[p2p-research] negative interest at NYT

Mon May 18 18:03:10 CEST 2009

This is certainly correct in principle.   I'm not sure about the -5%, but he
would probably advocate negative interest in a deflationary period based on
writings in *The General Theory*.

I suppose I would like to see an argument contra interest. It is hard for me
to fathom the moral or economic argument at present.

If you have a shovel and are not using it, you can lend it to me.  I use it
and gain value.  What is the problem for compensating someone for such
value?  It allows shovels to be fully employed, fewer shovels to be
produced, and all the inputs to the shovel to be used and allocated
efficiently.  Where is the controversy?

Ryan Lanham

On Mon, May 18, 2009 at 10:09 AM, Michel Bauwens <michelsub2004 at gmail.com>wrote:

> Very interesting article in the NYT by N. Gregory Mankiw a professor of
> economics at Harvard.
>
> He reminds us that Keynes was a supporter of negative interest rates as
> well (I knew this, but had forgotten it).
>
> The ideal interest rate for the US economy in current conditions would be
> minus 5 per cent, according to internal analysis prepared for the Federal
> Reserve's last policy meeting. (
> http://www.ft.com/cms/s/0/23b62bfc-338b-11de-8f1b-00144feabdc0.html)
>
> Via http://www.nytimes.com/2009/04/19/business/economy/19view.html
>
>
>
> text:
>
>
> The problem today, it seems, is that the Federal Reserve<http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-org>has done just about as much interest rate cutting as it can. Its target for
> the federal funds rate is about zero, so it has turned to other tools, such
> as buying longer-term debt securities, to get the economy going again. But
> the efficacy of those tools is uncertain, and there are risks associated
> with them.
>
> In many ways today, the Fed is in uncharted waters.
>
> So why shouldn’t the Fed just keep cutting interest rates? Why not lower
> the target interest rate to, say, negative 3 percent?
>
> At that interest rate, you could borrow and spend $100 and repay $97 next
> year. This opportunity would surely generate more borrowing and aggregate
> demand.
>
> The problem with negative interest rates, however, is quickly apparent:
> nobody would lend on those terms. Rather than giving your money to a
> borrower who promises a negative return, it would be better to stick the
> cash in your mattress. Because holding money promises a return of exactly
> zero, lenders cannot offer less.
>
> Unless, that is, we figure out a way to make holding money less attractive.
>
>
> At one of my recent Harvard seminars, a graduate student proposed a clever
> scheme to do exactly that. (I will let the student remain anonymous. In case
> he ever wants to pursue a career as a central banker, having his name
> associated with this idea probably won’t help.)
>
> Imagine that the Fed were to announce that, a year from today, it would
> pick a digit from zero to 9 out of a hat. All currency with a serial number
> ending in that digit would no longer be legal tender. Suddenly, the expected
> return to holding currency would become negative 10 percent.
>
> That move would free the Fed to cut interest rates below zero. People would
> be delighted to lend money at negative 3 percent, since losing 3 percent is
> better than losing 10.
>
> Of course, some people might decide that at those rates, they would rather
> spend the money — for example, by buying a new car. But because expanding
> aggregate demand is precisely the goal of the interest rate cut, such an
> incentive isn’t a flaw — it’s a benefit.
>
> The idea of making money earn a negative return is not entirely new. In the
> late 19th century, the German economist Silvio Gesell argued for a tax on
> holding money. He was concerned that during times of financial stress,
> people hoard money rather than lend it. John Maynard Keynes<http://topics.nytimes.com/top/reference/timestopics/people/k/john_maynard_keynes/index.html?inline=nyt-per>approvingly cited the idea of a carrying tax on money. With banks now
> holding substantial excess reserves, Gesell’s concern about cash hoarding
> suddenly seems very modern.
>
> If all of this seems too outlandish, there is a more prosaic way of
> obtaining negative interest rates: through inflation. Suppose that, looking
> ahead, the Fed commits itself to producing significant inflation. In this
> case, while nominal interest rates could remain at zero, real interest rates
> — interest rates measured in purchasing power — could become negative. If
> people were confident that they could repay their zero-interest loans in
> devalued dollars, they would have significant incentive to borrow and spend.
>
>
> Having the central bank embrace inflation would shock economists and Fed
> watchers who view price stability as the foremost goal of monetary policy.
> But there are worse things than inflation. And guess what? We have them
> today. A little more inflation might be preferable to rising unemployment or
> a series of fiscal measures that pile on debt bequeathed to future
> generations.
>
> Ben S. Bernanke<http://topics.nytimes.com/top/reference/timestopics/people/b/ben_s_bernanke/index.html?inline=nyt-per>,
> the Fed chairman, is the perfect person to make this commitment to higher
> inflation. Mr. Bernanke has long been an advocate of inflation targeting. In
> the past, advocates of inflation targeting have stressed the need to keep
> inflation from getting out of hand. But in the current environment, the goal
> could be to produce enough inflation to ensure that the real interest rate
> is sufficiently negative.
>
> The idea of negative interest rates may strike some people as absurd, the
> concoction of some impractical theorist. Perhaps it is. But remember this:
> Early mathematicians thought that the idea of negative numbers was absurd.
> Today, these numbers are commonplace. Even children can be taught that some
> problems (such as 2x + 6 = 0) have no solution unless you are ready to
> invoke negative numbers.
>
> Maybe some economic problems require the same trick.
>
>
> --
> Working at http://en.wikipedia.org/wiki/Dhurakij_Pundit_University -
> http://www.dpu.ac.th/dpuic/info/Research.html -
> http://www.asianforesightinstitute.org/index.php/eng/The-AFI
>
> Volunteering at the P2P Foundation:
> http://p2pfoundation.net  - http://blog.p2pfoundation.net -
> http://p2pfoundation.ning.com
>
> Monitor updates at http://del.icio.us/mbauwens
>
> The work of the P2P Foundation is supported by SHIFTN,
> http://www.shiftn.com/
>
> _______________________________________________
> p2presearch mailing list
> p2presearch at listcultures.org
> http://listcultures.org/mailman/listinfo/p2presearch_listcultures.org
>
>
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://listcultures.org/pipermail/p2presearch_listcultures.org/attachments/20090518/c0f40997/attachment-0001.html>