Citi economist wants to abolish cash because he doesnt like the fact that the fed cant use negative interest rates to force people to spend their money. This idea will end well im sure, once we get rid of the pesky ability of people to save their cash, and we punish the people who save their money enough, while rewarding people who take on more and more debt, the economy is going to the moon baby!!! Citi Economist Says It Might Be Time to Abolish Cash Would this save the world economy? Akos Stiller/Bloomberg The world's central banks have a problem. When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut — they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy. In a new piece, Citi's Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. Fundamentally, the ELB problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. Buiter's note suggests three ways to address this problem: Abolish currency. Tax currency. Remove the fixed exchange rate between currency and central bank reserves/deposits. Yes, Buiter's solution to cash's ability to allow people to avoid negative deposit rates is to abolish cash altogether. (Note that he's far from being the first to float this idea. Ken Rogoff has given his endorsement to the idea as well, as have others.) Before looking at the practicalities of abolishing currency, we should first look at whether it could ever be necessary. Due to the costs of holding large amounts of cash, Buiter puts the actual nominal rate at which the move to cash makes sense as closer to -100bp. So, in order for a cash abolition to become necessary, central banks would need to be in a position where they wished to set nominal rates much lower than that. Buiter does not have to go far to find an example of where a central bank may have wanted to set interest rates much lower to -100bp. He uses (a fairly aggressive) Taylor Rule to show that Federal Reserve rates should have been as low as -6 percent during the financial crisis. It seems Buiter is correct: Sometimes strongly negative nominal rates are called for. Buiter is aware that his idea may be somewhat controversial, so he goes to the effort of listing the disadvantages of abolishing cash. Abolishing currency will constitute a noticeable change in many people’s lives and change often tends to be resisted. Currency use remains high among the poor and some older people. (Buiter suggests that keeping low-denomination cash in circulation — nothing larger than $5 — might solve this.) Central banks and governments would lose seigniorage revenue. Abolishing currency would inevitably be associated with a loss of privacy and create risks of excessive intrusion by the government. Switching exclusively to electronic payments may create new security and operational risks. Buiter dismisses each of these concerns in turn, finishing with: In summary, we therefore conclude that the arguments against abolishing currency seem rather weak. Whatever the strength of the arguments, the chances of an administration taking the decision to abolish cash seem vanishingly small. http://www.bloomberg.com/news/artic...onomist-says-it-might-be-time-to-abolish-cash
Abolishing cash is a great way for the government to track everyone's transactions. Furthermore, abolishing cash makes sure that the gov gets all of its sales tax and other taxes. Also, it has some interesting implications on black markets? For example, how will someone pay a hooker or buy cocaine? I assume that if the gov abolished cash that it would also make alternative digital currencies such as bitcoin illegal or heavily regulate them.
Great post. I blame this on George Bush and Alan Greenspan. When the housing market overheated in 2004 they abrogated their responsibilities to the country by failing to raise interest rates. Instead they mashed the pedal to the floor and it has been held there ever since. The Federal Reserve Bank failed to regulate the economy by gradual adjustments of the interest rate, its only regulatory mechanism. They put a cinderblock on the accelerator pedal and then jumped out of the vehicle. The adults left the building long ago.
Yes, but that is still an oversimplification. The housing bubble was a reaction to the tech bubble and collapse...then we could probably argue that the tech bubble grew out of another period of abrogation when they bailed out LTCM, which was preceded by the Asian crisis, etc, etc...pretty much an endless series of bubbles and busts which are inherent part of modern finance.
Brilliant analysis! Omits entirely the part about how the Democrats forced lenders to give money to their voters that could never be paid back but hey, it's obvious that you are new to the analysis thingy.
Oh yeah, the free market failed, wow! Those assholes distort the free market to where it won't work then proclaim it's failed. They mandated that hospitals treat anybody that comes to an emergency room, destroyed hospitals all over the country as a result then they proclaim that Obamacare is working because hospitals are saving money on ER visits! They forced lenders to give money to inner city voters in the form of house loans and then blame capitalism when it all blew up in their little know-it-all faces...