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Saturday, April 25, 2015

Frances Coppola — The Swiss Have Eliminated The Zero Lower Bound

So, this is fun. Via Zero Hedge comes this report from a Swiss website, Schweizer Radio und Fernsehen (SRF). It seems that a Swiss pension fund tried to evade negative rates on deposits by withdrawing a very large amount of physical cash with the intention of vaulting it. But the bank refused to allow it to withdraw the money in the form of physical cash....
This could have far-reaching consequences. The monetary policy of the last few years has been hampered by the supposed existence of the “zero lower bound”, at which (it is assumed) everyone would opt for physical cash instead of bank deposits and bonds. We already know that the lower bound (if it exists) is actually slightly below zero, since it is the point at which the cost of negative rates on deposits and bonds starts to exceed the cost of holding physical cash (vaulting charges, theft risk and so on). But if investors simply cannot obtain large amounts of physical cash because banks won’t issue it to them, the slightly-below-zero lower bound cannot bind. In which case negative rates could be very negative indeed and no-one would be able to do much about it. There would be no need to abolish or tax cash, as Citi’s Willem Buiter suggests. It could simply be ignored. Welcome to the negative-rate universe.
Forbes
The Swiss Have Eliminated The Zero Lower Bound
Frances Coppola

Does anyone else have the feeling that the wheels are coming off?

6 comments:

  1. Taxing people works and floating rate currencies are their own capital controls because you can't get out of them in aggregate.

    Who knew?

    Generally though it is better if people are taxed by a democratically elected body rather than a bunch of bankers.

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  2. Negative interest rates as a means to impart stimulus are a complete nonsense because they can lead to negative output. (Though I appreciate that the Swiss motive for negative rates is not to impart stimulus)

    Second, adjusting interest rates so as to adjust demand is nonsense because it's DISTORTIONARY: that is it influences just loan related forms of activity. That makes as much sense as doing helicopter drops on households inhabited by blondes and red-heads, while those with brown or black hair wait for a trickle down effect.

    Conclusion: the method of imparting stimulus favored by most MMTers (far as I can see) is the best one, namely to create fiat and spend it (and/or cut taxes).

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  3. Ralph-

    Deficit spending is 'creating fiat and spending it", no 'reserve-only spending' necessary.

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  4. "When you find yourself in a hole, stop digging."

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  5. This is the flip side of Volcker's jacking the interest rate up toward 20%.

    The desperation of monetarism.

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  6. It's an interesting experiment though. We'll see at what point people start switching out of Francs and into foreign assets - effectively causing the currency area to shrink.

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