Q: Over the last few years we have seen central banks undertake unorthodox monetary policy to combat economic weakness in the developed world. Why do you feel it is now the time to start looking seriously at the idea of electronic money replacing paper money?
A: There has actually been quite a bit of discussion in this area that has been spread out over the past four years. Some of the concepts can even be traced back to [Silvio] Gesell, who died in 1930. What he was proposing was that the money was not good unless it had a tax stamp on it for every year since it was issued.
In more recent times I have to give a lot of credit to journalists such as Slate’s Matthew Yglesias who has done a good job of pushing these ideas forward.
One thing I have decided is that the details matter because people won’t take the idea seriously if it does not seem reasonably convenient. The more convenient you can make the set up, the more likely it is to happen.
I do not think people ever took Gesell very seriously, other than economists. It never got any traction in policy. Of course it may be that none of this stuff ever gains any traction in policy circles but then the world is in a pretty bad shape these days so there is some chance.
Q: One of the reasons you advocate electronic money is that central banks could set negative interest rates during a downturn. What impact could this have on the wider economy?
A: First of all, we have seen negative real interest rates before in the 1970s and so nothing really strange should happened. Lots of long-life assets would gain in value but that kind of thing tends to stimulate the economy.
The good thing about negative nominal interest rates is that they force a decoupling between expected payment and the nominal rate. When an institution lends someone money they are going to want at least the full value to be repaid, even if the nominal interest rate is below zero.
You will have to worry about asset bubbles, however. There is no question that with low real interest rates and negative nominal interest rates you are going to have to be ready to restrain bubbles. Yet I think we can do that through regulation.
I think the argument that the Fed kept rates too low in 2003 and caused the bubble has been overblown. As Ben Bernanke said, it is more likely that foreign capital flows were responsible for keeping rates low and the Fed was only a minor contributor [to the bubble].
Q: You have written: “as a society, we shouldn’t want money to be a good store of wealth over the long haul: we need people to put their wealth to work, either directly or indirectly building companies to help the economy to grow, not burying piles of paper in the sand.”
Yet you also acknowledge that paper money is psychologically significant – with some arguing that the physical ownership of money offers protection for the public against government (and monetary policymakers). How do you answer that argument?
A: The idea that people should be able to save in money is what you need to go against. It is at the very heart of the problem.
In order for people to get a good return on their money they should have to somehow put it into a flow that leads to really building things. The whole point of lowering interest rates around the Zero Lower Bound is that it removes ways of getting a good return without adding to the economy.
Whatever extent people might want to get a good return without doing something concrete for the economy, policymakers should resist giving them that. Once the economy starts doing better then it becomes easier to do this but under the current environment that is what you need to take away.
People are understandably going to be distressed that they are not getting a real return on their savings, but we have to get those funds to work.
Q: Could one objection be that those on lower incomes, who have limited ability to save, would be uncomfortable being forced to invest?
A: The whole point is that is should be temporary. The economy would get stimulated and then things would be better, so it is not like you have to worry about people saving for their retirements.
Most of those who are already retired in the US are getting a lot of their pension through social security, which would not go away, and overall they should be better off from the economy recovering quicker. They would indeed get lower returns for a year and half or so, but over a little bit longer term they should get better returns.
That said, there is no question that people will be able to demagogue over this issue fairly easily. What gives me hope that something like this could happen is that there are a lot of countries in the world and any one of them could do it. You just need one to get the ball rolling.
Q: Do you think that the Federal Reserve continuing with its Quantitative Easing programme has been the correct decision or should central bankers have been bolder in their policy choices?
A: I do not think there are a lot of problems with quantitative easing and given the current institutional structures it is exactly what the Fed should be doing. But the one serious downside to the policy is that it does involve the Fed buying high and selling low, so it is likely to lose money.
The mortgage-backed securities are better because on the one hand you have the general equilibrium effect because of making the assets more valuable as you stimulate the economy. With long-term treasury bonds, however, you really are going to buy high and sell low. If not then you are not having the effect on the economy that you need to.
Bernanke has done an amazing job of doing things differently than they have been done before. Electronic money may be too far from him, however, and would require an act of Congress.
Q: Could electronic money actually facilitate greater tax evasion and fraudulent practices by making it easier to transfer money overseas?
A: I am not really worried about that. The fight against terrorism has made countries clamp down a lot on bank secrecy and it is a lot weaker than it was a few years ago.
We put a lot of squeeze on terrorists through tracking their finances and as a consequence bank secrecy has been eroded. The fact that you are hearing about all of these offshore accounts these days is a good sign.
Inherently electronic transfers can be tracked as long as the government gets the subpoena rights it would ask for (although that is in itself a very contentious issue). Paper currency, however, is much harder to physically track.
Miles Kimball is professor of economics and survey research at the University of Michigan