If you borrowed $100 but kept it in a bank account, then you'd be losing to the negative interest rate on that sum too (and friction of having to make regular payments).

The only way to benefit is to borrow and invest that money, which is exactly what the fed wants (with the expectation that productive investments will boost economic growth).

I think the real issue is that if you're paying -5% for a loan. It's rational to invest that into something that returns -1% (and profit by 4%). This means people are incentivized to invest in unproductive resources... Which might be a bad thing in the long run.

Or borrow and keep a stack of $100 bills under your mattress to be used to pay back a smaller sum at the end of the term?

Keeping cash under mattress is risky. Why not buy gold(or precious metals)? Movement and hiding it is way easier than $100 bills and transport too is easier. Just wear it as jewellery.

That's why cash must be (gradually) banned, among other reasons. See Germany, Norway.

No need to ban cash for arbitrarily negative rates to work. Simply introduce an exchange rate between physical currency and deposits.

Simply introduce an exchange rate between the dollar and it's physical representation.

Barriers are largely people's lack of understanding of how this works and how huge the benefits would be for society.

> Maybe if you think government and society are the same thing.

No, I just think that neutral monetary policy which leads to full employment (defined as natural employment under given tax/regulatory regime) is good for society.

Also good for govt's ability to manage budget, but that's secondary.

> how huge the benefits would be for society

Maybe if you think government and society are the same thing.

But if you ban cash, you for the same reason also have to ban gold (even jewelry), collectible coins, non-perishable food, and anything else that can be bought and stored as a store of value. Good luck with all that.

Can one buy futures on Honey Buns?

http://gawker.com/5729214/honey-buns-are-the-new-prison-curr...

I don't see how that would fly in the US. Off the top, it would seem to violate at least the 1st and 4th amendments to the US Constitution.

I'd like to see an argument for that.

Argument for what?

Someone would need to propose a specific law. A law that says 'you may only contract with [insert privileged electronic currency here]" or something similar.

If the enforcement is through confiscation of other currencies it will likely violate 4th amendment protections on personal effects.

If certain contracts are banned (instead of, or in addition to, confiscation) it would violate speech protections. Exchanging money (in any form) is speech, as are your contractual dealings.

> Argument for what?

An argument as to how restricting the use of cash (or eliminating the use of cash entirely) inherently conflicts with the first or fourth amendments.

> A law that says 'you may only contract with [insert privileged electronic currency here]" or something similar.

The usual method would be more like "All damages, including -- but not limited to -- those for breach of contracts specifying payment in some other currency, shall be awarded and assessed in [privileged currency] as of the date the debt became due and payable."

> If the enforcement is through confiscation of other currencies it will likely violate 4th amendment protections on personal effects.

That's a creative argument, but, no, Fourth Amendment search and seizure protections do not prohibit confiscation of contraband.

> If certain contracts are banned (instead of, or in addition to, confiscation) it would violate speech protections.

Contracts that are contrary to public policy -- such as those whose fulfillment requires an act prohibited by law -- are generally void for that reason; this is a well-settled principal of law and is not contrary to the First Amendment. The idea that the First Amendment means any contract obligation, without restriction, is immune from prohibition is, well, silly in the extreme.

Read article I section 8.

Congress may make money, collect taxes, and do other things, yes. What is the relevance?

It gives congress the power to regulate the value of cash.

Hmm, I don't remember seeing that. Which clause are you referring to?

"To coin Money, regulate the Value thereof"

Why wouldn't you just stick it in the mattress? When the loan matures, pay off the principal and keep the rest.

The risk is people borrowing money at low rates and further pushing up asset prices. Control of interest rates is supposed to influence investment, but it's tied to leveraged asset speculation.

If you could get an interest-only mortgage at zero rates, why wouldn't you buy the largest house the lender would allow?

> The only way to benefit is to borrow and invest that money, which is exactly what the fed wants (with the expectation that productive investments will boost economic growth).

Isn't this a foolish proposition, considering the out of control speculation that occurred when interest rates dropped to near-zero? With negative rates, banks will only be rewarded further for acting recklessly.

I think the honest thing to do would be to let all of these irrational and highly-leveraged investment environments collapse so that we can have a chance of starting over with a clean slate.

No wants to be holding the bag when music stops, since that is how politicians lose their jobs.

I'm no economist, but with 0% interest rates and nonzero government bond rates banks have been able to do essentially this for years - get money for free, loan it to the government, call that a good day's work.

dodd frank and various international banking rules have limited the amount of govt bonds a bank can hold on their balance sheet.

