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Who: Kimball Corson. Text and Photos not disclaimed or that are obviously not mine are copyright (c) Kimball Corson 2004-2016
Port: Lake Pleasant, AZ
09 April 2018 | Pago Pago, American Samoa
An Informed Atheist Re-Addresses Christianity
10 March 2018 | Pago Pago, American Samoa
A Progressive Reform Program for America
10 March 2018 | Pago Pago, American Samoa
Supply Side and Libertarians Are Wrong and Not Supported by the Data
10 March 2018 | Pago Pago, American Samoa
How Income Inequality Injures People and the Economy
22 August 2017 | Pago Pago, American Samoa
A Democratic Reform Program for America
22 August 2017 | Pago Pago, American Samoa
The Supply Side Libertarians Are Wrong and Not Supported by the Data
22 August 2017 | Pago Pago, American Samoa
The Rise of Economic Ignorance
22 August 2017 | Pago Pago, American Samoa
The Rise of Corporate Dominance and the Rise of Income Inequality (Part VI)
22 August 2017 | Pago Pago, American Samoa
The Rise of Corporate Dominance and the Rise of Income Inequality (Part V)
22 August 2017 | Pago Pago, American Samoa
The Rise of Corporate Dominance and the Rise of Income Inequality (Part IV)
22 August 2017 | Pago Pago, American Samoa
The Rise of Corporate Dominance and the Rise of Income Inequality (Part III)
22 August 2017 | Pago Pago, American Samoa
The Rise of Corporate Dominance and the Rise of Income Inequality (Part II)
22 August 2017 | Pago Pago, American Samoa
The Rise of Corporate Dominance and the Rise of Income Inequality (Part I)
22 August 2017 | Pago Pago, American Samoa
Racial Hatred Is Confused
22 August 2017 | Pago Pago, American Samoa
What To Do About North Korea
22 August 2017 | Pago Pago, American Samoa
On Neoliberalism
22 August 2017 | Pago Pago, American Samoa
Ban Hate Marches and Assemblies
22 August 2017 | Pago Pago, American Samoa
On Miss Piggy and Mr. Pork
22 August 2017 | Pago Pago, American Samoa
The Demise of the Democratic Party
09 August 2017 | Pago Pago, American Samoa
On Elitism

Why Negative Interest Rates Might Not Be a Good Idea

03 September 2016 | Pago Pago, American Samoa
Kimball Corson
Consider interest payable or chargeable on a short term treasury --

---> 1 % interest with zero inflation
Holding a bond is better than cash or a demand deposit, although cash or a demand deposit is more liquid. Depends of degree of liquidity preference
---> 0 % interest with zero inflation
Holding cash or demand deposit is better because it is more liquid
---> -1 % interest with zero inflation
Holding cash or demand deposit is much better, i.e., hoarding is desirable.

But the question is negative interest rates on what? Savings deposits? The federal funds rate? The rate paid on bank deposits at the Fed? Or does it matter?

Four decades ago, Milton Friedman recommended that central banks like the Federal Reserve pay interest to depository institutions on the reserves they are required to hold against their deposit liabilities. This proposal was intended to improve monetary policy by making it easier to hit short-term interest rate targets. However, the Fed didn't have the authority to pay such interest until 2008. Then it acquired authority to pay interest on both required and excess reserves. Negative interest raises a legal problem because the legislative presumption was clearly positive interest rates.

Negative interest on reserves are intended to induce banks to lend more at lower rates and reduce their excess reserves. The three month treasury note is already at zero % percent yield. It is arguably better to hold or hoard cash, depending on liquidity preference.

There are three reasons negative rates on reserves might be ill considered.

First, they would increase private hoarding and off-shoring of cash by increasing liquidity preference.

Second, if negative rates were paid on total or excess bank reserves at the Fed, banks would have a greater incentive to lend and thereby compromise on lending standards. Alternatively, they might try to hold their own excess reserves which are the bulk of them. When the Fed started paying interest on total reserves held at the Fed, the ratio of excess to required reserves shot up hugely. The goal now is to reverse that and increase lending.

Finally, negative rates would spill out of reserves interest and that could push people out of notes and short term paper and into cash. Arbitrage and similar effects tend to equalize interest rates across like risk and similar considerations.

Kenneth Rogoff at Harvard is aware of the first and third of these problems and has just published a book, The Curse of Cash, proposing we eliminate cash from our monetary system or at least most of it, especially large denomination bills. His reasons are myriad, but his core motivation is his belief that negative interest rates will "give money that has been hibernating in the banking system a kick in the pants to get it out into the economy to stimulate demand thereby pushing up inflation and output." Assuming of course lending standards hold and we don't drown again in bad loans and again have a private debt liquidy crisis.

We might learn why negative rates could be a bad idea. We are treading into dangerous territory. The world of economic inter-meddling is historically overwhelmed with unintended consequences, as Friedman argued well. Negative rates and the elimination of cash are two major proposals. Negative rates are also arguably against the law.
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Vessel Name: Altaira
Vessel Make/Model: A Fair Weather Mariner 39 is a fast (PHRF 132), heavily ballasted (43%), high-aspect (6:1), stiff, comfortable, offshore performance cruiser by Bob Perry that goes to wind well (30 deg w/ good headway) and is also good up and down the Beaufort scale.
Hailing Port: Lake Pleasant, AZ
Crew: Kimball Corson. Text and Photos not disclaimed or that are obviously not mine are copyright (c) Kimball Corson 2004-2016
About:
Kimball Corson: I am a 75 year old solo sailor, by choice. However, I did take on a personable, but high maintenance female kitten, now a full grown cat, named KiKiPoo when she is sweet, or KatKatPo after she has just killed something like a bird or bat. [...]
Extra:
Although I was a lawyer and practiced law with good success for thirty years, creating significant new law, I never really believed in the law, the politics of law or in the over reaching self-interest of most lawyers I met. Too much exposure to Nietzsche and other good and seriously thoughtful [...]
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Profile

Who: Kimball Corson. Text and Photos not disclaimed or that are obviously not mine are copyright (c) Kimball Corson 2004-2016
Port: Lake Pleasant, AZ