October 20, 2015

Citi Economist Says It Might Be Time to Abolish Cash

By Lorcan Roche Kelly lorcan
April 10, 2015 — 11:03 AM EDT

The world's central banks have a problem.

When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut — they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy.

In a new piece, Citi's Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates.

Fundamentally, the ELB problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction?

Cash therefore gives people an easy and effective way of avoiding negative nominal rates.

Buiter's note suggests three ways to address this problem:

1. Abolish currency.
2. Tax currency.
3. Remove the fixed exchange rate between currency and central bank reserves/deposits.

Yes, Buiter's solution to cash's ability to allow people to avoid negative deposit rates is to abolish cash altogether. (Note that he's far from being the first to float this idea. Ken Rogoff has given his endorsement to the idea as well, as have others.)

Buiter is aware that his idea may be somewhat controversial, so he goes to the effort of listing the disadvantages of abolishing cash.

1. Abolishing currency will constitute a noticeable change in many people’s lives and change often tends to be resisted.
2. Currency use remains high among the poor and some older people.  (Buiter suggests that keeping low-denomination cash in circulation — nothing larger than $5 — might solve this.)
3. Central banks and governments would lose seigniorage revenue.
4. Abolishing currency would inevitably be associated with a loss of privacy and create risks of excessive intrusion by the government.
5. Switching exclusively to electronic payments may create new security and operational risks.

Buiter dismisses each of these concerns in turn, finishing with:

In summary, we therefore conclude that the arguments against abolishing currency seem rather weak.

Click on Link:
http://www.bloomberg.com/news/articles/2015-04-10/citi-economist-says-it-might-be-time-to-abolish-cash