The NYT published an Op-Ed from a Harvard economist a few days ago which is either indicative of insanity or of an early celebration of 4/20. It argues that the Fed should continue cutting interest rates to help the economy — yes, yes they have already cut rates to essentially zero, but they could go lower still, “to, say, negative 3 percent.” “At that interest rate,” the article continues, “you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand.”
But wait, you ask, why would banks have any motivation to lend at a loss? Don’t worry, there’s a plan for that too:
Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.
As might be expected, this is a proposal the writer argues that Keynes would approve of, and something in which he suspects Bernanke might be interested. Let’s hope he’s wrong on that latter point, at least. “Maybe some economic problems require” the use of negative numbers, the piece concludes. Or maybe they require the Fed to stop manipulating the money supply. (The one advantage to this plan, perhaps, would be that this random elimination of a 10th of the money supply might help the public realize that our money is worthless anyway.)
For a brief trip, read the rest here.Published in