46 / 48
Press, Journal Article
46
4
bank assets (real estate), gold, jewelry, and Bitcoin. You could prepay
your taxes—or overpay—and expect a refund (at a zero interest rate)
when the tax day arrives. You could prepay your rent.
Think these activities are merely hypothetical? Think again. In Janu-
ary 2016, the Canton of Zug (a state in Switzerland) requested that
taxpayers delay paying their tax bills. In fact, the interest rate that was
charged on late payments was abolished. In the Canton of Lucerne,
there used to be 0.3% interest paid on early payments, which was also
abolished last year. These cantons are obviously finding that holding
cash when interest rates are negative impacts their finances adversely.
3
In Japan, a chain of stores named Simachu ran out of a safe that cost
$700 and saw sales of safes soar by 2.5 times in a year.
4
Presumably,
Japanese savers are stuffing them full of yen notes.
Here’s the important lesson: under NIRP, instead of boosting eco-
nomic activity by saving and investing through the financial system,
people waste precious time and resources circumventing the tax on
their savings.
NIRP UNMASKS MONETARY POLICY
Oddly, the above horror story has done little to deter fervor for NIRP
among monetary theorists. No, these folks, when faced with one ob-
stacle, quickly find a novel solution. In this case, if the barrier to fur-
ther negative rates is the ability of depositors to shift into cash (a 0%
yielding asset), then why not just eliminate the asset? In Europe, talk
of eliminating the EUR500 bill has emerged. In the US some econo-
mists have advocated the elimination of $100 bills.
5
But, importantly, NIRP unmasks monetary policy. When nominal
rates are above zero, central banks can use inflation to surreptitiously
erode the value of money, lowering the real return earned and thus
prompting consumers to spend and businesses to invest—or else lose
purchasing power. Since inflation’s effects are not spread uniformly
across consumers and businesses, the effects are masked, less straight-
forward and perhaps less real.
By contrast, with low inflation and zero nominal interest rates, the
NIRP tool is a full-frontal assault on purchasing power. Taxing or
charging interest to currency holders or charging negative rates on de-
posits would be uniformly-experienced. In short, it makes the central
bank’s strategy plain: erode purchasing power to encourage consump-
tion and investment rather than hoarding.
CONCLUSION
Seen in this light, negative rates are hardly an Alice in Wonderland-
type oddity. Instead, it’s better to think of negative rates like taxes or
fees on specific types of deposit accounts. By“raising the fee” (lowering
the rate of interest into negative territory), the central bank seeks to
achieve its ends. Investors will tolerate a certain “fee” or “tax” before
seeking alternatives to preserve purchasing power.
In the end, we think NIRP will prove counterproductive. Since all
monetary policy works through the financial system, central banks
need the banks and financial markets to create and distribute credit.
Forcing investors, savers and depositors to divert liquid assets else-
where will not support credit creation.
Finally, it is instructive to think about what monetary policy seeks
to achieve: a boost to spending and investment by a carefully-crafted
erosion of money’s purchasing power. You may not like it, but that’s
the simple truth.The big question we’re asking: will it work?We think
not.
A rising portion of institutional investors and maybe soon retail sav-
ers will be forced to pay for safety and liquidity. We doubt they will
willingly comply—unless they have no alternative. What innovations
will such negative rates breed?
While you ponder that question we hope we will soon be awakened
and find that all the while we, like Alice before us, had just been slum-
bering in a bed of leaves in the English countryside.
SOURCES
1 Morten Linnemann Bech and Aytek Malkhozov. “How Have
Central Banks Implemented Negative Policy Rates?”
BIS
Quarterly Review
, March 2016.
2 “What makes US government bonds safe assets?” Zhiguo He,
Arvind Krishnamurthy and Konstantin Milbradt, January 28,
2016
3
Financial Times
4
The Wall Street Journal
5
Financial Times
«IF YOU WITHDREW A STACK
OF 1 MILLION US DOLLARS
COMPRISED OF ONLY $100
BILLS, YOUR LOOT WOULD
WEIGH 22 POUNDS AND
TOWER NEARLY 4 FEET HIGH»