Hello dear readers,
yesterday there was published a new article on a proposal by the IMF (International Monetary Fund) to introduce negative interest on cash. Especially for the cash-land Germany, this proposal would be very hair-raising ... But fortunately there is also Bitcoin.
In this post I would like to share a translation of the article about the IMF reflection.
Here you can find the original article: https://www.btc-echo.de/iwf-diskutiert-strafzinsen-auf-bargeld/
Picture Source Shutterstock and BTC-Echo
What funds will remain central banks to cushion the next recession when the powder is already over? This question arises in view of the ongoing zero interest rate policy not only the Bitcoin community, but now also the IMF. The outrageous suggestion: Cashes are penalized with negative penalty rates to prevent hoarding cash.
It's the specter of every central banker: deflation. If the economy slows down, consumption collapses, prices react by sinking. Of course, consumers perceive this and react with even more cash holdings, because a sinking price trend encourages saving. This is followed by a self-reinforcing deflation spiral. Central bankers therefore regard low inflation as healthy because it encourages consumption and keeps the economy going.
The economic crisis of 2008 could be successfully averted here by a mix of stimulus packages and expansive monetary policy - ie low interest rates and bond purchases. However, in the sense of an anti-cyclical policy, at the latest during an upswing, one would expect a certain reduction in the flow of money on the part of the ECB. That did not happen. The interest rate is still in the zero range, private loans are therefore favorable and the economy is booming.
How long is this still good?
However, and this is certain, the recession will eventually follow. The federal government now expects economic growth of only one percent for 2019. That would be the lowest value since 2013.
What resources will the central bank still have to avert the dreaded deflationary shock? The authors Katrin Assenmacher and Signe Krogstrup discuss this question in a working paper for the International Monetary Fund (IMF).
The thesis: You punish the holding of cash by negative interest rates. This would pave the way for an even more expansionary monetary policy. Previously, economists called zero zero bound, meaning zero interest rates. If the central bank lowers interest rates to the downside, non-banks simply switch to cash. Bankruns could be one of the consequences of negative interest rates.
But if you would also bear the cash negative, the Zero Lower Bound could fall below and the expansionary measure of the central bank would take again.
How does it work? The authors suggest separating book and cash. The central bank then sets an interest rate for the conversion of electronic money to cash. So who wants to withdraw 100 euros, gets paid only 97 euros. The account still lacks 100 euros. The central bank would have successfully defeated the Zero Lower Bound.
Germany is a cash-land
The cash is the German holiest estate. In hardly any other country is the taxpayer so firmly attached to cash as in Germany. Any news of the impending "abolition of cash" then provokes the outraged reaction of the public. As emotional as the ratio to the # 1 means of payment may be, there are good reasons not to run an economy solely with book money. Thus, only the cash allows anonymous payments and, moreover, in contrast to electronic money legal tender.
The fact that Katrin Assenmacher is also a leading ECZB employee among the authors of the study provides information about the predicament of the European Central Bank. Although this does not automatically suggest the short-term enforcement of the proposal. However, the negative interest on cash is ripe and an emergency implementation no longer seems impossible.
Fortunately, there is Bitcoin too.
Source of the original article: https://www.btc-echo.de/iwf-diskutiert-strafzinsen-auf-bargeld/
Greetings and hear you in my next article.
Michael Thomale - @michael.thomale
