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The Curse Of The Cash Stewards

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As I was finishing up Kenneth Rogoff’s new book, The Curse of Cash, I came across a little dustup between Rogoff and Jim Grant, the editor of Grant’s Interest Rate Observer. Grant disagrees with much of what’s in Rogoff’s book, and he let everyone know about it…in the Wall Street Journal.

Rogoff, for his part, feels that Grant’s review is “long on ad hominem and short on logic, and contains both simple errors as well as profound misconceptions.”

While Jim doesn’t need me (or anyone else) to defend him, I definitely don’t agree with Rogoff’s characterization. But I encourage you to read both pieces, and the book, to form your own opinion. (Be sure to read the comments on Rogoff’s blog post, too).

My siding with Grant won’t surprise anyone familiar with my recent article in the Cayman Financial Review. That piece, inspired by a 2014 Rogoff paper, made essentially the same point as Grant. One of my main points was:

The anti-cash crusaders offer various reasons for banning cash, but they all share a common distrust of free markets and a desire to give bureaucrats more control over people.

Jim Grant’s Wall Street Journal review concludes with:

Strip away the technical pretense and what you have is politics. The author wants the government to control your money. It’s as simple as that.

I’d say we agree. And now that I’ve finished reading Rogoff’s book, I stand even more firmly behind what I wrote. From a policy perspective, the book’s arguments are even less compelling than those put forth in Rogoff’s paper.

I don’t even like the title of the book. Cash isn’t cursed. The curse is on the people who ruined – and would continue to ruin – paper currency.

The frustrating thing is that Rogoff is familiar with the destructive monetary history of governments, but he still wants more government control over money. (Even though, in his words, government-issued currency survives partly because of governments’ “coercive power.”)

He even runs through a brief history of China’s debasement of paper currency prior to the 1500s, when “its leaders could not resist the temptation to rely excessively on printing to pay its finances, eventually debasing the currency and causing rampant inflation.”

He knows that governments routinely debased coins. On page 19 of his book, Rogoff writes “Although counterfeiting has been a constant concern everywhere, the biggest threat to the value of the currency is often the government itself.”

On the very next page, Rogoff includes a table titled “Selected peak debasement years for European coinage, 1300-1812.” He notes that the table “should dispel any notion that commodity currencies are safe.”

It’s hard to disagree with any of these points.

Rogoff also attacks the favorite piñata of conventional macro economists: the gold standard.

Just as with the other debasement episodes, his method of analysis for the gold standard is best described as: acknowledge what happened, then ignore what happened.

According to Rogoff,

with the outbreak of the Great War in 1914, the overwhelming financial priority for every government was to fund the war effort. One after another, they abandoned currency convertibility so that the printing press could be used to finance massive increases in military expenditures.

He even points out that it was hard for governments to restore trust in convertibility because they had “so thoroughly broken” it during WWI. After going through the specific U.S. debasement episodes, right up through the 1970s, he quips, “So much for the Fed’s mandate to achieve price stability.”

But after all of that, he lays the blame for destroying currency with the gold standard itself instead of the people that were supposed to maintain it. The problem after the war, as Rogoff sees it, wasn’t that these government officials screwed up the gold standard; it was that they tried to fix the mistake by going back on it.

That’s an incredibly twisted use of logic for someone who just ticked off a long list of how governments have consistently screwed up everything by debasing money.

Rogoff’s policy prescription is thus equally inexplicable: to give the government iron clad authority to debase money by charging people to store it (negative interest rates).

In Rogoff’s ideal (cash-free) world, people would not be able to escape a government-imposed fee on their idle money balances. In other words, people would have no alternative to electronic accounts, and have no way to stop the government from taking their money when, for example, the Fed declared a macroeconomic emergency.

From what I can tell, Rogoff earnestly believes in the power of macroeconomic stabilization policies. He therefore thinks that this negative interest rate authority is a valuable tool, albeit one the Fed should use only in times of severe recession or depression.

This is where we radically part ways.

I have no faith in these policy tools, especially in the spirit of what Rogoff envisions, to produce the economic outcomes he seems to think they can achieve. For instance, in his blog post, Rogoff writes:

Moreover, if the Fed could engage in effective monetary policy in a deep recession, most savers will gain far more than they will lose. It would bring back jobs more quickly, restore house and stock prices faster, and it would actually raise nominal rates on long-term bonds through restoring expected inflation to target. Negative rate policy would not just lower short-term rates, it would tilt long term rates up by raising inflation to target, a problem that has paralyzed Japan.

So, according to Rogoff, all we have to do is outlaw cash and, when the government decides people need to spend more on consumer goods, threaten to tax them to death (electronically) if they don’t spend their money. If only we had known this back in 2008!

Of course, interest rates weren’t really close to zero, but the mere threat of negative interest rate policy would have been a powerful tool. After all, effective monetary policy is about managing people’s expectations.

Just to be safe, though, we probably would have wanted to come up with something else. Given that a financial crisis started the whole mess, we could have created something called the Troubled Asset Relief Program, and authorized the Treasury Secretary to buy – oh, I don’t know – $700 billion in assets from financial firms.

For good measure, we could have thrown another $188 billion at Fannie Mae and Freddie Mac, the two giant housing finance firms.

Naturally, we wouldn’t want to risk everything on such a nonstandard approach, so we would have wanted to rely on good old-fashioned fiscal stimulus policies too. Maybe we could have gone with something like a $150 billion spending plan (with $40 billion in direct spending), and called it the Economic Stimulus Act of 2008. It would have been a real “booster shot” for the American economy.

Then, just to make sure things really got moving, we could have followed the 2008 package with another $800 billion fiscal stimulus in 2009. We could have called the new one the American Recovery and Reinvestment Act.

And every good macro economists knows that if you coordinate fiscal and monetary policy, so that they’re not working at cross-purposes, they’ll be even more effective.

So the Fed could have slashed its target federal funds rate.

It was up around 5% in September of 2008, so they could have taken it down to, say, 1% in maybe one year or so. For good measure, the Fed could have started some sort of super aggressive asset buying policy (maybe call it “quantitative easing” and spread three successive rounds out over several years) to take its balance sheet up from $870 billion to around $4.5 trillion.

The Fed could even have used its emergency lending authority to loan something like $16 trillion through broad-based emergency programs. Just to be super safe, we could have let the FDIC start a debt guarantee program, where the taxpayers stood behind another $345 billion in privately issued debt.

Surely that would have been the way to conduct effective monetary and fiscal policy. Jobs would have come back quickly, home prices would have skyrocketed, and nominal interest rates would have gone right up.

Yep, one has to wonder what the world would be like today if only macroeconomic theory had been more advanced back in 2008.

Norbert J. Michel is a research fellow specializing in financial regulation for The Heritage Foundation’s Thomas A. Roe Institute for Economic Policy Studies.