“Negative” Interest Rates and the War on Cash

Prof Richard Werner has written an interesting article on negative interest rates and the idea that “cash is a barbarous relic and needs to be abolished” which is being disseminated recently in the mainstream media. While there are parts of this article we disagree with, some good points are made about the dangers of negative interest rates.

Here’s a short extract:

The main reason advanced by the Bank of England for wanting to abolish cash is that it wishes to stimulate the UK economy, and to do so it wants to use interest rates. Since rates are already zero, it is now only reasonable to lower them into negative territory. However, to make such a policy effective, the possibility to move from electronic money into cash needs to be taken away. If cash is abolished, we can then enjoy the benefits of negative interest rates – or so the official narrative goes.

This story is so full of holes that it is hard to know where to start. Let’s begin by reminding ourselves that it has been the Bank of England that has since 2009 argued that interest rate policy is not a good tool to stimulate the economy, and instead it wanted to use what it (misleadingly) called ‘Quantitative Easing’. So if that is true, why now suddenly switch back from the quantity to the price of money? What is it that should make ‘price easing’ now more effective than an emphasis on quantities? Wouldn’t it be better to instead introduce true quantitative easing, which expands purchasing power in the productive economy, such as in the hands of SMEs?

Secondly, let us consider the proposal of introducing negative interest rates in an effort to stimulate the economy. As we know, the proclaimed transmission mechanism of lower rates is via cheaper borrowing costs. In countries where a negative interest rate policy has been introduced, such as Denmark or Switzerland, the empirical finding is that it is not effective in stimulating the economy. Quite the opposite.

Here you can read the article in full.