From the FED: Monetary Policy in a Zero-Interest-Rate Economy

Originally posted by cognoscente

www.lightparty.com...

From the article:

As it is, however, technology will soon liberate both people and resources from being "allocated" by market forces based on government-created, monopoly funny money. Digital cash will introduce diversity in both the number of parties who issue money and the type of money issued. This will allow citizens of the world to bypass the need to use official money for most transactions

I'm trying to wrap my head around what this person is actually saying. Is he saying in the age of digital money that for example a company like Mastercard could issue it's own currency? Because this way there would be competition for setting interest rates and making sure their particular currency did not lose any of its value (ie inflation) which in turn would force other issuers of currency work that much harder to retain its value including government run currencies.

If that is what he is saying, then I cannot wait til we have some competition.

Sounds like the FED is trying to run the banks out of business and corner the market.

Didnt that happen, oh, 80 years ago?

reply to post by ludaChris

If this goes into effect, I'm moving into the cash business.

That won't help you. I've read the entire article twice, just to make sure I caught all of the nuances. Indeed, one of the plans that they are considering long term is the one posted by the OP. At first glance, you might say, "Fine, I'll take my money out, and keep it in cash. Well, they have an answer for that- they will come up with a stamping scheme that stamps the last time the "hold tax" has been placed on the money. If you have NO stamp on your money, it will be null and void. If the last stamp, was say 8 months ago, then when you go to spend it, you will be charged 8 months worth of negative interest, if there is a negative interest. However, in the article they have stated that this plan is the most radical, and implementation would take a considerable period of time. However, they certainly ARE considering devaluing your cash, one way or the other.
My guess is that such a scheme would involve forced relinquishing of all gold holdings, and perhaps other precious metals, although they could probably control the valuation of those items in some other way. Any way you look at it, things are not going to be like they used to be. Your money WILL devalue if deflation takes hold. The Fed has gotten themselves into this mess (and us in the process) for one simple reason. They OVERPLAYED the drops in interest rates, in hopes that it would stimulate the economy, but they have virtually "no play" left in the rope, as rates near 0. I warned people in February on ATS that Greenspan was causing a financial crisis, but no one even responded to that thread.

Why Negative Interest Rates Are Good For You

Originally posted by behindthescenes
The idea is how to lower "real" interest rates below that of actual inflation to make the prospect of borrowing money and lending money worthwhile; thereby assuring that cash is still circulating in the system.

Correct. Let's see how this works.

1. Inflation causes money to lose its value
Most of the time, we live in an 'inflationary' economy. Inflation causes the value of money to decrease. If the annual rate of inflation is 5%, then $100 today will be worth only $95 (in today's money) this time next year.

Imagine you borrow $100 from a friend today. She's a friend, so she won't charge you interest on the loan. You promise to pay her back in a year's time.

Exactly 365 days later, you pay her back the full amount you borrowed. In cash terms, that's $100. But in value terms, you're only giving her back $95 (in today's money), because inflation has taken 5% off the purchasing power of the dollar.

She's actually lost money by lending it to you.

2. Interest rates are calculated to compensate for inflation
Next, imagine you borrow the money, not from a friend, but from a bank. Bankers aren't in business for their health, so they'll charge you interest. The interest is calculated to cover inflation and still make a profit for the banker. If the rate of inflation is 5%, the bank may charge you an interest rate of 10%

So in a year's time, you will have to pay back the $100 you borrowed plus another $10, which is the interest.

But in terms of today's money, you're not paying back $110. You're paying back only $104.50. Inflation has effectively lost the banker $5.50. But because he's set his interest high enough to compensate for inflation, he still makes a profit.

3. Inflation favours borrowers
So you see, inflation favours borrowers. Unless the lender adjusts his interest rate to compensate, he loses money by lending. Borrowers, on the other hand, actually make money. That is why (until the current financial crisis hit) banks and companies liked to be 'well leveraged'. Holding on to capital in an inflationary economy is a mug's game; it's better to be in debt, if you can borrow at low enough interest, because your debt actually reduces in value over time due to inflation.

4. Deflation is the opposite of inflation
You can probably see where this is leading now. In a deflationary economy (which is much, much worse than an inflationary one) money actually gains in purchasing power over time.

Imagine the annual deflation rate is (heaven forfend!) 5%.

