Earth to Planet Harvard, Earth to Planet Harvard ...

The New York Times has an article by Greg Mankiw: It May Be Time for the Fed to Go Negative.

Let’s start with the basics: What is the best way for an economy to escape a recession?

Until recently, most economists relied on monetary policy. Recessions result from an insufficient demand for goods and services — and so, the thinking goes, our central bank can remedy this deficiency by cutting interest rates. Lower interest rates encourage households and businesses to borrow and spend. More spending means more demand for goods and services, which leads to greater employment for workers to meet that demand.

The problem today, it seems, is that the Federal Reserve has done just about as much interest rate cutting as it can. Its target for the federal funds rate is about zero, so it has turned to other tools, such as buying longer-term debt securities, to get the economy going again. But the efficacy of those tools is uncertain, and there are risks associated with them.

The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less.

Unless, that is, we figure out a way to make holding money less attractive.

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Or they could just move their money into commodities or gold or a foreign currency.

Did that thought occur to you, Professor?

The reason that zero is the lower bound for interest rates is because you can always hold "stuff" - non-perishables ideally, but even "suitable" perishables.

People in Romania hoarded cars during the post-communist regime because a depreciating car "appreciated" faster than inflation.

It's the same reason that the Chinese and Indians hoard land and gold. Completely non-productive land and completely non-productive gold - a totally asinine thing in any economic paradigm actually.

So you could just hold gold. Or silver. Or even a foreign currency that didn't have such an asinine policy.

If they outlaw holding gold, you can hold copper, or toilet paper. It simply doesn't matter as long as it is suitably non-perishable.

And then you go out and borrow with the rest of society at that negative rate, and stick it in more gold or more copper.

Isn't this freakin' obvious? Do you have to be a Warren Buffett to grasp this basic point?

And this man is a Professor at Harvard? Jeebus! No wonder we're screwed.