Kenneth Rogoff: Negative interest rates are an emotional topic, too

Presenting the second post in a blog series by Kenneth Rogoff, author of The Curse of Cash. If you missed the first installment, read it here.

Rogoff

The book continues to create a vigorous debate about moving to a less-cash (not cashless) society with only smaller denomination bills; you can see various TV and radio discussion here. Below I’d like to respond to a provocative review in the Wall Street Journal.

But first a few other points that have come up: the gun lobby continues to seem particularly exercised about losing large bills. Perhaps the concern is that without convenient large notes, the government might have an easier time enforcing registration and background checks on people who buy firearms. A broader take is the American Thinker piece “Washington’s Endgame: First Your Guns Then Your Cash.” I can only say that I am not very sympathetic.

I try in the book to efficiently cover every possible misconception that people might have about where all the missing big bills are (even the spirit world), but I am afraid I missed one. Writing in the Numismatic News, Patrick A Heller suggests that we all should know “that a sizeable percentage of this (missing cash) is held by central banks as reserves.” Well, not really. Foreign central-bank dollar holdings are almost entirely in the form of electronic bills and bonds. Some foreign banks do hold physical U.S. dollars to meet customer demand, but most world holdings of dollars are in the underground economy (crime and tax evasion). As the book discusses extensively, foreign demand mostly likely accounts for less than 50% of total U.S. dollars outstanding.

In his thoughtful Finance and Development review, Peter Garber asks why not just make $100 bills larger and bulkier, then we don’t need to get rid of them. Well, if we make them ten times heavier and ten times bulkier, yes, that would be another approach (albeit not equivalent to mine, because tenfold oversized notes would be easier to tabulate, and you could probably pack them tighter unless the bills are larger still). But seriously, what is the difference, the symbolism? Anyway, I have no objections to leaving a giant $100 bill for collectors. Garber also argues that if the physical dollar becomes less prominent internationally, the electronic dollar will suffer. Maybe once upon a time that was true, but it is almost irrelevant today in the legal tax-paying world, domestic or foreign. Also, let’s not forget my plan leaves plenty leaves small bills, so the symbolism is still there.

This takes us to Jim Grant’s Wall Street Journal review. Several people I respect think Grant is a very smart guy who likes to be provocative, but I would to take up some of his simple errors and profound misconceptions.

Grant has little interest in the main part of the book, which argues that the large notes, which dominate the currency supply, do far more to facilitate tax evasion and crime than legal transactions. He posits that it would be so much simpler to legalize narcotics and simplify taxes, and that “Mr. Rogoff considers neither policy option.” In point of fact, I address legalizing marijuana on page 69, and the book goes on to detail the many other ways cash is used in crime besides drugs: racketeering, money laundering, human trafficking, extortion, corruption, you name it. Simplifying taxes is a great idea with lots of efficiency benefits I have written often about. But to think that any realistic simplification plan would end tax evasion is delusional.

Grant focuses his ire almost entirely on negative interest rates, saying “You rub your eyes. You can recall no precedent. There has never been one in 5,000 years of banking.” Well, Grant is known for his interesting historical analyses, but this statement is misleading at best. Before paper currency, governments routinely paid negative interest rates on metallic currencies by calling in coins and shaving them (as I discuss at some length in chapter 2). That might not immediately imply a negative rate on other debt instruments, but if your debt is repaid in physically debased pence that have much less silver than the ones you lent, it is a negative interest rate in any meaningful sense.

In modern times, the existence of paper currency prevents any significant negative rate on other government debt because of fear of a run on cash, though Europe and Japan have managed to get away with slight negative rates. So the statement that this has not happened until now is, well, hardly profound. Besides, there have been countless episodes of significant negative real interest rates on government bonds, that is when the nominal (face value) interest rate is not nearly enough to keep up with inflation, for example in the 1970s, when inflation went over 13% in the U.S. and over 20% in the U.K. and Japan.

In any event, my plan excludes small savers. And if effective negative-rate policy were possible, it would likely be quite short lived, and would probably cause a lot less problems that a decade of zero rates or high inflation. If the Fed could engage in effective monetary policy in a deep recession, most savers will gain far more than they will lose. It would bring back jobs more quickly, restore house and stock prices faster, and it would actually raise nominal rates on long-term bonds through restoring expected inflation to target. The suggestion that negative rates are just a policy to rob savers is empty polemic.

