tag:blogger.com,1999:blog-6704573462403312459.post4705460254946050434..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: Paying interest on cashJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-6704573462403312459.post-55345174820079825592018-01-27T12:00:32.558-05:002018-01-27T12:00:32.558-05:00"I think what your saying (but I could be wro..."I think what your saying (but I could be wrong) is that the Friedman rule is wrong because it implies that the costs of running the currency apparatus is zero, when in actuality the cost is greater than zero. If so, I'd agree with that."<br /><br />Yes, that's what I meant.George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-58413612967374678812018-01-26T16:46:47.493-05:002018-01-26T16:46:47.493-05:00Matt, you either didn't read my post and quick...Matt, you either didn't read my post and quickly commented, in which case shame on you. Or you did read it before you commented, and didn't understand, in which case shame on me.<br /><br />The reason for paying interest on cash is to correct an inefficiency. If cash wasn't a government monopoly, competing banks would have long since figured out how to make their notes yield interest. So by paying interest, the government would be acting as if it was operating in a free market. And that should make everyone better off.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2763827662974738522018-01-26T16:00:31.269-05:002018-01-26T16:00:31.269-05:00"Regarding criminals: well, you can't hav..."Regarding criminals: well, you can't have it both ways here, either: if they are reluctant to collect interest on currency, then the interest will not serve to encourage them to hold "optimum" quantities."<br /><br />I'm not convinced that paying interest on criminals' high denomination notes is consistent with the Friedman rule. The government's marginal cost of producing $100s and €500s isn't zero--each additional note facilitates tax evasion and increases the government's costs of law enforcement. I like the idea of limiting interest to small denomination notes. Put differently, the Friedman rule shouldn't be universally applied to cash-in-general but calibrated for each unique note denomination.<br /><br />"But then, I think that rule, as usually understood, a bad guide. The CB should pay IOR at a competitive rate, after deducting its (ideally minimal) operating expenses, perhaps including ordinary dividends."<br /><br />I think what your saying (but I could be wrong) is that the Friedman rule is wrong because it implies that the costs of running the currency apparatus is zero, when in actuality the cost is greater than zero. If so, I'd agree with that. <br /><br /><br />JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2910052778825486312018-01-26T15:37:06.470-05:002018-01-26T15:37:06.470-05:00The current technocratic version of central bankin...The current technocratic version of central banking defers all social insurance to central government but goes a long way toward insuring central government makes it budget. Mainly because this debate is an old one, the consensus view is provide accommodation to government, let it differentiate the social issues.<br /><br />The big paradox is that the new tech actually allows a much greater degree of differentiation of the various social insurance programs. We can make money more neutral, lower its cost, and allow it to be competitive. In that case, all the social insurance programs are much more accurate in targeting their clients, social insurance programs have independent access to fair banking, directly keeping themselves optimum and deferring their relative priority back to the legislature. Keep the old consensus, just drive its efficiency as far as we can.Matt Younghttps://www.blogger.com/profile/08404998406161097199noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42823405198666013262018-01-26T14:32:49.594-05:002018-01-26T14:32:49.594-05:00OK, I get it. You want cash users to earn interest...OK, I get it. You want cash users to earn interest on cash held, not pay. Why? <br /><br />"Cash is often the only means for the poor, new immigrants, and unbanked to participate in the economy. So the tax falls on those who can least afford it."<br /><br />All that security needed is a cost, it is part of banking. We currently charge these folks about 1.5%, typically for cash. If we want to reduce the cost of cash, then make more of it, what happened to free market, remember chapter 1 of Econ 101?.Matt Younghttps://www.blogger.com/profile/08404998406161097199noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-65432968578325226192018-01-26T14:06:50.266-05:002018-01-26T14:06:50.266-05:00Just that we now have many methods to charge a cas...Just that we now have many methods to charge a cash use fee. There seems to be no restriction except selecting a mechanism. That is the goal? Maintain the bearer cash concept otherwise the fiat system won't work with the new tech, the new tech is offering bearer cash.Matt Younghttps://www.blogger.com/profile/08404998406161097199noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62250779108945870062018-01-26T08:51:30.904-05:002018-01-26T08:51:30.904-05:00Of course one can try to compromise as you suggest...Of course one can try to compromise as you suggest. But banning certain denominations will cause people to sub, into interest-yielding ones, adding a new distortion. <br /><br />Regarding criminals: well, you can't have it both ways here, either: if they are reluctant to collect interest on currency, then the interest will not serve to encourage them to hold "optimum" quantities.