After 4 years of accelerating monetary stimulus, the Central banks are at the edge of their potential to react. The interest rates are close to zero and trillions of government bonds are in balance sheets of FED, ECB, BoJ, BoE... But the economy is still in a very bad condition. So now some rumors appeared that FED is to further lower the interest rates. OK. Let's go to the end of this way. But after that?
The happening reality is no surprise for conservative economists that very well know that printing money is not a decision. It is another problem. As the crisis is basically a crash in the confidence in everything in economy, so any move that additionally ruins the confidence is a bad idea. Money print ruins the confidence in money, adding it to other types of distrust that exist during the crisis. And the rational decisions of people of protecting from inflation create another difficulties for the economy.
So the right decision was the simple one - no bailout plans, no stimulus, no quantitative easing or LTRO. The right decision was free market to be left to regulate everything - to punish the bad by a default and to reward the good by new cheap assets. That is the proven system that worked for millenniums. But the politicians decided something other. So we see the result. In fact - we see the lack of result.
So what is next. Interest rates are at zero and Central banks' balance sheets are already full of government bonds.
If we are to invent crazy ideas let's help the policy makers? Why not negative interests? Sounds crazy? Isn't it crazy to have 0,25% interest? Isn't it crazy for FED to become the main buyer of US debt bonds?
So why we have to discriminate the negative numbers?
Imagine a -5% interest rate from FED. For every borrowed dollar FED will pay you 5% interest. In 20 years the debt will be self-erased. This means, you can spend this money immediately without thinking of payback... :) Don't you think this will boost the consumption, creating new orders for the economy?
Imagine also a home loan that is without monthly payment. The bank will create an annuity plan for self-repayment. If the period of repayment is longer, you will have even a monthly bonus in cash to spend for anything you like... :)
And the best of all this is that nobody is the looser. FED will have no problems of paying a 5% interest to its debtors, as it can print as much money as it likes... Everyone will be happy.
So why to discriminate the negative numbers?
In fact real interest rates are already negative. With official inflation of above 2% and rates at 0-0,25%, the real interest is negative. So if the economy is OK with this rate, why not to make an official negative interest of FED :) Lets free our imagination...
I would suggest another strategic move - lets Central banks burn the bonds they hold. This will immediately erase an enormous share of government debt. From almost bankrupted the governments will become with almost no debt. There will be enough money for so much social programs... :)))
If you think this article is a joke, just look at the evolution of Central banks thinking in last years. The difference between the real market interests of 6-8% and official interests of 0% is much bigger than the difference between 0,25% and -0,25%. The next step is to reveal the inspiring power of negative interests :) And with them there is no border in going down and down. The road of negative numbers is endless... :)
July 30th 2012