In chapter 12, I discuss populist perspectives on central banking, including Ron Paul and a return of the gold standard. Grant, evidently, was tapped to be Paul’s Fed Chairman had his 2012 presidential campaign been successful. On CNBC Squawkbox, Grant compares Fed chair Ben Bernanke to the head of Zimbabwe’s central bank, because he is just sure that all the “money printing” Bernanke was doing would lead to high inflation. Of course, what Bernanke was doing was not so much printing money as exchanging short-term central bank reserves for long-term government debt, as a reader of chapter 9 would understand. (And critically, the government fully owns the central bank.) I am not a big believer in the wonders of quantitative easing, but those who predicted that it would lead to very high inflation made an epic wrong call. Grant not only hates negative rates, he says he doesn’t like zero rates, and said back then the Fed should promptly raise them. Many other central banks, including the European Central Bank, tried just that—the results were disastrous.

Lastly, it is worth mentioning that by and large the financial industry lobbies heavily against negative rates. Leading financial newspapers regularly publish articles by banking industry proponents that argue how negative rates will deter governments from pursuing structural reform. Some of their arguments—about the problems with implementing negative rates today, having to with institutional, tax, and legal issues that need to be fixed before negative rates can be effective—are legitimate. The Curse of Cash addresses all that, and explains that it will take a long time even if the problem of a run into cash is taken off the table. Ultimately, banks make money off the difference between the rates they pay to borrow and the rates they charge to lend, and once the preparations are made, they will not have cause to complain.

In the end, if global real interest rates stay low for the next decade, there will likely be occasional periods of negative rates during recessions in most advanced economies, whether we like it or not. Part II of the book explains how to make negative rate policy better and more effective. Anyone who wants to understand it should read The Curse of Cash.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

Kenneth Rogoff: Cash is an emotional topic

Read on for the first post in a blog series by Kenneth Rogoff, author of The Curse of Cash:
Rogoff

In The Curse of Cash, I make a serious case for phasing out the bulk of paper currency, particularly large denomination notes. Since pre-publication copies started floating around just a few weeks ago, a number of engaging, thoughtful reviews have published (for example, here, here, here, here and here). But mere rumors of the book’s impending publication have also evoked an extraordinary number of visceral comments (online and by email): “This idea is almost as bad as banning semi-automatic weapons,” is one theme. Another is, “Why should people feel guilty about doing business in cash to avoid paying taxes when we all know the government will just waste the money?” Having first explained two decades ago why governments that print big bills are penny-wise and pound-foolish, I am well familiar with how emotional this topic can be.

There have also been some comments having to do with individual liberty and wondering if criminals will use other currencies and transactions media. I address these and many other serious concerns in the book, and I have tried to do so in a clear and engaging way that anyone can understand. But here is a quick version to straighten out some key points:

The most fundamental point is to emphasize that the book argues for a less-cash society, not a cash-less one. There is a world of difference. If the U.S. first phased out one hundred-dollar bills and fifty-dollar bills, and then after perhaps two decades phased out twenty-dollar bills, there would still be ten-dollar bills and below. I strongly argue these should be left around indefinitely, and explain why it would be a mistake to withdraw cash entirely, as opposed to just larger bills. Even if we get down to ten-dollar bills, making an anonymous cash purchase of $1,000 would still be pretty easy—and even a $100,000 purchase would require only a briefcase. The aim of my proposal is to get at wholesale tax evasion by businesses and higher-income individuals, and by large-scale criminal enterprises, e.g., drug lords and crime bosses. With ten-dollar bills and below—which will be left in place indefinitely—there will always be ways for ordinary people to make private (anonymous) payments and for low-income individuals to buy groceries.

Any reader of the book will see that I am not proposing getting rid larger bills as segue to an outright abolition of cash—I explain why I’m against eliminating physical cash into the very distant future, perhaps another century. But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.

What about the argument that in lieu of big bills, criminals and tax evaders are always going to find other ways to make anonymous payments? Obviously this is an important point, and one that comes up throughout in the book. But there is a reason why cash is king. No other anonymous transactions vehicle, however, is as remotely easy to use. Gold coins have to be weighed and assayed, and can hardly be spent at the tobacco shop. Uncut diamonds are even less liquid. Bitcoin is somewhat anonymous (albeit traceable in many instances), but governments have been putting up all sorts of tax rules and restrictions on financial institutions that make it a very poor substitute for cash. And by the way, governments will continue to do this with any new transaction media they view as facilitating tax evasion, money laundering, and crime. As I explain in the book, big bills facilitate big crime—taking them out of circulation will have a significant effect.

