Writes Kalim Kassam:
6:59 am on June 19, 2009 Email Llewellyn H. Rockwell, Jr.
This is just plain loopy. Just when I thought monetary policy couldn’t get any worse, The Times of London reports:
With recovery elusive, a population doddering into old age and perhaps a decade of deflation in prospect, Japan may start mulling the most radical monetary policy of all — the abolition of cash.
Unorthodox, untried and, said one Bank of Tokyo Mitsubishi strategist, “in the realms of economic science fiction”, the recommendation has nevertheless begun floating around Tokyo’s corridors of power and economists have described Japan as particularly suitable as a testing ground.
[These] ideas are based on a theory concerning interest rates and the concept that a nominal rate of zero — as Japan has now lived with for much of the past decade — may be too high. In Japan’s case, the theory would suggest that nominal rates of -4 per cent might be closer to what is required to rescue the economy from another deflationary spiral. Having agreed that this might be necessary, the next question is how it could be imposed.
Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.
In the 1990s the Japanese tried to print their way out of recession, the experiment resulted in the “lost decade” and the economy still hasn’t fully recovered. Instead of questioning the economic theories underlying this strategy however, the Keynesian dogmatists have reached the Krugmanite conclusion that they just didn’t print enough money. If only they could push interest rates below 0%, you see, all their economic woes would melt away.
After reading Murray Rothbard and Henry Hazlitt on our post-Bretton Woods global fiat monetary regime, I thought we had as unstable and destructive a monetary system as could be imagined. Now I recognize my error: one should never believe that central banksters and politicians won’t take a broken system and make it worse.