Now imagine borrowing $100 from your friend. When you pay her back in a year's time, you're still paying her just $100, but in terms of today's money you're actually paying her $105.

And if you go to your bank for the loan, and the bank charges you 10% interest (as before), your repayment when due, in purchasing-power terms of today's currency, amounts to $115.50!

5. The consequences of deflation
Scary stuff. When deflation hits, nobody wants to borrow money, because it costs so much to pay it back. Businesses, afraid to borrow investment capital, stop investing in new plant and machinery and new product development and start laying off employees. Banks, afraid to hold deposits and equally afraid to borrow from each other or the central bank (what Americans call the Federal Reserve), have no capital to lend to businesses anyway. And people in debt - people with mortgages, credit-card bills, bank loans and all the rest - are in big, big trouble, because the value of their debt (as well as their interest payments) is continuously increasing due to deflation. Even if they somehow manage to keep their payments up, deflation digs them into a bigger hole day after day.

Soon, the whole economy comes to a grinding halt.

6. How negative interest rates can help
Between 1999 and 2006, when Japan was in a deflationary cycle, the Bank of Japan (the Japanese counterpart of the Federal Reserve) held its lending rate at zero. This was to reduce the pain of borrowers (banks, businesses and consumers) and encourage economic activity to continue.

It worked, but not well enough. The former Asian tiger economy is now more like a tortoise, and despite oodles of government spending to try to kick-start the economy, recovery seems a dim and distant prospect.

The proposed negative interest aim to make the remedy more effective by actively compensating for the increase in the value of debt due to deflation. It is very radical and may be rash, but it is certainly worth considering, because it would mean that people could borrow without seeing deflation balloon their debts; and they would also be less reluctant to spend the money they have. Thus trade and exchange could continue and America would be saved from economic collapse.

And as for you, gentle ATS member, it would keep your debts affordable and keep you in work - surely something to be pleased about.

But what about your savings?

Originally posted by behindthescenes
What I think may be misinterpreted here is who that borrower is: I don't think they're saying that consumers will be charged to literally save money, but that banks which borrow money from the Fed will be charged, thereby incentivized to actually make loans in a deflationary environment, thereby (smartly?) giving companies the cheap capital needed to fuel expansion and what not.

I'm not so sure that it will end there.

Banks borrow the money they lend us from depositors, from one another and from the central bank (the Fed in America). The lender of last recourse is the central bank, which is in a position to decide how much interest it charges. It sets this rate at a level it believes will support optimal economic growth. This is the base rate below which other interest rates can never fall: in America it is called the Federal Funds Rate.

Banks lend to and borrow from each other at higher rates than this. And their rates when lending to businesses and consumers are still higher.

behindthescenes is right to point out that, just because the Fed cuts the funds rate to a negative number, it doesn't mean that inter-bank lending rates and consumer rates will be negative too. If you went to borrow money from a bank under a negative-rate federal-funds regime, you might still be charged a positive rate of interest, though very low - a few tenths of a percentage point, maybe.

But banks borrow from private individuals, too. Only it's not called borrowing, it's called 'accepting deposits'. That's what your savings are - a loan to the bank you put them in. Now ordinarily banks pay less interest on deposits than they charge on loans, so with this negative-fed-funds-rate regime you may yet end up being offered zero interest, or even a 'bank charge' on your deposit (which amounts to a negative interest payment).

But look: there's no need to get upset about it. Don't forget that, while your money sits in the bank, it's increasing in value. You may eventually get only $99 of the $100 you deposited this year, but it'll still be worth more than $100 - in this year's money. Even with the negative interest rate, you have made an effective profit.

Will we reach a point where banks offer negative rates to depositors? behindthescenes thinks not.

I disagree.

In a deflationary spiral, the first thing central bankers need to do is mobilize capital - they want the money out in circulation, increasing business activity and production and working to haul the economy out of the deflationary morass. The last thing they want is for consumers to tie up their money in deposits. They will do everything in their power to prevent that from happening.

So yes, I see negative deposit rates in the future. The very near future, at that.

And a very good thing too.

I think there is a conspiracy!! I spent the last 20 minutes typing out a reply, only to hit the "post reply" button and get "Page cannot be displayed".... No, I will not type that all out again, I was close to my limit and, well, your innitial thoughts are often the correct ones.

Originally posted by mybigunit
reply to post by redhatty

 

Wow that is what Im reading here. So if you save your money you get charged. WTF is that crap. Can someone verify? IF it IS the case you solve it by buying physical gold and silver. That is how you fix that. There is your savings.

