Money With An Expiration Date: A Primer on Negative Interest Rates
Issue #21 November 4, 2019
Should money have an expiration date? This long-forgotten economic theory from the 1930s is making a comeback. Today’s post will be a primer on negative interest rates- The tool du jour by monetary policymakers looking to avoid liquidity traps, and what the underlying power and purpose of sovereign-backed cryptos may really be.
What problem do negative interest rates solve?
First, let's talk about the problem that they are trying to solve. In times of very low-interest rates (i.e. like the last 10 years) which are monetary policies designed by central banks to stimulate consumer and business borrowing to expand the economy, the preference for “staying liquid” may become virtually absolute. This means that almost everyone prefers holding cash (saving/hoarding) rather than holding a debt which yields so low a rate of interest. It probably seems counterintuitive then as to why setting rates below zero (i.e. negative) would be a solution out of this kind of liquidity trap.
The truth is that the empirical evidence remains mixed as well, (and nothing beyond a short term, local test case in the 1930s has ever been viable) but negative interest rates (i.e. taxing the currency) is the only other solution to escape a liquidity trap other than the other tried and historical solution of fiscal policy to expansion (Government program spending like The New Deal, etc.).
For a full look at the pros and cons and discussion around these toolsets, I suggest you read the paper by Willem H. Buiter, Nikolaos Panigirtzoglou by clicking here.
How do negative interest rate policies work?
The concept of “stamping money” originated by an early 1900s economist Silvio Gesell who was reputed to “hate money” because he felt it served two conflicting purposes: 1) to store wealth and 2) enable business in the marketplace to occur efficiently. For instance, when people were uncertain or afraid of the future they hoarded cash, which in turn brought business to a standstill/contraction.
Over 70 years have passed since he innovated “Gesell Money” which was designed to expire and be used purely as a medium for exchange, and he has been one of the forgotten innovators in economic history until recently as the notion of negative interest rate monetary policy has taken off across the bulk of Europe, Asia, and other major economies.
The current-day version of this notion has me thinking a lot about what the future of sovereign crypto or CBDC (Central Bank Digital Currencies) might look like as the ultimate mediums of exchange in a digital world and where it might leave Bitcoin $BTC as the ultimate “store of value” and whether Gesell’s theory of taxing the store of value component of fiat currencies will take off at scale.
In Gesell’s day, he proposed a new kind of paper money that would have an expiration date and that in order to avoid expiration, the bills would have to be periodically stamped (taxed) for a fee. In other words, if you didn’t pay the duty owed those bills would become worthless. In this system, saving money would cost you money if you kept it in that form. Savings, in other words, would have a negative interest rate. The only way to avoid the fees was to keep the money circulating by spending or investing it.
What would society/the economy look like with “expiring money” as the legal tender?
If you think about what that could look like in a cashless or digitally native world where “programmable money” (central bank or sovereign cryptocurrency) could be the State-issued legal tender or global reserve it would essentially mean that if you held the future “Fedcoin” or whatever it was named in savings you would pay a tax (1% per year or whatever the negative interest rate was) for holding that liquidity, and that the only way to avoid that would be to spend or invest (all of which would be extremely trackable now) into commercially legal and approved products or asset classes.
This would also have tremendous accretive or potential destructive impacts on other analog (Gold, Silver) or digital (Bitcoin) stores of value, since essentially any investment or saving of your CBDC (stamped) currency would be tracked as flowing into these assets or potentially banned (i.e. if your country banned investing in Bitcoin).
The possibilities and problems with this are equally numerous. It could liberate the economy from the tremendous drain and cost of ‘fraud’ and illicit activity. It could also become the tool of an extreme ‘police state’. I encourage you not to bias one way or the other and to begin to engage in understanding what this could mean in either case to your portfolio opportunity because it is far more likely a scenario in the coming decade than not based upon current trendlines.
Likely interim impacts of negative interest rates outside the U.S.
Lastly, the fact that the FedFund’s rate is currently set as 1.65% and still several large moves away from zero means that as the rest of the world is already “stamping” money and taxing savers, that for the next several quarters and years the strengthening of the US Dollar is imminent and the inbound demand will continue even at these historically low yields, which pushes the current financial system to another set of global economic issues that could cause contraction in the coming years. To stay in the loop on this topic and CBDCs become a subscriber and don’t miss a daily issue or premium insight. Save 20% forever today as part of our introductory offer:
Shifting gears: Are you happy?
There are 58 days left in 2019 (counting today) to make a final push at your remaining goals and objectives for this year, before we round the turn into 2020 and I wanted to spend some of today’s newsletter talking about happiness, since the end goal of all our endeavors is to ultimately find, maintain, or increase that single metric.
AI Reads 8m+ books to index the key to happiness
According to a recent report published by Nature Human Behaviour (click to read full report) it turns out that an AI has now read over 8 million books to come up with a National Happiness Index (and essentially the largest ever analysis of the keys to a happy life. The research approach taken was novel and borrowed a fundamental insight from psychology-that the majority of the time what people say or write reveals much about their overall state of happiness/well-being. They developed a methodology using code to apply this to over 8m online texts, books and newspapers over the past 200 years to try and understand our shared history of happiness (cause and effect) and created a model that could help policymakers model it forward for their country.
Their findings appear in Nature Human Behavior.
TL:DR (Key Points from the study: Courtesy of a related post summarized by Weforum.org)
“Money helps: Increases in national income do generate increases in national happiness but it takes a huge rise to have a noticeable effect at the national level.
My thoughts on this are that when you look at historical cycles where we have had large gaps in the income equality gap (1920s-30s) and (1999-2019) as two recent examples that happiness dips until a sense of fairness and equal opportunity returns (1945-1960s).
“Longer lives matter: An increase in longevity of 1 year had the same effect on happiness as a 4.3% increase in GDP.
Quality of life/health (beginning with our mental health and physical function) have always been core tenants of the Wealth Matters doctrine and framework so it’s nice to have some relative numbers now to document as proof.
“War is costly: One less year of war had the equivalent effect on happiness of a 30% rise in GDP.”
This one made sense, but I was shocked by how resilient humanity is related to the impacts of war.
Happy Monday! ~Chris
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