By James Grant
If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice.
Ken Rogoff is a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund and (to boot) a chess grandmaster. He laid out his case against cash in a Saturday essay in this newspaper two weeks ago. By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the Federal Reserve’s control of interest rates.
“The Curse of Cash,” the Rogoffian case in full, comes in two parts. The first is a helping of monetary small bites: a little history (in which the gold standard gets the back of the author’s hand), a little central-banking practice, a little underground economy. It’s all in the service of showing where money came from and where it should be going.
Terrorists traffic in cash, Mr. Rogoff observes. So do drug dealers and tax cheats. Good, compliant citizens rarely touch the $100 bills that constitute a sizable portion of the suspiciously immense volume of greenbacks outstanding—$4,200 per capita. Get rid of them is the author’s message.
Then, again, one could legalize certain narcotics to discommode the drug dealers and adopt Steve Forbes’s flat tax to fill up the Treasury. Mr. Rogoff considers neither policy option. Government control is not only his preferred position. It is the only position that seems to cross his mind.
Which brings us to the business end of this production. Come the next recession, the book’s second part contends, the Fed should have the latitude to drive interest rates below zero. Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before.
In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” thus restore prosperity.
You may doubt this. Mr. Rogoff himself sees difficulties. For him, the problem is cash. The ungrateful objects of the policy community’s statecraft will stockpile it.
What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency. If the author has his way, there will be no more Benjamin Franklins, only Hamiltons, Lincolns and George Washingtons. Ideally, says Mr. Rogoff, many of today’s banknotes will take the future form of clunky, base-metal coins “to make it even more difficult to carry large quantities of currency.”
It’s plenty difficult enough now. Federal statute makes greenbacks in five- and even four-figure sums virtually non-negotiable. Just try to buy a car with a briefcase full of “legal tender.” Or try to deposit those tens of thousands of green dollar bills in the bank. The branch manager would likely file a Suspicious Activity Report. This intelligence would reside with the Treasury’s Financial Crimes Enforcement Network, as mandated by the Bank Secrecy Act of 1970. The government seems to hate cash as much as the fashion-forward economists do.
To such deep thinkers as Mr. Rogoff, 0% is only a number, not a boundary. It ought not to constrain an enlightened central bank, which strives to set a negative inflation-adjusted interest rate when prices are drooping. Thus, if the CPI should happen to come in at 1%, let the federal-funds rate be set at, say, minus 1%. If the CPI should measure minus 1% (meaning that prices are actually falling), let the funds rate register minus 3%.
This is a big can of worms that the author has pried open. He assumes, first and foremost, that falling prices are a calamity. It is not such a calamity that many Americans don’t spend most of the weekend seeking them out. Still, the policy community wants nothing to do with them.
And the policy community, especially in Europe, has had its way. More than $13 trillion of sovereign debt (German, Japanese, Swiss) is quoted at a yield of less than nothing. In Denmark, the banks pay homeowners to take out a mortgage. In Switzerland, depositors pay the bank to accept their francs.
Negative rates? You rub your eyes and search your memory. You can recall no precedent. And if you consult the latest edition of “A History of Interest Rates” (2005) by Sidney Homer and Richard Sylla, you will find none. A recent check with Mr. Sylla confirms the impression. Today’s negative bond yields, he says, are the first in at least 5,000 years.
A positive integer would almost seem inherent in the idea of interest. When most of us want something, we want it now. And if we don’t have the money to buy it now, we borrow. “Present goods are, as a rule, worth more than future goods of like kind and number,” posited the eminent 19th-century Austrian theorist Eugen von Böhm-Bawerk. He called this behavioral truism the core of his theory of interest.
Then again, because not everyone is equally impatient, some of us are prepared to wait, therefore to lend. Seen in this light, the rate of interest is either the cost of impetuousness or the reward to thrift. In the topsy-turvy world of Mr. Rogoff, negative rates would be the reward to impetuousness and the cost of thrift. A small price to pay, he insists, for a quick exit from a deep slump.
The author does not forget to salt his text with words of caution. They are unconvincing. Mr. Rogoff is a true believer in the discretionary command of monetary matters by former tenured economics faculty—the Ph.D. standard, let’s call it. Never mind that, in post-crisis America, near 0% interest rates have failed to deliver the promised macroeconomic goods. Come the next crackup, Mr. Rogoff would double down—and down.
Curiosity is notable by its absence in these pages. How have we come to this radical pass? What is it about today’s monetary and banking arrangements that seems to impel us to more and more desperate policy gambits? The nature of modern central banking and the pseudoscience of modern monetary economics are themselves surely part of the problem.
Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment.
The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market.
The trouble is that the Fed has become hostage to that very bull market. The higher that asset prices fly, the greater the risk of the kind of crash that impels new rounds of intervention, new cries for government spending, bigger deficits—more “stimulus.” Interest rates today, in the U.S., are perilously close to zero. What will the mandarins do in the next emergency?
You have to wonder if the agitators for negative interest rates read the newspapers. The crisis of state and municipal pension finance is no longer looming but upon us. In a world of 2% long-dated Treasury yields, the pension managers operate under the fanciful assumption that they can, on average, generate annual returns in excess of 7.5%. Just how America’s income-starved savers and pensioners would receive the news of the adoption of negative interest rates could be a fruitful topic for Mr. Rogoff’s next book; it plays no part in this one.
You have never met a more cocksure lot than the monetary-policy clerisy. The author, one of the highest of these high priests, casts aside his pro forma concerns about radical experimentation to deliver the following prediction about the coming brave new world: “A true shift to a world where negative interest policy is possible will be transformative, comparable to moving off the gold standard in the 1930s, moving off of fixed exchange rates in the 1970s, and the advent of modern independent central banks around the world in the 1980s and 1990s. Like all of these changes, there will be uncertainties during the transition, but after awhile, central banks and financial market participants likely won’t be able to imagine doing things any other way.”
It would make one more confident in such forecasts if the leading lights of the policy community had not been looking the wrong way in 2008. How did they miss the biggest event of their professional lives? The simple answer is that, though central bankers believe themselves to be independent of their governments (a debatable claim), they are hardly independent of each other or of the doctrines of John Maynard Keynes and his modern-day disciples.
The Nobel physicist Richard Feynman had their number as long ago as 1974, when, in an address to the graduates of CalTech, he warned against “Cargo Cult Science.” He talked about the inhabitants of the South Seas who, after seeing a cargo plane once land on their island, build makeshift runways and don bamboo headphones to re-create the setting in which the plane would land again. Cargo-cult scientists, like the islanders, do everything right, Feynman said: They “follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land.”
So it is with monetary policy. The economists build their runways and don their headphones. They create their econometric models and decorate their scholarly papers with mathematical appendices. Like the hopeful cargo cultists, they faithfully implement the rigmarole of modern science. Still, the economic planes don’t land.
Meteorology is a legitimate science, though anyone with a weather app on a smartphone knows how fallible the meteorologists are—how frequently they revise their forecasts of the short-term future of such inanimate things as raindrops. How much less reliable, then, are the economists who presume to forecast human behavior not just over the course of days but over the sweep of years?
As for the campaign for zero cash in the service of negative interest rates, Mr. Rogoff’s brief is best seen not as detached scientific analysis but as a kind of left-wing crotchet. Strip away the technical pretense and what you have is politics. The author wants the government to control your money. It’s as simple as that.
—Mr. Grant, the editor of Grant’s Interest Rate Observer, is writing
a life of Walter Bagehot.
Source: Hostage to a Bull Market