“If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates,” he said.
“That may require a rethink, a fairly fundamental one, of a number of current central bank practices….Without the ability to (set negative rates) on currency, there is an incentive to switch to currency whenever interest rates on reserves turn negative.”
How this dilemma plays out in Japan is interesting because it is harder for corporates to hold large amounts of hard currency than individuals and it is the corporates, not the household sector, hoarding cash in Japan. So maybe the Jedi trick might work.
Haldane noted in the 90s typical global, long term interest rates were around 6 per cent – 4 per cent rates and 2 per cent inflation – leaving plenty of room to move during a cycle. While inflation is still around 2 per cent globally, rates are near enough to zero, leaving much less policy room.
Haldane broke down the 4.5 percentage point fall in rates since the 90s into lower trend growth (100 basis points); worsening demographic trends (90 basis points); low investment rates due to the falling price of capital goods (50 basis points); rising inequality (45 basis points); and savings gluts in emerging markets (25 basis points).
“These factors are not will-of-the-wisp,” he said. “None is likely to reverse quickly. That being so, lower levels of global real rates may persist at levels well below their long-term average. And if so, central banks may find themselves bumping up against the ZLB constraint on a recurrent basis.”
This is where the hard currency constraint comes in. There are a number of undesirable elements for central banks and governments in the world shifting back into hard currencies. One is that monetary stimulus doesn't work so well. Another is the black economy of illicit funds, organised crime and tax evasion still relies on cash – at least for the moment.
Haldane reviewed a number of measures which can be taken to tax or penalise hard cash, from stamp duties to built-in discounts to, intriguingly, new technologies like cyber currencies and the blockchain distributed ledgers behind them.
“Perhaps central bank money is ripe for its own great technological leap forward, prompted by the pressing demands of the ZLB?” he mused.
For Japan, the challenge is manifold. In an essay Japan is sinking in a sea of money, Masanaga Kumakura of Komazawa University argued not only is the BOJ policy wrong, even if it is right, the central bank risks having one of its key confidence tricks exposed: “for the central bank to control inflation, it must be able to control the quantity of money. In the context of the BOJ's ongoing policy, this means disposing of a massive number of Japanese government bonds in a fairly short period of time”.
But to do so, according to Kumakura, investors must be convinced of the BOJ's infallibility, its solvency “otherwise private investors refuse to buy back government bonds, triggering a sovereign debt crisis”.
Kumakura is one of a large band of economists who believe Japan, because of ballooning debt and social security payments for the ageing population, is heading towards insolvency.
And we know from Watto in Star Wars Episode 1: The Phantom Menace, Jedi mind tricks don't work on everyone.
Andrew Cornell is manging editor at BlueNotes