Sunday, October 2, 2016

I'll take it in cash, please


I have my problems[1][2][3] with Scott Sumner. But at least he has an idea, what I would call an original idea (though I don't really know enough to say) and he keeps pushing that idea and testing it.

More pushing than testing; that's one of the problems I have with him. But anyway, this one I like: Got a blister on your pinky? Let’s amputate your right arm.
There is a rising chorus in the economics community calling for the abolition of cash. The argument is that cash is the cause of the zero bound problem—the fact that nominal interest rates cannot be cut (very far) below zero. And, so it is claimed, this causes weak growth in aggregate demand.

Actually, the severe recession of 2008 had nothing to do with the zero bound, as interest rates were still above zero. It was caused by tight money.

If you have the economic analysis wrong and you run with it, your conclusions are very likely to be wrong as well. And you see it often: the focus on the zero-bound problem. Once you decide that the zero-bound problem is the problem, everything that comes after is related to solving the zero-bound problem. But as Scott says, the 2008 recession "had nothing to do with the zero bound". Rates went to zero in response to the recession.

Deciding that we should eliminate cash is a bizarrely wrong conclusion to a very bad analysis of the state of the economy.

7 comments:

jim said...


Sumner's response to taking away cash is truly odd.
His response wouldn't be odd for anyone else, but he is the one who claims the recession was caused by tight money. When pressed to explain what tight money means and how one can recognize it he responds with
a graph showing the decline in growth of currency in circulation as an indicator of tight money before the recession:

https://fred.stlouisfed.org/graph/fredgraph.png?g=7vZ5

So you would think that if slowing the growth of currency caused a big recession then he would be telling us that taking all currency away would plunge the economy into medieval-dark-ages type depression.

geerussell said...

"But as Scott says, the 2008 recession "had nothing to do with the zero bound". Rates went to zero in response to the recession."

I'll take that a step further because it seems to me Sumner somewhat misconstrues the pro- negative rate camp. From what I gather they agree zero rates are a response to the recession and the ZLB handcuffs that policy response. So the argument goes if only the ZLB could be breached, response to the recession could be more effective.

That said I still get to the same conclusion: negative rates are a dumb idea. Not because ZLB causes a recession but because are effectively a tax and are contractionary like any other tax.

The Arthurian said...

Geerussell, from your link: "Banks hire inputs (in this case, deposits), which are used to produce output (loans)."

Deposits create loans?

//

Interest rates are interest rates. Taxes are taxes.

jim said...

Art wrote:
"Deposits create loans?"

Loans create deposits. The bank is responsible for the deposits it creates. If the deposits the bank creates migrate to another bank the bank is obligated to transfer funds to the other bank which means the bank has to borrow those funds from new depositors, or from another bank, or pay it out of the bank's own capital.

geerussell said...

"Deposits create loans?"

No.


"Interest rates are interest rates. Taxes are taxes."

A rose by any other name... labeling it an interest rate doesn't change the fact it's a fee levied by the government. More than just semantics, it's essential to understanding the effects of negative rates.

Moving away from zero in the positive direction increases the amount a bank has to pay to obtain additional reserves.

Moving away from zero in the negative direction increase the amount a bank has to pay for the reserves it already has.

In a fundamental misunderstanding the proponents of negative rates promote the idea as stimulus which is exactly backwards.

The Arthurian said...

Geerussell, from your link: "Banks hire inputs (in this case, deposits), which are used to produce output (loans)."

What does that statement mean? It means "deposits create loans". Your link would appear to be an unreliable source for statements that you can rely on.

//

I find that people call something a "tax" when it is something they don't like.

Myself, I don't like economic analyses that discretely embed connotations of "good" and "bad" into the argument. I find such analyses taxing.

The Arthurian said...

discreetly, not discretely
good grief