Last month Sweden’s central bank lowered its bank lending rate. From -0.35% to -0.50%. The Eurozone and Japan are also in negative territory. Swiss rates have been below -0.50% for a while. It turns out that banks will pay central banks a percentage fee for holding their electronic cash. As I understand it, storing physical cash is expensive. It’s not so expensive that the market would support rates of -3.0% (my WAG), but apparently -0.50% is ok.
The US’s Federal Reserve won’t rule out such a policy, but doesn’t plan on it either. Legalities have to be sorted out. Also we’re in recovery.
Naturally, low rates get passed on to consumers: I understand that Swiss banks pay negative rates, but I am not sure. In the US those with lowish balances pay monthly fees on zero interest rate checking accounts, so there’s nothing stopping them from charging per dollar deposited AFAIK.
I say the central banks are grasping at straws. It’s time to stop the Chinese water torture and plan a helicopter drop. As a joke, that means dropping cash out of helicopters. As a not-joke it means increasing the money supply by simply writing a check out to every citizen. And keep writing checks until you hit some sort of benchmark such as -yes- 3% core inflation. Call it a tax cut if that floats your boat. Issue new bonds and have the central bank purchase them.
The US had inflation higher than 3% prior to 1997 and there were no complaints. From 1985-1991 core inflation fluctuated in the 4-6% range, and there were… very few complaints. Under Nixon, core inflation hit 7% in 1970 and double digits after 1974. It didn’t come under control until Carter appointed Paul Volcker to head the Federal Reserve in October 1979. I’m not calling for a return to double digits. Again: 3%. Because enough is enough: it’s time to stop screwing around. Also, if you have an infrastructure deficit, spend money on that. Core inflation chart: https://research.stlouisfed.org/fred2/series/CORESTICKM159SFRBATL
What if they overshoot? What if they hit 5% or 6% core inflation? Well, so what? Central banks know how to get inflation down. Raise overnight interest rates so that they are 2-3% above the inflation rate. That can involve recession if they do it too rapidly. But the worst case scenarios are superior to another lost decade. And I don’t think they have to happen anyway.
This will require legislative action and coordination across branches of government. I call upon world leaders of the developed world to put down their donuts and start making phone calls. Also, ignore the views of inflation hysterics with awful track records. I call upon the world’s citizenry to point and laugh at them, starting with this message board (in a GD-worthy manner of course). It’s for the good of the world.
Addenda: Here’s a somewhat longer core inflation series. It’s a little different than the CPI which appears in the papers. Scroll down: under units choose “Percent change from a year ago.”
Or look here:
European Central Bank tries to revive European economy: