By expanding the money supply, central banks everywhere have been able to push nominal interest rates to zero. In some countries, real interest rates have plunged into negative territories; lending at real negative returns sounds really appealing, doesn’t it? While increasing the money in circulation, troubled banks and companies like GM have been able to survive. Select industries have remained afloat, continued to employ some (although severe cutbacks have still occurred at General Motors, and they have moved thousands of jobs to places like Mexico, China and South America to take advantage of the lower wages), and banks who received TARP funds are beginning to give the money back to the Treasury.
But if the economy doesn’t turnaround in a meaningful way by the end of President Obama’s first term, what is the next move for central planners? Just when you think they’ve ran out of bullets, they pull out a golden gun. Could the next move be a nudge towards a cashless society? Whispers of such an about-face have turned into legitimate policy debates in Japan. The total shift to electronic money would be designed, and sold to the Japanese people, as a way to fight the deflationary spiral they’ve battled for a decade plus (coined “the lost decade”). Nothing scares the central bankers more than deflation. And nothing works better to push through policy than fear. Americans have learned all about fear mongering through both the Bush and Obama administrations.
Some analysts have estimated the Japanese need around -4 percent nominal interest rates to fend off further deflation. If I’ve lost you, that’s just your gut kicking in. A monetary system that requires -4 percent rates to kick-start an economy, is obviously a flawed one. The only way to achieve such low interest rates, claims the argument, is by controlling the money supply exactly down to the dollar, or yen, in this case. When central bankers use open market operations to control the money supply, they buy and sell bonds to increase or decrease money in circulation. Buying bonds increases the money supply; selling bonds decreases the money supply. A target interest rate is not hit precisely; rather, the rates jump around a range, close to the target. With a fractional reserve banking system, the money supply is even more difficult to pinpoint.
As Minority Report as it sounds, we’re oddly not that far from the cashless, central banker’s nirvana. In the United States, roughly 97% of the money supply is electronic. We use eBills, eStatements, online banking and pay for most goods with debit or credit cards.
Japanese policymakers will have a harder time convincing their cash-based, savings-oriented consumer society to use eMoney. “Only” 84% of the money supply is electronic in Japan. Six cashless payment systems exist under the Osaka sun (although only a city, the sun in Osaka reaches all corners of the country. Or, I just wanted to use the term), with growing technology that embeds the systems into mobile phones. All totaled, 120 million cashless payment chips (cards or phones) have made their way into the Japanese consumer’s routine.
I’m not expert enough to explain why anybody would lend money at negative interest rates; or, pay the government for the privilege of holding their debt. Practically, negative nominal rates are impossible. But negative real interest rates are already here. A nominal rate of zero, plus whatever the inflation rate currently sits at, puts us at negative real interest. The increase in food and gas prices is probably enough to get most baskets of goods and services to a higher inflation rate than last quarter.
As Milton Friedman said:
“I have been fascinated by the fact that in country after country you have a paradox: you have what is supposed to be a government of the majority; you have a representative government. And yet that government repeatedly does things that a majority of the people oppose. You go around in the United States, for example, where I know the situation best, and you will find that a majority of the people in the United States think government is spending too much, imposing taxes that are too high and would like to see government cut back. At the same time, the representatives of the people…through the…Congress…follow policies that lead to those results that the majority deplore. The reason for that, I believe, is we have a defect in our government institutions. What we have is a situation in which minorities, special interest minorities, are able to exercise undo influence. In my opinion…our solution to that is going to be through public action, which will lead to Constitutional provisions, setting narrower limits on government. That was a device that was adopted in the 18th century by the founders of our country in the original Constitution, and we need to reinforce that…by using the Constitution to set narrower limits on the scope of government.”
Without cash, every transaction we make will be recorded, and traced back to us directly. It will be even easier for the Federal Reserve, a non-government entity with zero transparency, to manipulate the money supply (thus changing the value of money). Currently, when Federal Reserve Chair Ben Bernanke doesn’t want to answer a question on Capitol Hill, he claims “banker’s privilege.” For an institution moving around trillions of dollars, not to mention holding the ominous power of creating new money, how long can this arrangement stand? A cashless society also brings us closer to the possibility of all financial, if not personal, information like social security numbers, compiled in one place; perhaps a government card, or for the New World Order folks, a scan-able chip implanted in the back of the hand.
The good news is, a computer’s voice will be able to tell me which pants I might like, as I stroll into the Gap.
Negative nominal interest rates do occur in everyday life. Usually they are special cases, and not suitable for overarching monetary policy. For practical examples of negative nominal interest, check out an article by Alex J. Pollock: