Negative percentage: capitalism is on the verge of serious metamorphoses. Negative deposit rate is a new reality
Today I bring to your attention a small educational program about what it is negative discount rate. I already discussed the concept itself once (via the link), talking about what its increase and decrease leads to. Let me briefly remind you that this is one of the key financial leverage, at the disposal of the Central Bank of the state, with the help of which it regulates the level of inflation in the country, the exchange rate of the national currency and, globally, the pace of economic development.
The discount rate largely determines the cost of attracting and selling resources in the interbank market, as well as rates on loans and deposits for enterprises and households. The higher the discount rate, the more expensive the resources, which slows down economic growth, but also curbs inflation and devaluation. And, conversely, the lower it is, the stronger the economic growth, but at the same time the stronger the inflation and devaluation.
The size of the discount rate can serve as one of the indicators of the state’s economy: the lower it is, the higher the level of economic development of the country. For example, in the most developed countries the current discount rate ranges from 0 to 1%.
However, there is another side to the coin. Practice shows that even with excessively low interest rates, economic growth rates can slow down under the influence of other factors, which is what we are now seeing around the world. Likewise, inflation is falling, in many countries with a high level of development it is close to zero or even often negative (deflation). And this is by no means a good indicator, as many may think.
In such a situation it is very difficult to stimulate economic development countries. Judge for yourself: loan rates are already minimal, loans are available to everyone, but this is not enough for the desired economic growth. And in such a situation, the country’s Central Bank may resort to such an extreme measure as establishing a negative discount rate. What does this mean?
A negative discount rate, influencing pricing on the state capital market, leads to the formation of, if not negative, then at least zero rates in the country's banking institutions. This suggests that when receiving a loan, the borrower not only does not pay interest, but can also receive a bonus from the bank for lending, and the depositor, on the contrary, pays extra to the bank for keeping his money on deposit there.
For us this still seems like a fantasy, but for some countries it has already become a reality. Negative discount rates were introduced by banks in several European countries, and most recently by the Bank of Japan.
The most large values Switzerland and Denmark currently have negative interest rates – there they are -0.75%. In Sweden the discount rate is -0.5%, and in Japan - -0.1%. So far there are only 4 countries with negative interest rates, but it is possible that other states may be included in their number. There has already been a lot of talk about establishing a negative discount rate, for example, in Israel, which is closest to zero with positive side Czech discount rate (0.05%).
Why do central banks introduce negative interest rates? To stimulate business development and economic growth. If, in the opinion of the central bank, there is insufficient lending to business in the country, even at close to zero positive rates, then under zero and, especially, negative, loans will be taken out more. On the other hand, people who keep savings on deposits, when they have to pay extra to the bank for this, will think about withdrawing them and investing them in other instruments that contribute to economic development, for example, in the same securities of enterprises.
The introduction of a negative discount rate can lead to both the strengthening and weakening of the country’s national currency. For example, when the Bank of Japan recently resorted to such a measure, the Japanese yen strengthened against all world currencies by about 10% in a couple of weeks, and this was even before the new conditions came into effect. In Switzerland, on the contrary, the establishment of a negative discount rate helped to slightly and briefly reduce the exchange rate of the Swiss franc, for which the country often spent enormous financial resources (to maintain and maintain the exchange rate below the administratively established value, as a result, this measure was abandoned).
To which negative consequences could the introduction of a negative discount rate lead to? Well, for example, to failures of banking computer systems, which calculate many indicators based on its value - similar problem immediately arose in Denmark.
In many countries, the yield on government bonds held by both domestic and foreign investors is tied to the discount rate. If the discount rate becomes negative, it turns out that now they will not only not receive income on the purchased securities, but will also have to pay extra for owning them.
Owners of savings in various pension, insurance, and investment funds, the profitability of which is also calculated based on the level of the discount rate, may also experience losses.
As a rule, when introducing a negative discount rate, the Central Bank believes that this is a temporary last resort: when the planned inflation and economic growth indicators are achieved, it can be raised back and made positive. However, it is difficult to plan how things will actually turn out; it is likely that negative interest rates will be in effect in a number of countries for at least several years.
That's all. Now you know what a negative discount rate is and what it is used for. Increase your level of financial literacy on the website. See you again!
Negative rates became a reality in the modern financial world a few years ago. Dreaming of financial stability, many Russians do not even imagine what amazing (in our opinion today) forms it takes on in prosperous countries. There, in an almost inflation-free economy, depositors sometimes do not receive income from their bank investments, but on the contrary, sometimes they themselves pay the bank for the service of storing money in an account. Will the new reality reach Russia, and under what conditions will this become possible?
Bold experiments
Actually, human history I already knew the times when, when accepting capital for storage, its “guardian” took a fee from the owner for his deposit services. This is how banking began many centuries ago, when gold was the only reserve currency. Already in our time, the German economist of the early 20th century Silvio Gesell was the first to theorize the idea of negative deposit interest at the state level. His free money model assumed a small regular payment by citizens to the state for the issue of money (as a fee for a government service). However, the loan interest was completely reset to zero. Money, thus, ceased to serve as a store of value, accelerating its turnover in the economy.
And although a completely successful practical experiment “according to Gesell” took place on the territory of several Austrian cities in the 30-40s of the last century, yet modern economists 10 years ago considered it unthinkable that negative rates would become a reality of the 21st century. The idea of financial demurrage still makes many people twirl their fingers at their temples. In the minds of most of us, at best, the rate is at least zero. However, the national bank of Sweden, the Riksbank, in 2009 became the first modern central bank that began to charge its ward credit institutions a fee for money accepted from them into correspondent accounts, i.e. thus introduced a negative deposit rate at minus 0.25% per annum. Which, however, did not yet mean an unambiguous and immediate extrapolation of negative returns on bank deposits for citizens and corporations.
Countries and rates
Since then, the Swedish model has been gradually adopted by the Central Banks of other economically developed countries, which, after observing a little of the pioneer, in 2012-2016 began to introduce extraordinary methods at home. Negative rates have already been tried (following Sweden) by Switzerland, Japan, and Denmark. However, their key rates do not stand still, they change (by Russian view almost imperceptibly - by hundredths or tenths of a percent), sometimes popping up to a positive level just above zero.
If we talk about the experience of the pan-European ECB, then two years ago it lowered its deposit rate for the first time from 0% to minus 0.1%, while simultaneously maintaining base rate within the range of 0.15-0.25%. Positive ones are still hovering around zero bank rates Canada, USA, UK, Norway... Their regulators are only looking closely at the experience of others. At the same time, there are already American and European government bonds with negative yields (it turns out that investors pay extra to governments for storing their capital). Looking back a little, we will see that the Japanese regulator, long before the Swedish innovations, kept its deposit interest at the lower level of 0.1% for several years in a row in 2001-2006, without even thinking that it would ever enter the negative zone.
Why does the government need negative rates?
What is the reason for such an amazing interest rate policy? Do Western banks really have so much money that they decided to turn depositors against themselves and bribe borrowers with a small commission, instead of earning money on loan interest? After all, the policy of negative interest rates of the Central Bank is not immediately, but gradually transferred to relations between commercial banks and their clients.
To understand, let us remember the conditions under which the Swedish Riksbank began its bold experiment. 2009 is the year of the ongoing global financial crisis, during which investors lost confidence and stopped investing in the real economy, hiding their capital in quiet, safe bank deposits. Almost zero inflation generally developed into deflation, which by that time had reached, in particular, in Sweden a level of minus 0.9%. In response, the economy stopped growing: in addition to GDP, wages, the number of jobs, and demand for goods and services stopped growing. Demand for loans also fell, as potential borrowers were afraid that the crisis would prevent them from paying off their debts in the future. Banks accumulated unclaimed liquidity, which almost stopped working and making a profit.
Measures were required to stimulate economic growth. To restart the economy, theorists have calculated an effective rate of target inflation close to 2% per annum (as strange as this may sound to a Russian who is shocked by the mere fact that inflation in some countries is deliberately raised from negative values). At the same time, the national currency must be protected from sharp exchange rate fluctuations, which is not easy. Economists believe that the introduction of negative interest rates will encourage citizens and corporations to take out loans, forgetting fears of loss of solvency. A negative deposit rate may force people to withdraw capital from risk-free bank deposits in order to invest in real business, for example, in real estate construction. Thus, the long-awaited growth of added value should begin, which will also bring profit to investors.
What is good for the borrower?– then it’s bad for the investor
It is clear that not every Western bank has yet boldly transferred the policy of negative rates to relationships with its ordinary clients, as the state regulator does with supervised credit institutions. Not every private bank is willing to pay borrowers or charge its depositors. But let's see how this happens in life using only a few known examples.
Almost four years ago, the Danish Central Bank introduced a negative base rate (analogous to our key rate), which today has changed to minus 0.65% (with inflation in 2014-2015 plus 0.6%). One ordinary Danish mortgage holder, who took out a home loan more than 10 years ago, was very surprised when at the end of last year the bank paid him a small bonus, instead of once again charging him interest on the loan. At the same time, the floating annual rate of his bank’s mortgage program was approximately +0.56% per annum at that moment. However, according to the mortgage agreement, the client must regularly pay additional commission fees to the bank.
The name of the European bank that was the first to charge its depositors interest for storing money has not been established. Journalists suggest that it was one of the Swiss credit organizations. They say that a negative deposit rate is charged there for amounts over 10 million Swiss francs. According to other sources, the minimum threshold is only 100 thousand CHF, but already in several banks. The introduction of a negative interest rate for deposit operations is now being discussed in many European countries, incl. in Spain, far from total prosperity.
Side effects
It seems that paid deposits are still a headache for wealthy VIP clients. It is them large sums it is difficult to completely convert it into a cache by hiding everything, for example, in a safe. Cashing out costs may be more expensive than negative interest. The average population may not be affected by this rate. Citizens of economically developed countries have long been accustomed to almost zero rates. Their deposits often increase by only tenths of a percent, approximately equal to our demand deposit rates.
It is also not yet clear how long the era of negative rates will last, how effective it is and whether it is applicable to different economies. After all, problems have intensified along the way, which are not always resolved quickly and successfully. For example, almost zero interest rates could lead to another real estate credit bubble. However, there is reason to believe that Western central banks will find a reasonable solution and will be able to turn monetary policy in the right direction in a timely manner.
Are negative rates possible in Russia?
Russian investors may not be afraid of “paid” deposits for a long time. The high level of inflation, and numerous other risks of the domestic economy, do not yet provide grounds for introducing nominally negative rates. In addition, one of the conditions for the emergence of “good” deflation is a reduction in production costs (for example, due to the introduction of IT technologies), and not a fall in the effective demand of the population.
But de facto, the problems of our investors, although they lie on a slightly different plane, still make us fear the decrease in the value of savings over time. For example, there is a known imbalance between the deposit rate and the price growth index, when inflation eats up the value of invested money, sometimes more than the deposit interest covers this depreciation. And not always foreign currency deposits ( low rates which are already approaching European ones) are saved from inflation and devaluation. Especially considering the sharp fluctuations in the ruble exchange rate up and down and the authorities’ intention to prevent the ruble from strengthening so as not to increase the Russian budget deficit, which is heavily dependent on hydrocarbon exports.
Experts suggest that the downward trend in deposit interest rates in Russian banks will continue this year. However, not to negative values, at least nominally. The Chairman of the Bank of Russia fears that inflation in the Russian Federation (calculated by Rosstat) will remain stuck at 6-7% per annum for a long time. The inflation target for the Central Bank is an average figure of 4% by the end of 2017. And some independent economists predict the start of growth in the domestic economy no earlier than 2020, and then only under certain conditions.
Oksana Lukyanets, expert at Vkladvbanke.ru
In some Swiss banks, interest rates on retail deposits have already dropped below zero. Are negative interest rates on deposits possible in Russia?
Of course, negative rates are a nightmare for savers, but they would be very welcome for borrowers. Imagine: you take a ruble and return fifty dollars. Dream!
Of course, savvy investors can combat negative rates by moving into cash. However, for a VIP, going to the cache is not an option. After all, the costs of storing and transporting cash can “eat up” up to 1% per year.
Essentially, negative deposit rates are the equivalent of a tax on money. Previously, negative rates were considered a theoretical delight. Although initially “proto-banks” (for example, goldsmiths) charged a fee for storing money - for placing deposits.
The idea of demurrage, negative interest rates, by German businessman and social reformer Silvio Gesell (1862-1930) for a long time was not considered seriously. It was believed that the natural limit on interest rates was zero.
However, already in April 2009, Gregory Mankiw predicted a negative Fed key rate in the New York Times. If lower interest rates stimulate the economy, and the key rate is already close to zero, why not reduce the rate to negative values? The idea of negative rates seems absurd: lend a dollar, get 99 cents. But the idea negative numbers, Mankiw recalls, initially seemed absurd.
Mankiw’s prediction quickly came true, although not with regard to the Fed: in July 2009, the Riksbank, Sweden’s central bank, introduced negative rates.
Then negative key rates were established in a number of other countries, including Switzerland, Japan, Denmark, as well as in the eurozone countries (deposit rate - -0.4% per annum). Moreover, negative interest rates have also been established in the interbank lending markets of some countries. Bond yields have also turned negative in some countries.
The Japanese and Germans responded to ultra-low interest rates by increasing demand for safes. Negative rates pose a threat of a run on banks and can lead to a liquidity crisis.
Probably the first bank to upset its customers with negative interest rates on deposits was Alternative Bank Schweiz, which since 2016 introduced a rate of -0.75% on deposits worth more than 100 thousand Swiss francs. Another well-known Swiss bank, Lombard Odier, upsets its wealthy clients in the same way. So the first victims of negative deposit rates are wealthy clients - it is difficult for them to “escape to cash”.
Are negative rates possible in Russia? Not excluded. The condition for their appearance may be deflation. Deflation itself is pleasant and useful for consumers - what's wrong with falling prices? However, it is not deflation that is bad, but its main reason - a reduction in demand - for example, due to a crisis. People don't have money to buy goods, so prices are falling. Of course, if the reason for the price reduction is a reduction in production costs, for example, as a result technical progress, then one can only rejoice at such deflation.
For now, the threat of negative interest rates in Russia appears to be low. However, a recession may lead to the realization of this threat. It is possible to soften monetary policy even to negative interest rates.
In means mass media There is more and more talk about negative interest rates. How effective can this approach be, since there is great uncertainty regarding the consequences for commercial banks, organizations and other entities economic activity and their behavior.
Many developed countries around the world are entering the realm of negative interest rates. Five central banks - the European Central Bank (ECB), the Danish National Bank, the Swiss National Bank, the Bank of Sweden and the Bank of Japan - have already introduced negative rates on commercial bank funds held in deposit accounts at the central bank. Actually, commercial banks must pay to store their funds at central banks. The main goal of these decisions is to stimulate economic growth and combat low inflation and the growing threat of deflation.
Why use negative interest rates?
In simple terms, with negative rates, a depositor, such as a commercial bank, must pay the central bank to store funds at the government-owned central bank. What is the purpose of such a policy? Once banks had to pay to hold their cash, they would be incentivized to lend out any additional cash businesses and individuals, fueling the economy. Another example would be a depositor (such as a large company) who must pay to hold funds with a commercial bank if the latter uses negative rates. In this case, one goal would be to encourage companies to use the money to invest in businesses, again to increase economic growth. That is, negative rates imply that lenders pay borrowers for the privilege of making loans. However, it would be extreme case at the level of commercial banks, since the economic logic of lending is to receive interest in exchange for accepting the credit risks of borrowers. However, borrowing is limited by the use of negative interest rates, and the goal is to promote consumption, one of the main engines of economic growth. So far, the listed goals and intentions for negative interest rates are very theoretical, and there is uncertainty about their implementation in practice.
Eurozone example
In the eurozone, the central bank's goal is to stimulate economic growth and increase inflation. The ECB must ensure price stability by keeping inflation below 2%, and at the same time as close to this figure as possible, over the medium term (currently inflation in the eurozone is slightly below zero). Like most central banks, the ECB influences inflation by setting interest rates. If the central bank wants to take action against too high level inflation, it basically raises interest rates, which makes borrowing more expensive and makes saving more attractive. And vice versa, if he wants to increase too much low level inflation, it lowers interest rates.
The ECB has three main interest rates at which it can operate: margin lending for providing overnight loans to banks, main refinancing operations And deposits. The prime refinancing rate or base interest rate is the rate at which banks can borrow regularly from the ECB, while the deposit interest rate is the rate that banks receive on funds deposited with the central bank.
Due to the fact that the eurozone economy is improving very at a slow pace and inflation close to zero and expected to remain well below 2% for a long time, the ECB decided it needed to cut interest rates. All three rates have been falling since 2008, with the most recent cut being made in March 2016. The prime rate was cut from 0.05% to 0%, and the deposit rate went further into the negative from -0.3% to - 0.4%. The ECB confirms that this is part of a set of measures aimed at ensuring price stability over the medium term, which is a necessary condition for sustainable economic growth in the eurozone.
The deposit rate, which has become even more negative, means that eurozone commercial banks that deposit money with the ECB must pay more. The question may arise – is it impossible for banks to avoid negative interest rates? For example, couldn't they just decide to hold more cash? If the bank keeps more money than required for minimum reserve purposes, and if he does not want to lend to other commercial banks, then he has only two options: keep the money in an account with the central bank or keep it in cash (of course, the most expected option by central banks is that banks will increase business lending and individuals). But storing cash is also not free - in particular, the bank needs a very secure storage facility. Thus, it is unlikely that any bank would choose such an option. The most likely outcome is that banks will either lend to other banks or pay a negative deposit rate. Between these two options, the second one looks more realistic because in this moment Most banks hold more money than they can lend, and it is not necessary to borrow from other banks.
The opposite effects of negative rates
As central banks aim to boost economic growth and inflation through negative interest rates, such policies are becoming increasingly unusual and raise questions worth considering. Below are some of the main pros and cons.
Firstly, given that central banks' intentions are being met and negative interest rates are stimulating the economy, this would be positive sign for the banking sector. If markets believed that negative interest rates improved long-term growth prospects, this would increase expectations of higher inflation and interest rates in the future, which is beneficial for banks' net interest margins (commercial banks make money by taking on credit risks and charging higher interest on loans than they pay on deposits - in this case they have a positive net interest margin). Moreover, in a stronger economy, banks would be able to find more favorable lending opportunities, and borrowers with more likely could repay these loans. On the other hand, negative interest rates could harm the banking sector. If the lending rate is constantly kept lower due to falling interest rates, and commercial banks are unwilling or unable to set the deposit rate below zero, then the net interest margin becomes smaller and smaller.
Secondly, a negative interest rate policy should encourage commercial banks to lend more to avoid central bank charges on funds that exceed reserve requirements. However, for negative rates to encourage more lending, commercial banks would have to be willing to make more loans at lower potential earnings. Since negative interest rates are introduced as a counterbalance to slow economic growth and the risks of deflation, this means that businesses need to solve problems arising in this area and, as a result, banks face increased credit risks and reduced profits at the same time when lending. If profit levels suffer too much, banks may even reduce lending. Moreover, the difficulty of setting negative rates for savers could mean higher debt costs for consumers.
Third, negative interest rates also have the potential to weaken a nation's currency, making exports more competitive and increasing inflation as imports become more expensive. However, negative interest rates can trigger a so-called currency war - a situation in which many countries seek to deliberately reduce the value of their local currency in order to stimulate the economy. A lower exchange rate is clearly a key channel through which monetary easing operates. But widespread currency devaluation is a zero-sum game: world economy cannot arrange a devaluation of money for itself. In a worst-case scenario, competitive currency devaluation could open the door to protectionist policies that would negatively impact global economic growth.
Fourth From an investor's perspective, negative interest rates could, in theory, serve the same function as cutting rates to zero - this could be beneficial for exchanges since the relationship of interest rates to the stock market is quite indirect. Lower interest rates imply that people looking to borrow money can enjoy lower interest rates. But it also means that those who lend money or buy securities such as bonds will have less opportunity to earn interest income. If we assume that investors are thinking rationally, then falling interest rates will encourage them to take money out of the bond market and put it into the stock market.
But in practice, this particular policy of negative interest rates may not be so useful. Investors may view negative interest rate policies as a sign of attempts to sort out serious problems in the economy and remain risk averse. Also, the use of negative interest rates will not necessarily encourage commercial banks to increase lending, which will complicate financial companies making a profit in the long term and will harm the work of the global financial sector. Problems in the financial sector are very sensitive for the entire stock market, and they can weaken it. And even if commercial banks wanted to increase lending, success in encouraging businesses and individuals to borrow more money and spend more is questionable.
Fifthly, negative rates could complement other easing measures (such as quantitative easing) and signal to the central bank the need to address the economic slowdown and missed inflation target. On the other hand, negative interest rates could be an indicator that central banks are reaching the limits of monetary policy.
Main conclusion
Central banks are determined to do everything possible to increase economic growth and inflation. With interest rates already at zero, everyone larger number Central banks resort to negative interest rates to achieve their goals. However, this is relative new tool for them, and the main opportunities and risks of such a policy have not yet been realized. Therefore, it is worth taking a closer look at and monitoring the unintended consequences of these increasingly popular policies. Currently, the eurozone economy is gaining momentum slowly, inflation is low, commercial banks are in no hurry to increase lending volumes, but instead are looking for other ways to reduce the potential damage to profits, the desire of businesses and individuals to take out more loans at a lower interest rate is growing quite slowly, investors are not rush to take on more investment risks, bond yields remain at record lows. Negative interest rates will take longer to realize the full impact.
Gunta Simenovska,
Head of Sales Support Department, Business Development Department, SEB Bank
Sources: European Central Bank, World Bank, Bank for International Settlements, Nasdaq, Investopedia, Bloomberg, BBC, CNBC
Miles Kimball, an economics professor at the University of Michigan, spoke to CoinTelegraph about negative interest rates, the future of paper and electronic money, and the expected place of cryptocurrencies in the economy.
IN Lately interest in negative interest rates has increased significantly. They operate or have operated in Denmark, Switzerland, Germany, the Netherlands, Austria and Sweden. Some corporate bonds, such as Nestle and Shell, were also offered at negative interest rates.
What is a negative interest rate
A negative interest rate occurs if, having given your money to a bank or government, you receive back a smaller amount after some time. Essentially, you are paying the bank or government to temporarily manage your money. This strange situation occurs when many people who are very risk-averse seek a “safe haven” for their finances, and is usually the result of a large-scale recession in regions where there is virtually no economic growth (for example, the European Union).
CoinTelegraph: Why is it easier to introduce a negative interest rate with electronic money than with paper money? Can you explain how it would work with Bitcoin and e-dollars?
Miles Kimball: For money kept in a bank, introducing a negative interest rate is easy: just gradually reduce the account balance, even if no funds are withdrawn from it. On the other hand, paper money has specific numbers printed on it, so it is more difficult to impose a negative interest rate on paper currency. Among other things, this requires the use of an electronic dollar as a measure of value.
If the measure of value is the paper dollar, then the interest rate on paper currency is always zero (unless you tax paper money, which is much more difficult from an administrative and political point of view compared to an electronic monetary system). Thus, in order to be able to introduce a negative interest rate for monetary currency and other assets, the measure of value must be the electronic dollar. In this case, the central bank could impose a non-zero interest rate on fiat currency right at its own treasury level, where banks deposit or receive fiat currency into their accounts.
To conduct effective monetary policy, it is important that the central bank has control over the measure of value, and the electronic dollar as such may have many aspects of a cryptocurrency - perhaps enough to be considered a cryptocurrency.
As for private cryptocurrencies (like Bitcoin), they may well be a medium of exchange and a store of value, but monetary policy requires control over the measure of value. Central banks need to maintain control over the type of money that determines the measure of value - in in this case electronic dollar. There are three key factors to ensure that the electronic dollar (or electronic euro, electronic yen, etc.) is used as a measure of value:
- requirement to calculate taxes in electronic dollars;
- accounting standards requiring accounting in electronic dollars;
- the need for coordination between companies, as well as between companies and households (similar to the coordinated transition to summer time, but without checking the clock on anyone's part).
C.T.: How can one introduce a negative interest rate in a cryptocurrency system?
MK: To be able to introduce a negative interest rate in a cryptocurrency system that uses Bitcoin or its equivalent for most transactions, the functions of a measure of value and a medium of exchange must be separated. This can be done with a non-Bitcoin e-dollar (it's also a good idea to have many different stores of value, but they're always available).
Currently, robots cannot conduct monetary policy as well as banks. Perhaps someday they will be able to do this, and then the responsibility for the electronic dollar can be placed on the computer. However, there will still be a need for a separation between the electronic dollar measure of value (controlled by a computer) and any asset that automatically receives a zero interest rate in its own terms (as Bitcoin currently does).
C.T.: Can Bitcoin be a currency? What do you think are its limitations?
MK: Bitcoin is already a currency, but it would be unwise to try to use it as a “full-fledged” currency. A good measure of value should have a constant value relative to goods and services, but Bitcoin is not like that. It cannot have a constant relative value without much more complex algorithm emission controls that far exceed the current capabilities of central banks. Designing and implementing good monetary policy is not easy.
The measure of value should be controlled by the institution best able to ensure its constancy across goods and services and, in the process, maintain the natural level of production in the economy. Currently these are central banks. Bitcoin's value fluctuates significantly relative to goods and services, and central banks (humans using computers) can so far manage monetary policy much better than the Bitcoin algorithm.
C.T.: Tell us about blockchain technologies in the context of central banks. What operations/tools is blockchain best suited for?
MK: I do not consider myself an expert on blockchain technologies, but it seems to me that they or developments based on them will be important to ensure the normal operation of electronic dollars. Electronic dollars include money in the bank, but they are very inefficient, their transaction fees are high, and banks will have to go the way of Bitcoin. Blockchain is a huge achievement that can significantly reduce the cost of processing transactions compared to modern banking methods. It will make electronic transactions much more efficient.
C.T.: What do you think about "currency wars» and their influence on central bank policies? Do negative interest rates have anything to do with them?
MK: “Currency wars” are mostly speculation and prejudice. If all countries follow an inflationary monetary policy, this is not a currency war, this is global inflation. Replace "currency wars" in everything you read with "global inflation" and you won't go wrong.
The only time the phrase “currency war” is justified is when a country sells its own assets and buys equivalent foreign assets. If all countries do this, their trades are partially canceled out, but if a country or its central bank buys assets at a higher interest rate than the assets it sells, it is a monetary expansion, not a strike in a currency war.
Of course, monetary expansion affects interest rates, but if another country is unhappy with this effect on its own interest rate, it should simply counter with its own properly calibrated expansion. Such a response is not a salvo in a “currency war”, but an element of normal monetary policy.
C.T.: What motivates central banks to introduce negative interest rates?
MK: The job of central banks is to ensure price stability and sustainable economic growth by maintaining natural levels of production. To do these two things well, you need to resort to negative interest rates at least occasionally.
The Fed, European Central Bank, Bank of England, and now the Bank of Japan are targeting 2% inflation over the long term because they have not yet added negative fiat interest rates to their toolkit. Willingness to introduce a negative rate makes it possible to reduce the target inflation rate to zero - to true price stability. Additionally, the ability to use negative interest rates helps nip a recession in the bud. I think these are big enough benefits that most central banks will eventually add negative interest rates. paper currencies into your arsenal.
Miles Kimball, negative interest rate expert and electronic money advocate .
George Samman