As I understand it, negative interest rates are difficult to arrange because cash exists.
Rates below zero can and have existed in the secondary market but the easy availability of government obligations which pay zero percent makes issuing Treasury bonds with a negative yield a non-trivial problem.
Willem Buiter discusses this problem, and in particular ways to get around it, in a blog post at the FT:
Currency is the only problem. Paying positive interest on currency is difficult because you don’t know the identity of the owner. The same note could be presented repeatedly to earn the interest due for a single period. To get around this problem, the instrument itself must be clearly identified as current or non-current on interest. Once interest has been paid, it is marked, traditionally by stamping it or by clipping a coupon off it.
With negative interest, the problem is not the owner turning up too often to claim his interest. It is getting him to turn up at all. Since the authorities don’t know I am the owner of the currency I own, why should I volunteer to pay the government money for the privilege? It is this prima facie trivial obstacle of paying negative interest on currency that has prevented central banks from breaking through the lower floor (no stories about Switzerland, please).
Stricly speaking this story must be qualified in minor ways. If currency is the most liquid security, no other risk-free nominal instrument can earn less than it, net of carry costs (costs of storage, safekeeping and insurance). Carry costs for currency are higher than for Treasury bills or reserves with the central bank. The zero lower bound is therefore, strictly speaking a lower bound somewhat below zero. But not enough to achieve a minus five percent Federal Funds target rate.
He lists three ways to deal with this, none of them--in my opinion--politically feasible in the current environment:
(1) Abolish currency.
(2) Tax currency and ‘stamp’ it to show it is ‘current on interest due’.
(3) Unbundle currency from the unit of account.
I know the first two have been tried in various times and places and things have not worked out very well.
I do think negative interest rates are a lot harder to accomplish than Buiter claims, but his post is more a thought experiment than anything else, so I think he is deliberately underestimating the difficulty in doing so. I am also skeptical of the utility of screwing with currency in such an obvious way; it's already the case that money is a social fiction, but making that more clear to everyone--as opposed only to people who pay attention to finance--that it is so easily manipulable probably has social costs that Buiter evidently doesn't care about as much as I do.
Put another way, I grant that making negative interest rates possible would be helpful to central banks. I'm just not sure that the benefits of this outweigh the problems it may cause to the rest of society.
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Date: 2011-12-27 12:22 am (UTC)Rates below zero can and have existed in the secondary market but the easy availability of government obligations which pay zero percent makes issuing Treasury bonds with a negative yield a non-trivial problem.
Willem Buiter discusses this problem, and in particular ways to get around it, in a blog post at the FT:He lists three ways to deal with this, none of them--in my opinion--politically feasible in the current environment:
I know the first two have been tried in various times and places and things have not worked out very well.
I do think negative interest rates are a lot harder to accomplish than Buiter claims, but his post is more a thought experiment than anything else, so I think he is deliberately underestimating the difficulty in doing so. I am also skeptical of the utility of screwing with currency in such an obvious way; it's already the case that money is a social fiction, but making that more clear to everyone--as opposed only to people who pay attention to finance--that it is so easily manipulable probably has social costs that Buiter evidently doesn't care about as much as I do.
Put another way, I grant that making negative interest rates possible would be helpful to central banks. I'm just not sure that the benefits of this outweigh the problems it may cause to the rest of society.