Finally, another very early comment on the book, of a vastly different type, is from someone I greatly respect but do not always agree with, Edward Chancellor. Unfortunately, he makes a couple of absolutely critical misrepresentations. Most importantly, he seems happy to blur the critical distinction between “less cash” and cashless. He slips easily into the “cashless” phraseology, for example, when wondering how to give money to beggars in my world. I am impressed if he can give out one hundred-dollar bills to beggars, but if so, I think he would find that a fistful of tens is also welcome.

I agree with Edward that to take advantage of today’s ultra-low real interest rates, it would be a good idea for governments right now to issue very long-term bonds (see my recent article); I have no objections to his preferred perpetuities. But there is an enormous difference between issuing registered perpetual bonds and issuing anonymous currency; that is my whole point. By the way, as the book notes, anonymous bearer bonds were effectively killed a long time ago.

Edward and I disagree on negative interest rates, but that it is whole different can of worms. I’ll just say that, in addition to explaining the issues, the section in the book on negative rates shows that effective negative-interest-rate policy is going to require laying many years of ground work—not a recommendation for something the ECB or the Bank of Japan can do tomorrow. But for reasons discussed, it is by a wide margin the best plan for the future. All the others are much worse.

In the meantime, anyone who has looked serious at the data will realize that even as currency use is declining in the legal economy, it is growing in the underground economy. Something is badly out of whack, and it is time to have a serious discussion about it.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

The Curse of Cash: An interview with Kenneth Rogoff (Part II)

Rogoff

This is the second installment of a two-part interview with economist Kenneth Rogoff on his new book, The Curse of Cash. Read the first part here.

Your new book advocates a “less cash” society, phasing out all paper currency notes over (roughly) $10, and in due time even replacing those notes with large coins.(You observe that notes of $10 or less account for only 3% of the US currency supply). How will getting rid of the vast majority of all paper currency help central banks fight financial crises?

KR: It will allow central banks to engage in much more aggressive stimulus with unfettered and open-ended negative interest rate policies, without running up against the “zero lower bound” on interest rates, a bound that exists because cash pays a zero return that any bond has to match. There are other ways to stimulate the economy at the zero bound, some quite elegant, but phasing out cash is simplest and more robust solution. If only large bills are phased out, people could in principle hoard smaller ones, but the cost is far greater (allowing rates to be much more negative), and in extreme circumstances, the government can place other restrictions on redepositing cash into the banking system.

How do negative interest rates work?

KR: The idea behind negative interest rates is simple: they give money that has been hibernating in the banking system a kick in the pants to get it out into the economy to stimulate demand thereby pushing up inflation and output. If successful, negative interest policy could end up being very short-lived because as demand and inflation rise, so too will market interest rates. In other words, if there were no obstacles, central banks could use negative interest rate policy to push down very short term interest rates, but at the same time longer term interest rates would actually rise because people would start to again expect normal levels of inflation and inflation risk. If you are worried about your pension then, on balance, this would be a very good trade.

Are negative rates the main reason to phase out cash?

KR: There are other very clever ways to introduce negative rates without phasing out cash, and the book explains these at length, with one especially clever idea in having its roots in the practices of the Mongol empire of Marco Polo’s time. In any event, the case for drastically scaling back paper currency is very strong even if the central bank is proscribed from setting negative rates. That would be mistake, as negative rates are a valuable tool. In any event, because phasing out cash opens the door wide to negative rates, it makes sense to treat the two topics in any integrative fashion as we do in this book.

Haven’t the early returns on negative interest rates been mixed?

KR: Some central banks have tiptoed into negative interest policy already, but they can only move so far before investors start to hoard cash, hampering the effectiveness of negative interest rates. If negative interest rates were open-ended, central banks could decisively shift expectations without necessarily having to go to extreme lengths.

Aren’t negative rates bad for financial stability?

KR: Not necessarily, because open-ended negative rate policy would allow central banks to turbocharge out of deflation, so that the low interest rate period would be relatively short-lived. The existing regime, where rates have been stuck at zero for many years at a time, likely presents far more risk to financial stability.

Is expanding the scope for negative interest rates really worth the trouble if the next big financial crisis isn’t expected to occur for many decades?

KR: Well, first of all, the next major financial crisis might come a lot sooner than that. Besides, the option of negative interest rates might matter even for the next “normal” recession if the general level of world interest rates remains as low as it has been in recent years. Clearing the way for open ended negative interest rate policy would not only help make monetary policy more effective, it would clear that air of a lot of dubious policy suggestions that would be extremely damaging in the long run. Too often, the zero bound is used as an excuse to advance politically motivated policies that might or not be a good idea, but should be evaluated on their own merits.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. He is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).  He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. Rogoff resides in Cambridge, Massachusetts.

