

    We can have full employment. We have enough resources so no one is in poverty.

    Time for a new approach.

  7. NIRP proponents have lost the plot. Large denominations of cash should be eliminated, but whatever is decided on this, the value of a savings account should have an irrevocable floor. That is sufficient for me to preserve freedom and liberty, not the existence of paper that C&S claim. Seignorage is not a net gain: the mint gains, but holders lose the same amount.

    More important: reread the Bernanke speech []. The objective is to achieve equilibrium then that means real rates are negative. They are so negative that zero rates are too high (see footnote 5, Bernanke presciently realized that people have trouble with the concept that zero is just a number, not high or low per se). You do this with:
    1) the right buffer zone: 2% seemed right, but turned out too low, but efforts to try 3 or 4% have been spurned.
    2) avoid financial crashes and violent crises: rather than letting banks become TBTF and too interconnected
    3) cut rates at the first sign of distress — don’t claim that subprime, China, Greece will be contained

    If you screw up on 1-2-3, which, surprise surprise, happens a lot, take the following medicine and call Ben in the morning:

    A) Forward Guidance: promise ZIRP for the next M years
    B) Ceilings on Yields: promise N-year treasuries will be bought at a yield of 0.25% in unlimited quantities if there are any offers.
    If A and B don’t work, try increasing M, N, and add GSEs and others to the mix
    C) Buy foreign debt (excluding dodgy countries with low ratings — no bailouts, sorry PIIGS!)
    D) Fiscal-monetary cooperation: a money-financed tax cut, transfers, spending, a.k.a. Friedman’s helicopter drop. ARRA and QE1 were similar, and worked, but were never really linked and when Greece came along in 2010 everyone got scared of fiscal. Abenomics is also close, but the big tax hike also reversed the experiment (and guess what, the theory was verified empirically again, just with opposite sign).

    If any country does 1-2-3 and A-B-C-D and that doesn’t work, I will (a) eat my shoe and (b) concede that something else should be added. In other words, Tony, your conclusion is absolutely right, and the logic is no different from 13 years ago.

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