I’ve read a little article in a German newspaper today about Ken Rogoff’s new book and his central ideas. Let’s have a quick wrap-up.
His idea that European countries, especially Germany, should grab the historic opportunity of negative Bund-yields and invest heavily in infrastructure is a no-brainer. I may add investment in childcare to make it easier for parents to combine family and work and also investment in digital infrastructure, like broadband internet connection and mobile coverage, where Germany is trailing behind our European peers. The only puzzle here is why the federal government doesn’t do it on a grand scale.
But Rogoff’s next idea is just bonkers. Low, but still positive interest rates hurt the profits of banks. At the same time, we want the banking sector to build up equity cushions in order to prevent (or just mitigate) the next banking crisis. Negative interest rates do not help at all, whether globally coordinated or not. They only destabilise the banking sector and lead to questionable ‚investments‘, especially into housing, which increases the overall risk of private defaults. A central bank can only do so much, but alone and single-handedly pulling the economy out of a low-growth equilibrium is not in the power of even the strongest central banks. Now Rogoff’s suggestion of strongly negative interest rates of minus five or six per cent globally coordinated, would only destabilise the banking sector and deepen a liquidity trap. Let the central bank do what it is supposed to do, i.e. steer the money supply and interest rates to suit the overall economy, but do not expect things from it, that cannot be delivered.
He then repeats the idea to get rid of cash, but this time with a twist: Abolish only the big denominations, i.e. 100s, 200s and 500s in the case of the Euro area, but keep the smaller ones and coins for daily use. This is something we can surely talk about because it fits the behaviour of people, at least in Germany who rarely pay big purchases in cash but use cash frequently for daily purchases like groceries. I know that the Nordics look at Germany somewhat baffled for our fondness of cash, but wait until someone hacks their beloved e-cash systems. I think that at least for small amounts, cash is convenient and here to stay. But for the bigger notes we can talk about getting rid of them (although they are the biggest source for seignorage…)