The Curse of Cash: An interview with Kenneth Rogoff

Rogoff

What if cash is making us poor?

Called a “fascinating and important book” by Ben Bernanke, The Curse of Cash by leading economist Kenneth Rogoff argues that cash is making us poorer while fueling a corrupt underground economy on a global scale. Even as advanced economies are using less paper money, the amount of cash in circulation is on the rise, a reality Rogoff says feeds terrorism, tax evasion, and human trafficking, among other nefarious activities. Rogoff’s case for eliminating most paper currency is sure to stir serious debate. Recently we asked him to comment on his book and the reasons for his position.

Why do you think paper currency can be a “curse?”

KR: The big problem with paper currency is that a large part of it is used to facilitate tax evasion and a huge spectrum of criminal activities, including drugs, corruption, human trafficking, etc. Most people don’t realize the sheer scale of currency outstanding, over $4200 for every man, woman and child in the United States, with 80% in 100 dollar bills. The vast bulk is unaccounted for; it is not in cash registers or bank vaults. The phenomenon is the same across virtually all advanced economies. The dollar is not special in this regard.

Won’t the government be losing out on huge profits from printing currency?

KR: Yes, governments delight in being able to pay for things by printing money, and the United States government earns tens of billions of dollars each year by doing so. But tax evasion, which is widely facilitated by the use of cash to hide transactions from authorities, costs government far more, in the hundreds of billions for the United States alone, and far more for Europe. If phasing out most paper currency reduces tax evasion and crime by say, 10%, the government should at least break even, and the overall gains to society will be far larger. This is not a quixotic attempt to end all crime and tax evasion, but simply the observation that earning profits by printing large denomination notes is penny wise and pound foolish, a point I first made in an academic paper almost two decades ago.

Are you arguing for phasing out all paper currency?

KR: No, for the foreseeable future, I am proposing a “less-cash” society, not a cashless society. My plan would leave smaller notes, say $10 and below, for an indefinite period. This will help mitigate concerns about privacy, power outages, and the continuing convenience of cash in some small scale transactions. Over the very long run (perhaps several decades), moderately heavy coins would be substituted for small bills to make it even more difficult to transport and conceal large quantities. This last piece is inspired by the experience of ancient China, where paper currency was introduced in part because lower-grade metals were used in coinage, and it proved burdensome to carry large amounts over long distances.

Are you advocating digital currencies such as Bitcoin instead of cash?

KR: Private digital currencies are, in fact, a complete non sequitur, though of course they need to be regulated. Drastically scaling back currency was already a good idea two decades ago when I first wrote on the topic. Credit cards, debit cards, checks and electronic transfers have long been far more important than cash in the legal economy for larger transactions. Today, the role of cash is dwindling even for smaller transactions.

If we get rid of most paper currency, won’t criminals and tax evaders find other ways around the system?

KR: Of course, but there are good reasons why cash is king in the global underground economy. There are other ways to launder money and hide income, but they do not offer the same safety or universal acceptance as cash.

Aren’t most dollars held abroad anyway?

KR: Overwhelmingly, the evidence is no, at least half of all dollars are held inside the United States, still more than $8000 per four-person family.

Do other countries have the same issue with huge amounts of currency outstanding or is the dollar unique?

KR: The US is no way unique, virtually every advanced country has a massive currency supply, some even larger than the United States. And in virtually all cases, the vast bulk is in very large denomination notes. Japan, for example, has issued over 50% more cash per capita than the US, with over 90% of it in 10,000 yen notes (roughly equivalent to the US $100 bill). T

What will happen to the poor in your “less-cash” society?

KR: The poor are not the ones accounting all the 100 dollar bills, but they are the ones suffering the most from crime and who stand to benefit the most if the government were more effective at collecting tax revenues. To facilitate financial inclusion, my plan calls for providing free basic debit card accounts; several other countries have already done this.

What about privacy from the government?

The continuing circulation of small bills will ameliorate privacy concerns to some extent.  The basically philosophy of this approach is that it should remain convenient for individuals to keep modest-size transactions completely private from the government, but for large transaction, the government’s right to tax, regulate and enforce laws trumps individual privacy considerations. I am making this argument on pragmatic, not moralistic grounds.  The current system just makes it too easy to do repeated large-scale illicit trades in cash with big bills.  Even after big bills are gone, there will still be many ways for ordinary citizens to conduct one-off high-value transactions with a significant degree of privacy.  These alternatives, however, are typically inferior to cash for repeated large-scale transactions, as risk of detection rises proportionately.

What about power outages, hurricanes, etc.?

