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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: 3, Informative) by Runaway1956 on Tuesday September 06 2016, @02:40PM
The "black market" is the "free market". Government dictating who may or may not have precious metals, or how much they may hold, is the exact opposite of a "free market".
Before we can even discuss the concept of a free market, we each must acknowledge that we have been brainwashed almost from birth. Remember your first few coins? Maybe you found them, maybe Grandma gave them to you, or whatever. With that first meager dab of "wealth", you were taught that those silly damned coins have some kind of intrinsic value.
Money has no value. You can't eat it, you can't stay warm with it in the winter, you can't do much of anything with it - except trade it for things that do have value.
Your dependence on money is just a form of dependence on government - or the ruling class.
(Score: 3, Informative) by HiThere on Tuesday September 06 2016, @05:57PM
Paper money has little intrinsic value, and those fancy alloy coins have minimal value, but gold and silver have actual value. You may not be able to eat it (nutritionally), but gold plated contacts don't oxidize, etc.
More seriously, traditionally gold was used as a jewelry material long before money was around. I'm not sure about silver, I think it was unknown, but copper was used as jewelry before money existed. The original form of money was a bar of metal with an official seal upon it guaranteeing purity. This was valuable because people could then depend on being able to make things out of it.
As to what the article is proposing, most modern money *is* nothing but electronic bits. But as it's gotten more electronic, the market has gotten more controlled by both the governments and the big players (mainly those who control large corporations). So the market is moving in exactly the opposite direction to the one that he hypothesizes in reaction to moving in the direction that he recommends.
Javascript is what you use to allow unknown third parties to run software you have no idea about on your computer.
(Score: 2) by aclarke on Tuesday September 06 2016, @05:59PM
(Score: 1) by khallow on Tuesday September 06 2016, @11:19PM
except trade it for things that do have value.
Thus, money has value - when you use it as intended.
(Score: 3, Funny) by Webweasel on Wednesday September 07 2016, @02:55PM
Dope will get you through times of no money, better than money will get you through times of no dope. Gilbert Shelton 1971
Priyom.org Number stations, Russian Military radio. "You are a bad, bad man. Do you have any other virtues?"-Runaway1956