Qui bono?

SODERMALM, STOCKHOLM – It’s all so damned… banal.

Source: The Telegraph

Our monetary oracle has spoken. Behold his wisdom.

From The Telegraph:

A widely used digital currency could pave the way for negative interest rates by making it harder to hide cash under the mattress, the Bank of England’s chief economist has said.

Andy Haldane said that if most families use virtual money instead of notes and coins, and rates go below zero, customers would find it impossible to hoard cash rather than depositing it in a bank account where they might be charged a fee.

The Bank has repeatedly warned consumers against embracing high-risk online money such as bitcoin where values swing wildly, but is also considering developing an alternative over which it has control…

… He said: “One of the most pressing issues for monetary policymakers today is the zero (or close to zero) lower bound (ZLB) on interest rates.

“At root, the ZLB arises from a technological constraint on the ability to pay or receive interest on physical cash, whether positive or negative.

“In principle, a widely used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets.”

You have to admire the brazenness of our financial vizier. To say the act of imposing negative interest rates on UK citizens – to tax all pound sterling that exists in a bank account for the crime of existing – would have ‘significant benefits’ takes some bottle…

But to describe such an action as merely the overcoming of a “technological constraint” takes the cake.

Why wasn’t anyone in the past thousands of years trying to innovate around this problem? Why was nobody trying to breach the “technological constraint” of making money automatically self-destruct at a pre-determined rate?

Did it not cross their mind? Why did nobody think their currency should be taxed for existing? Could they not see the ‘significant benefits’ that would come with it?

Maybe it’s because past generations weren’t blessed with the likes of Haldane. That’ll be it. True visionaries don’t come often…

Nowhere in human history can negative interest rates be found until you fast forward to our happy times today. Nobody was dumb enough to try this nonsense until you reach the modern era.

The Swiss were first to try it in the 70s, when they wanted foreigners to stop buying their currency. Everyone outside Switzerland who could was buying Swiss francs because their own currencies were being inflated to hell. The franc was a cool oasis amid a blistering desert of currency devaluation, and foreign investors flocked to it for relief.

But the franc became so strongly valued as a result that the Swiss were having problems exporting anything. And so the Swiss National Bank started charging foreigners for having Swiss bank deposits to get them to stop.

It didn’t work. So they kept doing it. By the time 1978 rolled around, foreign bank deposits carried an interest rate of an incredible -40%… and it still hadn’t put anyone off Swiss francs. In nominal terms, the franc had risen by 62% in value relative to other currencies during this period of ever lower negative rates. The policy was a failure.

It was only when they decided to stop with their “innovating” that their currency finally stopped rising in value.

It’s possible to understand the Swiss approach in the 70s – their currency was being piggybacked, used as an umbrella by foreign investors, and they were just trying to shake them off.

What the Bank of England’s chief economist is suggesting however, is quite different and much more insidious – though I expect just as futile. Ultra-low interest rates make people save more – not spend more, as they’re supposed to – and I think negative rates will just push people into saving in something else altogether…

I’ve written often in this letter about the possibility of the UK going underwater with negative interest rates (We’re seven years below the waterline – 22 September). While Haldane says he doesn’t see negative rates coming imminently in that article, central bankers don’t come out in public with this stuff unless it’s on the table or they want people to believe that it is. It’s a sad state of affairs, but a negative interest environment is a future we should be prepared to weather.

Gotta love that bit about warning Brits against “embracing high-risk online money such as bitcoin” though. If you haven’t submitted your answer to yesterday’s poll yet, please do so below.

Do you think bitcoin has any value?

Just click your answer, and I’ll come back with the results here in a forthcoming issue of Capital & Conflict.

Until tomorrow,


Boaz Shoshan
Editor, Capital & Conflict

Category: Central Banks

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