<br /><br />Of course, my own ideal--leaving currency provision to the private sector--might also leave central banks without means for covering their expenses if they abided by the Friedman rule. But then, I think that rule, as usually understood, a bad guide. The CB should pay IOR at a competitive rate, after deducting its (ideally minimal) operating expenses, perhaps including ordinary dividends. Under this scheme the Treasury would still get diddly, which is as it ought to be: consumers' surplus trumps producers' surplus.George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27392283827211396952018-01-25T22:29:16.081-05:002018-01-25T22:29:16.081-05:00George, great points. I agree that the existence o...George, great points. I agree that the existence of 0% yielding cash is what buys central banks their independence. That's one reason I think the Riksbank is <a href="https://jpkoning.blogspot.ca/2017/12/electronic-money-will-only-save-central.html" rel="nofollow">trembling with fear right now</a>. <br /><br />Is a more democratic, less technocratic central bank really so bad, though? <br /><br />"In short, one can have one's interest-on-all B based Friedman rule, or have the Fed retain its current degree of independence (while meeting its mandate), but you probably can't easily have both."<br /><br />You say you can't easily have both. Ok. But what about the idea I mentioned in the post of offering interest on just low denomination bills? That allows the central bank to continue collecting seigniorage on high denominations, thus preserving independence, but implements the Friedman rule on notes that regular people are more likely to use.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-11273667530849093982018-01-25T22:09:59.615-05:002018-01-25T22:09:59.615-05:00Interesting. Not sure what it has to do with my po...Interesting. Not sure what it has to do with my post, though.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-49050070911402250602018-01-25T19:18:00.308-05:002018-01-25T19:18:00.308-05:00Sorry, for "both bank reserves and deposits&q...Sorry, for "both bank reserves and deposits" read "both bank reserves and currency."George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-11870166608162923942018-01-25T19:17:07.445-05:002018-01-25T19:17:07.445-05:00JP, you might want to remark upon the implications...JP, you might want to remark upon the implications of a strict, conventional Friedman rule based on interest payments on both bank reserves an deposits, under which the rate on M0 must equal the rate on short-term Treasuries. In that regime, setting aside GSEs, the Treasury balance, and long-maturity securities, the Fed's portfolio earnings all go to pay interest--there is not even an allowance for Fed operating expenses, let alone dividends and remittances to the Treasury. So the Fed cannot manage without a Treasury appropriation, which has big potential implications for its independence. Holding long-maturity assets, and a bigger balance sheet of such, assuming a normal yield curve, only gains net income at the expense of greater risk of loss, so no real gain. Inflation is another way out--but not one consistent with the Fed's mandate. In short, one can have one's interest-on-all B based Friedman rule, or have the Fed retain its current degree of independence (while meeting its mandate), but you probably can't easily have both. George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53779119813298595872018-01-25T15:29:08.773-05:002018-01-25T15:29:08.773-05:00The Post Office sells 'cash' stamps from ...The Post Office sells 'cash' stamps from a machine one can buy. Each time the customer needs some stamps, they turn the crank and charges are applied automatically. The Post Office has to hold some pre-printed stamps in inventory when issuing fee based stamp allocation so as not deviate from planned delivery capacity.<br /><br />Then there are ATM machines which charge a fee. The ATM banks allocate the fee based schedule to match the typical consumer who ends up paying a typical monthly fee for the typical quantity of cash.<br /><br />So, this leads to the idea that if everyone can have an honest ATM machine in their chip card. If everyone had the intelligent ATM machine then all the congestion problems go away because all queues can be balance with congestion fee. <br /><br />Interest charges always set so as to avoid money congestion, as long as you do not introduce time. The digital bearer cash concept allows all of the monetary network to be congestion managed.Matt Younghttps://www.blogger.com/profile/08404998406161097199noreply@blogger.com