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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (2903)	7/2/2003 9:20:35 AM
From: smolejv@gmx.net	Read Replies (3) \| Respond to of 4909

>> maybe inflation of 3% a year, plus stamp tax of 12%. so 15% expropriation of value per year<< I still contend that the context is a deflationary environment with a zero or less interest rate. So, fine, your suggestion computes as well, but it's out of the context of the paper. Here's some quotes from the original at dallasfed.org ... Unfortunately, conventional open market operations lose their effectiveness as the yield on Treasury bills is driven to zero. At a zero interest rate, a Treasury bill is no different from vault cash or large-denomination currency. An open-market operation is like the Fed offering to exchange twenty $1 bills for one $20 bill: The increase in liquidity is negligible. Moreover, there is no way to achieve any further reduction in the interest rate. Why would anyone accept a negative return on Treasury bills when they have the option of holding cash, which offers a zero return? With no increase in liquidity and no reduction in the interest rate, there is no reason to expect an open-market operation to produce any increase in household or business spending. ... The Zero-Interest-Rate Bound Can Lead to Serious Trouble if There is Deflation Policymakers can find themselves in serious trouble if they come up against the zero interest rate bound during a period of falling prices—that is, during a period of deflation. That’s because what ultimately matters to households and firms is the real cost of borrowing—what economists call the real interest rate. The real interest rate is the difference between the market, or “nominal,” interest rate and the rate of inflation. It is the prospect of a low real interest rate that makes current consumption and investment spending attractive. The trouble is, even a zero nominal interest rate can produce an expected real interest rate that is too high if people expect a negative inflation rate. For example, if prices fall at a 3 percent annual rate, then a zero nominal interest rate puts the real cost of borrowing at a positive 3 percent. The prospect of a 3 percent real interest rate might be just fine in a healthy, growing economy. It will be excessive, however, in an economy where the growth outlook is poor, or where fragile finances have led households and firms to become cautious about spending and banks to become cautious about lending. .... Bold, but Impractical — Eliminating the Bound Altogether The most daring suggestion for escaping the zero-interest-rate trap is one that eliminates the zero lower bound altogether. How can this be done? As noted in the first part of the presentation, the zero bound on interest rates exists because money pays a sure nominal interest rate of zero. No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of "carry tax" on currency and deposits. It’s easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent. The technological difficulty lies mainly in imposing such a tax on currency. In the 1930s, Irving Fisher of Yale University, one of the greatest American economists, proposed such a system, in which currency had to be periodically ‘stamped’, for a fee, in order to retain its status as legal tender. The stamp fee could be calibrated to generate any negative nominal interest rate that the central bank desired. While the technology available for implementing such a system is more sophisticated today than in Fisher’s time, enforcement still seems a mammoth problem, involving physical modifications to currency and some means of tracking the length of time each piece spends in circulation. ... RegZ dj