Monday, April 6, 2009

On negative interest rate.

Havard "new" old ideas of negative interest rate came out. (Hat tip to Dan Wright.)

Here is my thoughts: I see no difference between negative interest/tax on cash holding and a positive inflation rate. If anyone starts to make cash holding worth less, people will convert their cash into gold/other assets that are better in preserve value which will lead to, well, inflation. The ultimate question is how much inflation will the Fed tolerate at this time. Playing with inflation expectation is a dangerous game since central banks usually spend a lot of effort to anchor inflation. Will the Fed release the beast out of its cage? Will Paul Volker agree with that?

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