[edit on 8-12-2008 by mybigunit]

It's a way to "jumpstart" the US economy (investment/consumption) if the US face the same problems as Japan did in the 1980s' and 1990s. Nominal and real rates in Japan were close to 0% for almost 10 years (even negative real interest rates for some time), the main problem was that no companies did invest and very little private consumption. The cause was a slumping housing market and that the Japanese government bailed out the large banks, thus perpetuating bad loans with the result very low or zero credit available. Paul Krugman have a easy read paper on the problem,

Paper


[edit on 9-12-2008 by reugen]

And why, may I ask, does my employers not give me a minimum of a 5% raise to adjust for inflation?? That's almost a $1 raise starting this year... So according to the above Astyanax who laid it out in very plain english, I'm making 5% less each year that I work at this place.... No wonder they try to give you the 3% raises! they make 2% on you the next year! No wonder minimum wage is nearly $8 an hour in 09, I never thought about it that way....

If companies want to keep me doing what I do, they will certainly give me what I am worth, adjusted for inflation, at a minimum. But we all know that doesn't happen.

Edited to clarify that I do NOT get a 5% raise each year (I wish).... 3% MAX here......

[edit on 9-12-2008 by Ecidemon]

reply to post by Fiverz


Why would people want money?

Why would people want to work for money?

Why would people want to work in anything other the basic subsisting activities like agriculture, fishing, hunting?...

Originally posted by evilod
Nice catch. Looks like we weren't reading it in context.

You were reading it right evilod.

The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate by imposing some type of “carry tax” on currency and deposits....

It’s easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. The main difficulty—both technological and political—lies in imposing such a tax on currency.

I think the "political" reference means us. That we would pose a difficulty to this policy...I believe is an understatement.

Still, while I'm sure some private money would exit the banking system...we might be surprised at how many depositors would be willing to ante-up a small carry-tax, rather than tackle the security issues associated with safeguarding large amounts of cash.

For a brief period in 1978, the Swiss successfully imposed negative interest rates on foreign deposits. In that situation, depositors were willing to risk that the "levy' would be offset by a rise in the Franc.

In regard to currency-in-circulation, the author goes-on to explain the problems associated with Irving Fisher's currency "stamp" (kind like paying an annual fee to re-register your car). Imo, novel approaches to breaking through zero-limit...such as...dating the currency and having it's value decline across time...may be theoretically sound, but impractical in any real sense.

As we now know, following 2003 when this piece was written, none of the measures proposed by the author were ultimately necessary. The Greenspan Fed in collaboration with the entire US financial system & mortgage industry pulled a rabbit out their collective hat. We call it the housing bubble....well, it's over.

As we again approach zero-bound, will the uncertain policy of quantitative easing produce another rabbit? Maybe...but rabbits are quick...don't stick around long....better a hare.


[edit on 9-12-2008 by OBE1]

reply to post by Ecidemon

The figures I used were just examples, okay? US inflation in October (the latest for which we have figures) was 3.66% according to this site. That's actually quite high when you compare it with figures for the last six or seven years. But economists fear imminent deflation, which is why the Fed funds rate today is just 1%. Effectively, that's a negative interest rate.

Your employer is not obliged to keep adjusting your wages upwards in line with inflation. If every employer did that, it would just push inflation even higher and you'd end up in a vicious spiral.

[edit on 9-12-2008 by Astyanax]

Originally posted by Astyanax
reply to post by Ecidemon

 

The figures I used were just examples, okay? US inflation in October (the latest for which we have figures) was 3.66% according to this site. That's actually quite high when you compare it with figures for the last six or seven years. But economists fear imminent deflation, which is why the Fed funds rate today is just 1%. Effectively, that's a negative interest rate.

Your employer is not obliged to keep adjusting your wages upwards in line with inflation. If every employer did that, it would just push inflation even higher and you'd end up in a vicious spiral.

[edit on 9-12-2008 by Astyanax]

You're right and I understand you were using examples, and your 5% was low in regards to what I was told and taught my entire life. In fact, I was told that 6% (yes, just 1%) was the defacto standard. irregardless, it was close to neither.

