Guest post by Alhambra Investment Partners
Currency Genocide; Or Let’s Kill it More
There is an irreconcilable tension that lies at the heart of every “extraordinary†monetary policy. It isn’t something that is talked about much, and in fact it is steadfastly avoided as if these were two distinct topics. Bringing them together amounts to “crossing the streams†(to use 1984-style metaphors) and tends to undermine the idea that in the most extreme circumstance most extreme measures are needed to deviate.
You hear it all the time from central bankers and economists, as their contention of the cumulative economic shortfall since August 2007 relates to “inadequate demand.†Their solution then is to “stimulate†demand mostly by killing the impulse toward savings. Indeed, the qualification “repression†fits this intent, as central banks are intentionally suppressing rates of returns on “safe†and “liquid†instruments in order to “nudge†people toward spending currency. This has a long history of intellectual development, tracing back further than even the under-consumptionists who timed their apex to just before the Great Crash in 1929.
Orthodox adherence to these views tend to be less public as it would rightfully raise suspicion about exactly what is being planned and executed. Instead, central bankers look to the more positive side, or one that at least sounds upbeat, of “stimulus†through lower interest rates. They tell you it is cheaper to borrow which sounds terrific if you have little concern over repayment and absorbing even minor increments of interest, but it is all part of the whole recession-fighting kit.
The first part, repressing savings, amounts to killing the currency in favor of its usefulness only as a tool in intermediating spending. More extreme views on this have been expressed regularly, but even more so as the latest rounds of similar “solutions†fade into ill-fated history. Citigroup’s Global Chief Economist, Willem Buiter, only last weekend was on his soapbox about the “dangers†of allowing people to opt out of central bank repression by holding nothing more than currency:
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.
