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posted by cmn32480 on Tuesday September 06 2016, @01:19PM   Printer-friendly
from the everything-electronic dept.

Bloomberg reports:

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.


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  • (Score: 1, Troll) by Arik on Tuesday September 06 2016, @04:07PM

    by Arik (4543) on Tuesday September 06 2016, @04:07PM (#398163) Journal
    "I don't think that word means what you think it does.

    Because the market will be "more free" when you take away the ability of people to store their money anywhere other than banks? What the hell?"

    With you so far.

    "An utterly free market is a terrible idea. So is a heavily-regulated one. As usual, the answer is somewhere in the middle."

    And there you just dove right off into the deep end and I can't follow you. There is nothing wrong with freedom, and there is nothing wrong with moderation, but they don't belong together like that. If you disagree, please specify, exactly how much slavery do you think needs to be mixed in to avoid too much freedom?

    --
    If laughter is the best medicine, who are the best doctors?
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  • (Score: 1, Funny) by Anonymous Coward on Tuesday September 06 2016, @04:38PM

    by Anonymous Coward on Tuesday September 06 2016, @04:38PM (#398186)

    If you disagree, please specify, exactly how much slavery do you think needs to be mixed in to avoid too much freedom?

    Just the tip, baby.

  • (Score: 2) by tangomargarine on Tuesday September 06 2016, @06:00PM

    by tangomargarine (667) on Tuesday September 06 2016, @06:00PM (#398220)

    Depends whether you consider owning property to be slavery. In that case, I can't really have a conversation with you.

    If I'm a small business owner, I will always have constraints placed on me. I can't market arsenic in a bottle as a health elixir. Philosophically, I am fine with this, although I know the hardcore free market people have some silly excuse about how killing people with your product is okay "because then people wouldn't buy your product" or something.

    So how about instead of me trying to guess what you're saying, you just tell me what you mean by "slavery?"

    --
    "Is that really true?" "I just spent the last hour telling you to think for yourself! Didn't you hear anything I said?"
    • (Score: 2) by tangomargarine on Tuesday September 06 2016, @06:03PM

      by tangomargarine (667) on Tuesday September 06 2016, @06:03PM (#398222)

      Or is the line "property is theft?" Bleh. Probably not what you were saying.

      --
      "Is that really true?" "I just spent the last hour telling you to think for yourself! Didn't you hear anything I said?"
    • (Score: 2) by Arik on Tuesday September 06 2016, @06:46PM

      by Arik (4543) on Tuesday September 06 2016, @06:46PM (#398236) Journal
      'Depends whether you consider owning property to be slavery.'

      There's nothing wrong with owning property. But only certain things can be property. People are not property, and neither are ideas.

      "If I'm a small business owner, I will always have constraints placed on me. I can't market arsenic in a bottle as a health elixir."

      Sure you can. You could in a free market and you could as things stand today as well. And in either case, you'd be stupid. You'd be liable for both civil and criminal charges, just as you should be.

      "So how about instead of me trying to guess what you're saying, you just tell me what you mean by "slavery?"

      See above, but also; a free market is a market where all actors are *free* - uncoërced, not compelled to buy or sell at any given price or at all. A slave is by definition a person who has been compelled to sell his labor for a fixed price of 0* (some benefits may apply but are not guaranteed.) The two concepts are fundamentally incompatible on the deepest level.
      --
      If laughter is the best medicine, who are the best doctors?
      • (Score: 2) by tangomargarine on Tuesday September 06 2016, @07:08PM

        by tangomargarine (667) on Tuesday September 06 2016, @07:08PM (#398241)

        uncoërced, not compelled to buy or sell at any given price or at all. A slave is by definition a person who has been compelled to sell his labor for a fixed price of 0* (some benefits may apply but are not guaranteed.) The two concepts are fundamentally incompatible on the deepest level.

        Your own definition is answering your question for you. So we just need that price to be anywhere from .1 to infinity and what I was talking about is no longer slavery. Which of course you knew to begin with, but used the most inflammatory term possible anyway just for kicks.

        --
        "Is that really true?" "I just spent the last hour telling you to think for yourself! Didn't you hear anything I said?"
        • (Score: 2) by Arik on Tuesday September 06 2016, @09:59PM

          by Arik (4543) on Tuesday September 06 2016, @09:59PM (#398311) Journal
          "So we just need that price to be anywhere from .1 to infinity and what I was talking about is no longer slavery."

          No, you need to read that again, you clearly did not understand it. The issue is not the price, the issue is coërcion.

          In order to arrive at a fair price, there must be an uncoërced agreement between buyer and seller. If either the buyer or the seller is coërced, whether towards a higher price or a lower price, or to offer something for sale that he would not freely offer, or even if another party that would potentially be involved but is not because they have been coërced to NOT compete - those are the conditions that are not compatible with the free market.

          Slaves are not incompatible with a free market because the price of their labor is set at 0, but rather because they are not allowed to set their price as they will. People voluntarily set their price at 0 all the time, it's called volunteering, and while strictly speaking you might say a transaction like that is *outside* of the market, it's certainly not imcompatible with it. Slaves are. Even if you pass a law requiring slaves be paid minimum wage, let us say, they would still be incompatible with a free market, because they would still not be able to negotiate freely, nor would they be allowed to decline to trade at all.

          --
          If laughter is the best medicine, who are the best doctors?
          • (Score: 2) by tangomargarine on Wednesday September 07 2016, @02:27PM

            by tangomargarine (667) on Wednesday September 07 2016, @02:27PM (#398704)

            You say "coerce," I say "negotiate." Apparently it's difficult for capitalists to admit they live in a world with other people.

            All this talk about slavery still has nothing to do with my original point.

            /done

            --
            "Is that really true?" "I just spent the last hour telling you to think for yourself! Didn't you hear anything I said?"
            • (Score: 1, Flamebait) by Arik on Wednesday September 07 2016, @04:12PM

              by Arik (4543) on Wednesday September 07 2016, @04:12PM (#398763) Journal
              "You say "coerce," I say "negotiate." Apparently it's difficult for capitalists to admit they live in a world with other people."

              So you're now calling yourself a capitalist?

              Come on, coërcion and negotiation are not the same thing at all, that's absurd.

              Negotiation - You have something I want. I offer you something I think you want. You may accept, decline, or make a counteroffer.

              Coërcion - You have something I want. I produce a weapon and demand it. If you don't give it up I subdue you physically, possibly killing you, and take it.

              If you seriously don't understand the difference I feel sorry for you.

              --
              If laughter is the best medicine, who are the best doctors?