The Fed is insolvent and is playing ponzi scheme games to kick the can down the road. When it all comes collapsing back down expect a complete overturn of the currency and of the petrodollar system.

Oh no, people aren't buying enough stuff. Let's penalize them for saving money to encourage them to buy more stuff.

What's the impact on the environment?

Excessive saving can be a problem, which the Fed is trying to address. It can be problem that can depress demand and drive down inflation to deflationary levels, which can further depress demand as people put off payments.

On the issue of penalising savers: passive savers can't expect a good risk-less return on their investment when there isn't the economic growth to support it. Savers are basically asking for a free lunch while everyone else is suffering from depressed incomes and profits when they complain about the Fed's base rate decisions penalising savers.

> Excessive saving can be a problem, which the Fed is trying to address.

And maybe trying to address in exactly the wrong way.

Let's say I'm trying to save for retirement. If, during retirement, I'm going to be able to earn 4% return, I need some amount. If I'm going to earn 0.1%, I need a lot more, so I'd better save a lot more now. And if interest rates go negative, then I have to save even more...

So this approach may not actually lead to decreased saving.

That makes some intuitive sense, but I would raise two problems for that thought experiment.

Firstly, I very much doubt you will see negative rates within consumer or retail products, or even attached to the rates seen by pension funds who usually don't sit on cash held in cash saving accounts held with the Fed.

Secondly, I would think that if I were pension fund manager or an individual saving for retirement and I somehow encountered negative rates that persisted for cash savings, I would look for other types of investments that offer higher returns, or in the case of individuals, just spend the money as going to the cinema has greater utility than getting 0% returns on your investment. You would have to pessimistically assume that there are no viable investment opportunities with returns above 0% for your thought experiment to carry some water, which seems very unlikely.

If rates or yields remain positive for retail products, what's to stop hedge funds / companies with lots of cash / banks, from investing in those same products? Yields may be positive on paper, but I would suppose that fees will hide the fact that actual returns will be negative. Set up maximum account balance limits and you restrict investment by the non-retail crowd. Then again if these products are actually making profits for the small guy, what's the seller's incentive to keep providing them?

Because you can't buy $1 billion in individual cash saving accounts; there isn't a supply of them and a bank won't sell them to you. When you have very large sums your options of what you can buy and kind of the returns you can expect change. A small investor with $10k can experience greater volatility in their returns (good and poor), and can just go ahead and buy Apple shares without the FT writing an article about it.

Also, the base rate is only really encountered directly by Banks that have accounts with central, in the case of the US, or regional central banks. A normal company and even very large non-bank firms don't typically have accounts with the central bank. For consumers and most businesses the interest rate set by the fed is more of a benchmark that ends up being used to help calculate the returns of other products.

Firstly, consumers have already seen negative rates on their deposits in Europe (Denmark?).

Second, NIRP is designed to push money from low risk vehicles to high risk vehicles, including the stock market, and further inflate the current bubble.

>Excessive saving can be a problem, which the Fed is trying to address

Is this really what is being addressed here?

It seems more likely that the fed is just pushing harder on the same string.

I didn't say they would be successful, but merely 'trying'. If you want to address demand issues or excessive savings you typically look to fiscal policy, but that is basically a non-starter for political reasons. The Fed and many other central banks such as the ECB and BOE are operating basically as the first and last defence with regards to all macro issues.

negative rates won't happen in the retail market. it's fed to banks to enforce lending (and "economic activity").

Negative rates, maybe not. 0% rates, perhaps.

as best i can logic (my abilities here are extremely limited), i'd say only a public entity would ever consider lending at 0% or lower. they receive a payoff indirectly through generated activity and tax revenue so could stand the real upfront loss. no non-crooked private party would entertain lending with no interest (i certainly wouldn't).

If you had $800 million in cash, and you could either deposit it with the central bank and be paid -0.5% interest, or invest it in say, a 12-month Apple corporate bond at 0%, what would you do? Note that attempting to hold onto the cash in a vault has real costs as well.

BofA offered 0% loans about 5-7 years ago.

Fixed APR?

I didn't think so.

Yes. They were short-term however; 18 months or less, if I recall.

It'd be better if it did.

It's a deposit rate, no? i.e. you can pay the ECB x euros now and they'll pay you 0.993x euros in a year's time.

Take a loan, convert to cash, heat your house with the cash. Rinse. Repeat.