KR: Again, the continuing circulation of small bills mitigates the issue. Other payment mechanisms, including via cell phones, are rapidly becoming more important in the aftermath of storms anyway, and there are a variety of backup technologies such as checks. In a sufficient profound power outage, ATM machines and cash registers will not work either, and the government will have to airlift cash and script regardless.

How will reducing the role of cash help deal with illegal immigration?

KR: Without paper currency, it would be vastly more difficult for employers to pay workers off the books, and sub-market wages. It would be more difficult for employers to avoid making social security tax contributions and to skirt labor laws. Phasing out paper currency is a far more humane way of channeling immigration through legal channels that some of the draconian methods being proposed, such as building giant walls and barbed wire fences. Remarkably, no one in the heated political debate on immigration seems to have quite realized this. Of course, any substantial phase-out of paper currency would take place of a very long period, perhaps 10-15 years, giving a long runway for policy to help existing immigrants.

If the US gets rid of large denomination, won’t other countries just fill in the void and supply their large notes to the world underground economy?

KR: The gains from reducing domestic tax evasion and crime still should make it a big win, even though the US would forgo profits earned from supply the global underground economy, including for example, Colombian rebels, Russian oligarchs and Mexican drug lords. Europe might profit if the euro becomes more popular, but frankly Eurozone countries have much larger underground economies than the United States, and thus even more incentive to phase out paper currency. By the way, foreign notes will hardly fill the void in the United States underground economy. There are already strict reporting requirements on banks and financial firms, and there already exits limits on taking cash in and out of the country. Any alternative currency that cannot easily be spent and recycled in the legal economy will be costly to use and sell at steep discount.

Is it realistic to think cash will ever get phased out?

KR: In fact, the Scandinavian countries are already far along the path, and have successfully negotiated many of the practical concerns that have been raised, for example now to give money to indigent individuals on the street. Sweden is particularly far along. Several countries, including Canada, Sweden, the European Central Bank and Singapore have already taken action to phase out their largest denomination notes, very much in response to concerns about their role in tax evasion and crime.

Part 2 of this interview with Kenneth Rogoff will appear tomorrow.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. He is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).  He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. Rogoff resides in Cambridge, Massachusetts.

Natasha Dow Schüll Recieves Honorable Mention for “Addiction by Design”

Natasha Dow Schüll – Addiction by Design: Machine Gambling in Las Vegas
Honorable Mention for the 2013 Gregory Bateson Prize, The Society for Cultural Anthropology

The Bateson Prize is designed to reward work that is theoretically rich, ethnographically grounded, and in the spirit of the tradition for which the SCA has become known-interdisciplinary, experimental, and innovative.

“Addiction by Design: Machine Gambling in Las Vegas (Princeton University Press) by Natasha Dow Schüll offers a simultaneously critical and empathetic account of the world of machine gambling and machine-human interface, more generally. Schüll richly documents the crafting of an interiority that is highly attractive to the gambler and very profitable for the gaming companies and offers a comprehensive analysis of this deeply disturbing effort to engineer a psychic state through expert calibration of the human senses via machines. This highly engaging and accessible book is destined to serve as a model of ethnography for science and technology studies in the years to come.”

Addiction By DesignRecent decades have seen a dramatic shift away from social forms of gambling played around roulette wheels and card tables to solitary gambling at electronic terminals. Addiction by Design takes readers into the intriguing world of machine gambling, an increasingly popular and absorbing form of play that blurs the line between human and machine, compulsion and control, risk and reward.

Drawing on fifteen years of field research in Las Vegas, anthropologist Natasha Dow Schüll shows how the mechanical rhythm of electronic gambling pulls players into a trancelike state they call the “machine zone,” in which daily worries, social demands, and even bodily awareness fade away. Once in the zone, gambling addicts play not to win but simply to keep playing, for as long as possible–even at the cost of physical and economic exhaustion. In continuous machine play, gamblers seek to lose themselves while the gambling industry seeks profit. Schüll describes the strategic calculations behind game algorithms and machine ergonomics, casino architecture and “ambience management,” player tracking and cash access systems–all designed to meet the market’s desire for maximum “time on device.” Her account moves from casino floors into gamblers’ everyday lives, from gambling industry conventions and Gamblers Anonymous meetings to regulatory debates over whether addiction to gambling machines stems from the consumer, the product, or the interplay between the two.

Addiction by Design is a compelling inquiry into the intensifying traffic between people and machines of chance, offering clues to some of the broader anxieties and predicaments of contemporary life.

Natasha Dow Schüll is associate professor in the Program in Science, Technology, and Society at the Massachusetts Institute of Technology.