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If you believe that government meddling in financial markets was responsible for the last recession and the lackluster recovery, you might be right. But probably not in the way you think.
Imagine what would happen in a free market if everyone suddenly decided that future economic growth would be very slow. The price of safe assets such as U.S. government bonds -- assets that pay off even in a low-growth environment -- would rise sharply. As a result, the real (inflation-adjusted) interest rate, which always moves opposite to the price of safe assets, would fall. In principle, if the demand for safe assets was strong enough, the real interest rate could go deep into negative territory.
Yet two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won't buy safe assets that yield even less. The second is the central bank's promise to keep the inflation rate low and stable -- at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).
In other words, governments -- by issuing cash and managing inflation -- put a floor on how low interest rates can go and how high asset prices can rise. That's hardly a free market.
[...] The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England. Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required.
[...] If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)
Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.
We've endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets. Why not ensure that doesn't happen again?
Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
(Score: 4, Interesting) by opinionated_science on Tuesday September 06 2016, @01:53PM
It's not the cash. Like it's not capitalism - that's just a system.
The problem is the artificial scarcity that doesn't agree with the physical world.
The crazy appearance of the market is in effect a monte carlo sampling of the "artificial phase space" vs the real one.
Cash is just a counting parameter - just like in our molecular simulations, we use energy (say).
If you mess up in our simulations the real world values (e.g. Energy) go wildly unrealistic - this is what we see in "economics".
Only their models are too simple to predict anything...
(Score: 2) by Thexalon on Tuesday September 06 2016, @02:11PM
Are you saying that the physical world doesn't have scarcity? Because that makes approximately no sense - the whole point of an economy is have some sort of means of managing scarce real resources.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 4, Insightful) by nitehawk214 on Tuesday September 06 2016, @02:36PM
The physical world doesn't have artificial scarcity. It has real scarcity.
"Don't you ever miss the days when you used to be nostalgic?" -Loiosh
(Score: 0) by Anonymous Coward on Tuesday September 06 2016, @11:06PM
The physical world doesn't have artificial scarcity. It has real scarcity.
That is just silly! There is just the right amount of everything in the world, since it is a creation of god, and since god is perfect, his creation has to be as well. You are not a pagan-heathen capitalist, by any chance?
(Score: 1) by Frost on Friday September 09 2016, @02:08AM
(Score: 1) by nitehawk214 on Friday September 09 2016, @07:12PM
Good point. I guess we have both kinds.
"Don't you ever miss the days when you used to be nostalgic?" -Loiosh
(Score: 3, Interesting) by opinionated_science on Tuesday September 06 2016, @02:40PM
well the business systems of the world are architected on time limitation, to raise price. Supply limitation to raise prices. And information limitation to raise price.
The thing about maintaining a system against entropy, is that it takes energy/resources. This is why monopolies are such a bad thing - they are essentially the black holes of economics.
I like physics descriptions because the models are well explained. I like biological solutions, because this is the real world ;-)
The problem with our capitalist system, is there is no legal basis for "too big", "too rich" or for profit "too exorbitant".
In the physical-world, there are...
(Score: 2) by GreatAuntAnesthesia on Tuesday September 06 2016, @08:47PM
> I like physics descriptions because the models are well explained. I like biological solutions, because this is the real world ;-)
Sorry, we only accept car analogies here.