By Daily Bell Staff | 29 January 2016
THE DAILY BELL — Japan adopts negative interest rate … In a surprise move, the Bank of Japan has introduced a negative interest rate. The benchmark rate of -0.1% means that commercial banks will be charged by the central bank for some deposits. It hopes this will be a disincentive to banks to save and prompt them to lend in another attempt to counter the continuing economic slump in the world’s third-largest economy. – BBC
Dominant Social Theme: Negative interest rates are necessary to increase the velocity of cash.
Free-Market Analysis: If someone gives you money for something, he is providing you with compensation that has value. Presumably if you hold this “money” it shouldn’t depreciate because of this value. This is just common sense.
Wampum didn’t devalue that we know of. Even the huge stone circles of the Polynesians that sometimes sank to the bottom of the sea didn’t devalue. They held their value because people accepted the value and recalled it.
But increasingly around the world, as we can see from the BBC article excerpted above, central banks are considering or implementing negative interest rates. Switzerland, Denmark and Sweden are afflicted with negative-rate money now and these won’t be the last countries, surely.
This is supposed to force money into circulation. The idea is that economies aren’t growing quickly enough because money is not circulating fast enough. If money circulates, economies will grow.
This is a purely Keynesian way of looking at economic growth. Always, the theoretical approach of central banks is monetary. Enough money (notes, actually) cures any economic evil.
It is simply not so. Austrian economics explains this very well because Austrian economics is built around the primacy of human action. If people don’t want to do something, then they won’t, certainly not in aggregate.
In this case, people are not using money to buy and sell things. And they are not using money to build or expand businesses. They are not because the West and the world, in fact, are still mired in a Great Recession.
The Great Recession has been perpetuated by central bank loans to insolvent banks. At every level of the economy, people aren’t sure of the solvency of counterparties. This has a retardant effect on commerce.
If the central banks had just left the economy alone, institutions large and small would have failed years ago and the recovery would have begun. Instead, central banks froze the Great Recession in a kind of amber, perpetuating it to the present day.
And now they are hoping a monetary cure will shatter the amber and loose economic spirits.
The putative model for this must in some sense be the Fabian, crackpot economist Silvio Gesell who wrote in the 1930s about depreciating money. He actually wanted the government to time-stamp money and give it away with the provision that it depreciated monthly.
We’ve written about Gesell before, whose theories were always considered on the fringe. But now central banks are bringing his logic to the fore.
Here’s more from the BBC:
Why has Japan made this move? Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it in future. So rather than spend or invest it, they keep it in the bank. Charging a percentage to keep money in the central bank might encourage commercial banks to lend that out. That would boost both domestic spending and BUSINESS investment.
We can see from the above excerpt that the idea is to enhance monetary momentum, just as we have explained. But people won’t spend their money because it is depreciating. They will simply try to find another medium in which to store it, perhaps gold.
There is another element of fallaciousness in circulating this kind of money and that has to do with the real reason for imposing negative interest rates.
It has to do with the war on cash. We wrote about this in “Bamboozlement of Bank Runs as World Goes Cashless.”
Over the next months we will be likely be bombarded with statements about the fragility of the banking system, worldwide. But it is the progress of the “cashless society” that you want to keep your eye on.
Our point was that the real goal of central bankers is to remove physical cash and non-precious metal specie from circulation. We are now being exposed to a series of virulent dominant social themes that will attempt to confuse the reality of what is actually going on.
Here, from Business Insider:
This is how a central bank could kill off cash with negative interest rates … Miles Kimball, professor of economics at the University of Michigan, explains that flight to cash could be prevented in the latest economic review from the National Institute of Economic and Social Research (NIESR), published Wednesday. Clearly, bringing in negative interest rates on electronic money isn’t the problem, that’s just a matter of setting them.
Kimball argues that the value of various units of cash is determined by the central bank: … If the Fed simply refuses to take cash at its printed value, that poses a major problem for ordinary banks … There’d be a reduction in the value of paper money over time.
… If you did want to practically abolish cash, you’d just need a small tweak. In fact, all you’d need to do is make that negative interest rate at the cash window more steeply negative than the one people were getting on their electronic money.
… Cash is valuable to some extent because it’s fungible — exchangeable for an identical unit — and liquid. But this proposal would quickly end that, and split electronic money and paper money into two effectively different currencies. Paper money would be depreciating in value more quickly than electronic money. In effect, paper money would have higher inflation than electronic money.
You see? There’s a lot that can be done with negative interest rates to make electronic money more attractive than cash. In fact, it doesn’t make much sense that savvy central bankers really believe negative interest rates will radically increase the volume of circulating “money.” There’s got to be something more to it. There probably is.
What’s going on with NIRP may be a kind of directed history that justifies other changes yet to come. The real target is a cashless society. This is the sudden and substantive goal that is being concealed by the “noise” of other issues. Let’s watch what unfolds to see …