Typography

Unfathomable Depths by Ibai Acevedo Denmark's Nationalbank and the Swiss National Bank are the world's most interesting central banks right now. As the two of them push their deposit rates to record low levels of -0.75%, they're testing the market's limit for bearing negative nominal interest rates. The ECB takes second prize as it has been maintaining a -0.2% deposit rate since September 2014. At some point, investors will flee deposits into 0%-yielding cash. This marks the effective lower bound to rates. Has mass paper storage begun? The last time I ran through the data was in my  monetary canaries post , which was inconclusive. Let's take a quick glance at the updated data. To gauge where we are relative to the effective lower bound, I'm most interested in the demand for large denomination notes, which bear the lowest costs of storage. Once a central bank reduces its deposit rate so deep into negative territory that the carrying cost of deposits exceeds the...

John Cochrane has written  two posts  that question the ability to implement negative interest rates given the wide range of 0%-yielding escape hatches available to investors. These escapes include gift cards, stamps, tax & utility prepayments, and more. In a recent post entitled However low interest rates might go, the IRS will never act like a bank , Miles Kimball and his brother rebut one of Cochrane's supposed exits; the Internal Revenues Service. I've responded to Cochrane's other schemes here . Think of Cochrane's exits as arbitrage opportunities. As nominal rates plunge into negative territory, the public gets to harvest these outsized gains at the expense of institutions that issue 0% nominal liabilities. The Kimballs' point (and mine here ) is that because these institutions will lose money if they continue to issue these liabilities, they will implement policies to plug the holes. Cochrane's multiple exits aren't the smoking gun he takes them...

Last week Citi's Willem Buiter published a note on the three ways to get rid of the effective lower bound to nominal interest rates, one of which is to abolish cash. He goes on to say that politically, the abolition of currency would run into opposition from some of the legitimately cash-dependent poor and elderly, from those for whom the anonymity of cash is desired because they are engaged in illegal activities and from libertarians. The first constituency can be helped, the second can be ignored and the third one should take one for the team. I think that Buiter is wrong to characterize libertarians as necessarily opposed to the abolition of cash. Their take on cash is probably (or at least should be) a bit more nuanced. Since libertarians generally advocate government withdrawal from lines of business like health care or liquor retailing, an exit of central banks from the cash business should be a desirable outcome. What Buiter is advocating is a bit more extreme than just gov...

In his first blog skirmish , Ben Bernanke took on Larry Summers' secular stagnation thesis, generating a slew of commentary by other bloggers. If the economy is in stagnation, the econ-blogosphere surely isn't. I thought that Stephen Williamson had a good meta-criticism of the entire debate. Both Bernanke and Summers present the incredibly low yields on Treasury inflation protected securities (TIPS) as evidence of paltry real returns on capital. But as Williamson points out, their chosen signal is beset by static. Government debt instruments like TIPS are useful as media of exchange, specifically as collateral, goes Williamson's argument. Those who own these instruments therefore enjoy a stream of liquidity services that gets embodied in their price as a liquidity premium. Rising TIPS prices (and falling yields) could therefore be entirely unrelated to returns on capital and wholly a function of widening liquidity premia. Bernanke and Summers can't make broad assumptio...