Nominal interests rates have a zero bound, because it is preferable to hold money rather than lend it if rates go negative. But Mankiw and his clever grad student have a solution: let the Fed randomly pick an integer from 0 to 9 once a year and invalidate all currency whose serial number ends with it. Then people would gladly accept negative interest rates to unload their disintegrating cash.
Um, no. I don’t know what they teach at Harvard, but where I work we don’t postpone past grad school the following rather elementary observation: most money is not currency. The most recent Fed data put the monetary base at just under $1.6T, of which about half is in the form of reserves held by member banks at the Fed. M2, which includes the deposit accounts you and I have at our banks and represents a more relevant measure of the money supply, is a bit over 8.3T (not seasonally adjusted). In other words, about 90% of the money supply under a reasonably conservative definition is not cash and bears no serial numbers.
Imagine that.
And even if we could force everyone to trade in the coin of the realm and abjure those newfangled bank accounts, there would still be the international dimension to consider. About half of our dollars circulate abroad; whole countries are even dollarized. Now here’s something for Mankiw to consider: Panama, to take one example, pegs its currency to the dollar but prints the stuff itself to put a local face on legal tender. Can you foresee a spike in demand if they decide to not play the self-destructing digit game?
All of this is bonkers, of course. The more serious proposal in Mankiw’s column is for the Fed to target a particular rate of inflation, but effectively, by publicly opposing deflation, they are already doing that. Money growth has been ample so far (for instance, a 9.4% growth in M2 over the past year); there has been no repetition of the monetary contraction that accompanied the early stages of the Great Depression, just like Bernanke promised. The Fed’s toxic asset buying spree has been a form of open market operations, and monetary expansion has been one of the main sources of its bailout finance. There is general agreement, however, that this particular spigot cannot be opened much further. Enough money creation can always crank out high rates of inflation, but this would set off a run on the dollar, and the willingness of portfolios to accept ungodly amounts of dollars, and dollar-denominated T-bills, is the underpinning for the entire bailout strategy. Surely Mankiw must know this too.
So what’s the point?
8 comments:
Mankiw's idea has to be a joke because money is not devalued by having less of it. If you dispose of some of the money then that which remains is worth more than it otherwise would have been. The net result is a big fat zero or a deflation. The only way that I know of to devalue money is to create more of it while making the money accessible to the producing and leisure seeking sector of the society.
The labor theory of value is not just a theory. It is, in the true scheme of human existence, a fact of objective reality. Wealth (as the term is used to describe wealthy people) is the capacity to commend the labor of others. As the term is used to describe the wealth of the society, it is the amount of labor avoidance. Labor is the cost of all commodities. Value is then measured as comfort and leisure.
Mankiw and other "neoclassical" economists do things that are, to me, very confusing. I think it is because their value systems are based on something other than what I have profferred. I think most disagreements in economics can be traced to differences in value theories.
During the Bush years, Mankiw accentuated the positive. Post-Bush, he accentuates the negative. For Mankiw there is no Mr. In-Between to mess with.
As to the "0 to 9" technique, perhaps this could be done more broadly with zip codes to get the job done quicker.
Unlike the proposal of Mankiw's grad student, wealth taxes are possible to implement. Like the proposal of Mankiw's grad student, wealth taxes deter hoarding.
Consider a temporary tax requiring everyone with more than 15K in reasonably liquid, non-real estate, gross assets to fork over 5% for the next five years.
Mankiw's student is also channeling one of the ideas of the Technocrats from the 1930s. I think they picked it up from Frederick Soddy. Major Douglas's Social Credit might have had some of this expiring money angle to it. I don't recall for sure.
These monetary crank schemes are always just one brick short of a load (that brick being the cornerstone of the whole edifice).
Anonymous,
Why exclude real estate?
It is horded. But the NAR has a big political machine.
ilsm
Mankiw gives us a 5-point follow up at his Blog. Doesn't the joke lose its humor if a long explanation is required?
Mankiw further follows up at his Blog, admitting "tongue in cheek" on the grad student integer from 0 to 9. But what did Greg have in his other cheek? Is he leaning towards perhaps taxing undeveloped (or underdeveloped) real estate to encourage development in suggesting taxing banks on its idle funds to encourage lending? Maybe he hasn't read "Prosperity Without Growth?"
Well, as I have pointed out here, indeed in some past posts, we have actually seen negative nominal interest rates, including during this past fall, and negative real rates have been seen many times in many places. What is the big whoop?
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