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Negative interest rates are easy to do

In the virtual world of money, anything is possible …

Is there a zero bound? The “mysterious” world of negative nominal interest rates.
from Economic Perspectives from Kansas City by
By Eric Tymoigne

Yesterday I attended a Federal Open Market Committee (FOMC) simulation at Reed College in Portland, OR. At the beginning of the simulation the President of the College jokingly asked participants to find a way to make the policy rate negative, so that we (the FOMC members) could pay banks who borrow reserves. Of course everybody in the audience laughed but let’s take a look at this more carefully: Could the Federal Reserve set the nominal federal funds rate and the nominal discount rate in negative territory?

Yes.  (Find out how – link to full article)

Posted in Money Systems, News.

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  1. Adriaan Koreman says

    MONEY is TIME! (by Adriaan Koreman)

    The MELTDOWN of our financial and economic system.

    Too many people believe that FREE MARKET ECONOMY and CAPITALISM are one and the same thing.

    Capitalism is nothing but a monetary system originating from the use of gold and later deposit slips for gold as a means of exchange.

    Free Market Economy is nothing but a natural way of balancing offer and demand by attributing more value to items that are scarce and in demand. It originates from far before capitalism and already existed in the time of barter trade.

    Contrary to popular believe: MONEY is TIME! When you earn money, you have given your time in producing something. Or in rendering a service of some kind. Or in trading something. Whatever you did to earn a living, you received money for your time and that money allows you to buy TIME from somebody else. You can buy a product that someone created with his time. Or a service. No matter what …… It is always TIME that you buy!

    Part of the time that you can buy for your money has already been transferred into products. A car waiting to be sold. Food in the supermarket. Tools of some kind. Machinery. A house.

    But services still to be rendered. Products not yet created. Raw materials not yet extracted from the earth. They are waiting for TIME to be applied to be realised. So when unemployment is skyrocketing we should be so happy! There is so much TIME available! What richness? What wealth for a nation? But are we happy with high unemployment?

    TIME when it is not consumed loses it’s value. At a rate of 100 % per day. We are used to transfer the time that we are owed into CAPITAL in order to be able to transfer it back into TIME when we want to buy something or invest it.

    But CAPITAL keeps and TIME doesn’t! There is not necessarily a direct relation between the amount of capital available and the amount of products or time that can be purchased with it. In times of euphoria (years 1920, 1960 and 2000), overspending and borrowing increases the total amount of capital available and inflation lurks around the corner. In times of recession (years 1930, 1970 and 2008), so many bad debts have to be written off, that there is an implosion of the amount of capital available and deflation puts our financial system at risk. FED and ECB fight deflation by expanding the available amount of money drastically, but when government spending head starts inflation this tremendous amount of money available could lead to hyper inflation, causing our financial system to meltdown.

    In the last three centuries CAPITALISM has produced an enormous increase in our standard of living. But in 1930, 1970 and 2008 it has also produced unacceptable high levels of unemployment in developed countries and high unemployment in most other parts of the world throughout the last century. Because it transfers time owed into CAPITAL and only buys time back when added value can be created, TIME or LABOUR is allowed to be completely lost when it is thought that no profit can be expected.

    CAPITAL is only invested when more than 100 % can be expected in return.

    TIME would be invested when anything above 0 % can be expected in return.

    And that is the reason why CAPITALISM produces high unemployment levels. Transferring TIME owed to us into CAPITAL blocks the possibility to put time to good use when it could produce anything above 0 % in return.

    So how can we avoid the MELTDOWN?

    Barter trade? Of course not! We live in the 3rd millennium! Even though we still use a monetary system from the 1st and 2nd millennium, with an elementary flaw in it that will finally have to be eliminated!

    If CAPITAL or MONEY is to be a means of exchange for TIME, then it should have the same property as TIME! Meaning … it should lose value when it is not consumed within a certain period, just as TIME does! But how to achieve that?

    Nothing is easier. Let’s look at a possibility: Substitute V(alue) A(dded) T(ax) by V(alue) D(iminished) T(ax) on money in possession as long as it is not used. A negative interest Tax on money. For that we would hardly have to change our money system. We cannot have cash money and would have to work with digital money in our bank account. But hey! We pay with pin, credit card, chip, internet, mobile phone ….. We are in the 3rd millennium! ATM’s could give out cheques of 5, 10, 20, 50 or 100 Dollar or Euro with our bank account number printed on them. We fill out the date, sign them and use them as money. The first month of negative interest tax is charged from the bank account of the person issuing the cheque. Any subsequent month is charged from the person collecting the cheque into his bank account by filling out his account number and giving it to the bank. Small change can be made from any material with a year and month printed on it, being taxed in the same way as bank cheques. If banks have to keep the total worth of current accounts of their clients for 100 % in their account at the Central Bank, it is easy to tax that account. Banks pass on the tax to their clients. 1 % or 3 % of negative interest tax per month on our current account is not going to make us any poorer if other tax is reduced. But having a monetary system based on negative interest rates allows the Central Bank to give out loans to commercial banks, paying back only 80 % of the money borrowed in fixed amounts per month during 10 years or so. Commercial banks can then give out loans that pay back 83 %, so they are still making a profit. But for that price houses can be built and investments can me made in industry absorbing unemployment. Money invested in stock of banks and industry is still turning a profit. Money in saving accounts, as long as it is invested, still carries positive interest and such accounts don’t change. Substituting VAT by VDT will certainly make us all a lot richer, because unemployment can be avoided by lowering interest rates under 0 % if necessary. Inflation can be avoided by adjusting the negative interest tax on available money to keep spending and investing inline with available products and services.