Two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won’t buy safe assets that yield even less. The second is the central bank’s promise to keep the inflation rate low and stable — at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).
In other words, governments — by issuing cash and managing inflation — put a floor on how low interest rates can go and how high asset prices can rise. That’s hardly a free market.
What’s the fix for this problem? John Williams, president of the Federal Reserve Bank of San Francisco, has offered some ideas, such as increasing inflation targets — but these are partial work-arounds at best.
The right answer is to abolish currency and move completely to electronic cash.
September 1, 2016
Want a Free Market? Abolish Cash
[Via Michael Krieger who says:
Possibly the most idiotic article I’ve ever read.
See also The Sinister Side of a Cashless Society (via email from Lynn Z.).
Electronic cash would allow government to be so much more efficient. Just imagine how much easier it would be to find people who were trying to cheat on their taxes by not reporting their tips. And bribes would be easy to catch. And armed robbery of banks would cease to exist. It would be wonderful, right? Isn’t that what everyone wants, a more efficient government? Who could possibly object?
Oh, yeah. Now I remember. It fails The Jews in the Attic Test.—Joe]
I keep wondering why people don’t attack the “2 percent inflation target” notion. Inflation as a side effect of government monetary fraud is bad enough. Government monetary fraud as an explicit policy is worse. It translates to “it is the government’s policy to steal 3% of your property every year without any legal or Constitutional authority”
With real money (such as gold, or other options not based on fiat, the long term average outcome is slow deflation, the reciprocal of productivity increase. So any time you see the government aim for constant prices, let alone increasing ones, you know that their policy is to debase the currency, i.e., to steal from the people.
I don’t use credit cards or checks to buy anything. I will and have bought prepaid debit cards for online purchases, used once and trashed. So this bull of e-cash worries me some, not much, but some. If e-cash is forced on us, I can see a very vibrant barter type system continuing to skirt the rules.
But only criminals and drug dealers and child molesters use cash or prepaid debit cards.
I though five and a half percent interest and 10 percent inflation was negative interest, or has that time in the Seventies been shoved down the memory hole?
I read somewhere that hyperinflation meant that no one wanted to hold that currency anymore; it had nothing to do with growth of the money supply.
Ferfal Aguerre who wrote about the economic collapse in Argentina thought that buying gold was a good thing, but buying gold chains and other small jewelry, as the sale of coins or bullion suggested that there might be more still at home, and that a home invasion robbery might be profitable for someone.
But if precious metals are the way you want to go, then junk silver coins (pre 1964, of course) might be the way to go. A dime, quarter, half or (hey big spender!) a silver dollar, because that would be the denominations most used day to day.
“I read somewhere that hyperinflation meant that no one wanted to hold that currency anymore; it had nothing to do with growth of the money supply.”
Huh? Inflation, hyper or otherwise, is caused by the growth of the money supply. The non-hyper case applies when the government is debasing the money slowly enough that people don’t feel major pain and therefore aren’t catching on to the fact that they are being robbed.
The fact that during hyperinflation people don’t want to hold on to currency is the effect, not the cause, of inflation.
Inflation becomes hyper as the horse gets out and starts to really get running, so people get paid at lunch and rush out to buy something, anything before the afternoon shift begins, which accelerates the inflation, I have a 13 trillion Deutschmark bill from 1922. Weren’t the Versailles reparations required to be paid in gold?
No, it’s the manic money printing that creates the hyperinflation. Yes, the fact that people end up spending money the moment it gets into their hands is the classic symptom. But only the symptom.
I don’t know about the reparations, but it would make sense. Even while governments were busy switching to fake money (fiat money) for the peons, they tended to hang on to real money for their own use for a while longer. That’s called the “gold exchange standard”, often mistaken for an actual gold standard. In the US, the gold standard essentially disappeared when the Fed was created, and FDR confirmed it. But gold was allowed for certain privileged parties (governments) as an exchange medium for their special transactions for a while longer.
If you are a Christian, this perfectly matches the Mark of the Beast control mechanism that will cause the whole world to fall under the control of a single government and a single evil leader. No thank you.
You know, Charles Stross may love himself some european style social democrat superstate, but he had an interesting idea in one of his books.
The problem he addressed was: how does one get a return on investment in a colonization mission to another solar system? No faster than light travel, so after you accumulate resources for decades if not centuries, then launch it for centuries of travel, then the colony actually has to establish itself and create an industrial base… if it is not the most enormous act of charity ever, where’s the ROI?
He had the idea of fast, medium and slow money.
Fast money is used day to day, for perishable and semi-perishable goods and services and paying taxes i.e. a service by another name. You buy food and ammo and oil with fast money. You rent a house with fast money. There’s an exchange rate to…
Medium money, which is non-perishable goods and commodities and real estate. This currency is backed by real assets, which can definitively be owned by specific people or an anonymous trust. You buy guns and machine tools and Rembrandts with medium money. You buy (or mortgage) a house with medium money. There is a conversion rate to…
Slow money is the kind you use to finance a non-terrestrial colony. It is non-perishable goods, plus the expense of imparting it with delta-V and every other kind of infrastructure necessary to deliver it to a location where ‘speed of light’ is a factor in the equation. You use slow money to colonize Mars from Earth. (Colonizing part of Mars from another, already established, part of Mars is Medium money.)
Putting aside slow money for the time being, maybe we need to split our money between fast ‘fiat’ currencies and medium ‘non-fiat’ currency. It might be a bit more obvious how badly governments do at managing monetary policy if everyone can compare it directly to the fully backed, no-fractional-reserve currency that has a reliable relationship to their hard assets.
I haven’t thought this one through all the way, so don’t kill me too hard for stealing an idea and trying to adapt it.
As someone who has thought about this quite a bit I always liked the idea of a dual currency system, one fiat and one backed. The problem with backed currency is one of scale. As the economy grows you run the risk of running out of a single convenient hard currency that everyone agrees on. That happens to be the strength of fiat currency; everyone agrees on it and there is effectively an unlimited supply as the economy grows. For hard currencies you run into supply and demand issues. There really is not enough gold around for everyone to be paid in it (or even the baked note equivalent) and selecting multiple precious materials for use at once runs into conversion issues (if I give you an ounce of gold and need change, should I get 3 ounces of silver back or 4? What happens if just yesterday Space Mining Company X captured an asteroid with 1000 tons of silver? How do I keep track of that to make sure the clerk is not ripping me off?). We really do need a fiat currency for day to day transactions, but we should also have a well defined and agreed on hard currency to help stabilize larger transactions. Fiat currency would be used to buy a hamburger, hard currency would be used to buy a car. This would also serve the purpose (as you noted) of directly illustrating the drawback of fiat currency, while heightening the accountability of the people who set monetary policy. Of course there are a lot of deeper nuances with a split money system, like figuring out how policy affects conversion rates or with what system you would draw a salary in, but most of those will logically sort themselves out in a true free market system.
You’ve fallen for one standard trap the fake money advocates have set.
You can’t run out of hard currency. When the economy grows, prices drop in proportion. It’s that simple.