Originally posted by Astyanax
reply to post by Ecidemon

 

The figures I used were just examples, okay? US inflation in October (the latest for which we have figures) was 3.66% according to this site. That's actually quite high when you compare it with figures for the last six or seven years. But economists fear imminent deflation, which is why the Fed funds rate today is just 1%. Effectively, that's a negative interest rate.

Your employer is not obliged to keep adjusting your wages upwards in line with inflation. If every employer did that, it would just push inflation even higher and you'd end up in a vicious spiral.

[edit on 9-12-2008 by Astyanax]

While they WERE examples, you struck really close to home in the percent-[er-year that I was told as a child. Currently, I think no one REALLY knows what's going to happen year to year. When I was a teanager, %6 yearly was the defacto standard.

Having said that, I spend pretty much every dime that I make... My wife and I spend approximately 5300 a month, which is nothing in the grand scheme of things, but I understand this country is built off of money (amendments my ass), so I do my best to keep this economy afloat, as I feel it's my duty as an american citizen. I put in, what I take out. Simple as that, really.
Editted for a typo

[edit on 9-12-2008 by Ecidemon]

reply to post by redhatty


THEIVES

AWAKEN YOUR FAMILY AND FRIENDS NOW!!! DONT WAIT FOR XMAS PARTIES

We will de throne the NWO take the money back, feed the starving and advance into a FREE eatrh.

We are coming, the revolution is coming

NON VIOLENCE sit in like the Thai people, like ghand, like King Jr.

NON VIOLENCE After we seal the NWO in their FEMA coffins for the rest of our existence

umm....if this article is right. the gold and silver reserves will be hitting the negative soon...that's if I am reading the article right...
physical gold and silver will becoming quite rare (except for ebay, where it is being traded quite often).

news.goldseek.com...

I haven't read all of the posts, but someone has brought up at least two times that they are taxing the banks for holdling the money, not the people. that would make more sense to me, but I have read the whole article as well. so I don't know.

of course, if you are taxed on your savings, can't find the gold or silver to invest in, and like someone pointed out, they could come up with a system to ensure you don't just hide it under you mattress and avoid the tax, well, where do you go with it? overseas? seems like most of the overseas markets is lockstepping with ours. I think this would promote more people to sink their savings into the delapidated stock market.

Originally posted by ProfEmeritus
[- they will come up with a stamping scheme that stamps the last time the "hold tax" has been placed on the money. If you have NO stamp on your money, it will be null and void. If the last stamp, was say 8 months ago, then when you go to spend it, you will be charged 8 months worth of negative interest, if there is a negative interest.

this is the reason RFIDs are a problem, because if it can be tracked it's a more of a goods-stamp rather than money. people did not listen and were laughing at the 'mark of the beast' hysteria instead of thinking it through.

who's going to guarantee that they won't give money varying purchasing power, depending on the current holder, btw? differential taxing? what are you going to do about that?

reply to post by redhatty


After reading the article I found that you may be taking the statement out of context. The article is simply stating what 'COULD' happen if the rates keep getting knocked down. It is essentially what happened in Japan earlier this decade.

Granted, it's not a good thought. I am leaning more towards the idea that they are trying to 'scare' people into allowing for the rates to stay the same or even be increased. Because after all, they won't make any FREE money if the interest rates are at zero.

i met six eskimos the other day, and they were running a black hip hop charity with funds given to them by the federal reserve.

reply to post by Astyanax


You are a God among men. Thank you for eluciditing what I was poorly trying to say.

While I'm not in complete disagreement with the idea of negative interest rates, I am of that -- some argue -- foolish Austrian mentality, which seeks to preserve the value of a currency. Unfortunately, Austrian-held beliefs are put to real tests in a deflationary environment.

So, I'm on the fence. Ultimately, it's be belief that banks are in business to lend money, so they'll have to do such at some point no matter what.

My God!!! I swear I hope they try this. Viva La Revolutione!!! The mattress looks better and better.

After reading the article, I have some questions that hopefully somebody in this thread can answer.

I'm under first impresssions that this will be a defacto tax against individuals who save rather than spend. Maybe it is not....

Consider this, one of the more pervasive gripes about Paulson's bailout is that the banks are hoarding the bailout cash and not lending to consumers. If this measure is only applied to banks Libor rate, their overnight borrowing rate, as a lending stimulation measure, 1) the money supply will radically increase and rapidly to avoid paying the fed for hoarding.

Massive increases in the money supply reverse this deflationary spiral and yadayadayada we all know the rest.