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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: 3, Insightful) by jmorris on Tuesday September 06 2016, @10:59PM

    by jmorris (4844) on Tuesday September 06 2016, @10:59PM (#398342)

    that is an indication, to the capitalists of the world, that the worker was paid $1000 too much that year

    Yes and no. The problem is the supply of labor almost always exceeds the demand, leading to the situation you describe. For example we always discuss the unemployment rate, the labor participation rate, etc. where the assumption is that there are more workers than jobs and we are measuring how many unneeded workers there are in the current reporting period. Of course an employer would be a fool to pay more than needed in that situation. Now stop looking at the macro picture and zoom in on specific cases where the demand for labor can't be met (at least easily) by the available supply. You get similarly extreme cases in the other direction where workers make outrageous demands and get them. Anyone remember the .com era of Aeron chairs for everybody, in house 5star chefs, etc? Supply and demand at work, perfectly natural and good.

    Our challenge is to get an economy firing hard enough to create enough demand for labor that the price rises above the minimum required to support the worker's continued life processes. Of course one way to start doing that would be to stop importing third world labor to compete with the natives, from illegals at the low end to H1Bs in higher wage/skilled markets. Moderate tariffs to remove some of the incentive to outsource everything and just import the product of third world labor from the third world would also help. Balance between too low to be effective and so high it does more harm than good would be required of course.

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  • (Score: 2) by Thexalon on Wednesday September 07 2016, @05:44PM

    by Thexalon (636) on Wednesday September 07 2016, @05:44PM (#398796)

    Now stop looking at the macro picture and zoom in on specific cases where the demand for labor can't be met (at least easily) by the available supply. You get similarly extreme cases in the other direction where workers make outrageous demands and get them. Anyone remember the .com era of Aeron chairs for everybody, in house 5star chefs, etc? Supply and demand at work, perfectly natural and good.

    Notice what happens in these cases, though. All of a sudden we get barrages of news stories about the drastic shortages of X kind of workers, and how universities need to train more of them and and we need to expand H-1B to import more of them, and so forth. And since the employers have the clout to drive public policy, while workers on average don't, the employers typically get what they want and eventually drive the price down. If they succeed, they will report this to their shareholders as improving the efficiency of their business.

    This even affects relatively high-status and high-education professions like doctors, lawyers, and scientists. Why do you think there's such a push to educate more in STEM fields?

    --
    The only thing that stops a bad guy with a compiler is a good guy with a compiler.