Cash Ban Would Boost Effect of Negative Rates
Cash Ban Would Boost Effect of Negative Rates
Q&A with Joseph Gagnon

WASHINGTON—When the first news organizations and policymakers started talking about negative interest rates and a ban on cash a little more than a year ago, the general public either thought they were joking or dismissed the ideas as something completely impracticable.

Joseph Gagnon, a senior fellow at the Peterson Institute of International Economics, thinks negative interest rates and a ban on cash are just an extension of unconventional monetary policy. The Epoch Times spoke to the former associate director at the U.S. Federal Reserve Board about quantitative easing, helicopter money, and negative interest rates.

Epoch Times: How well do you think quantitative easing worked?

Joseph Gagnon: Quantitative easing (QE) has worked better than people think. It’s all new. I think the Fed and other central banks have been slow to use these new tools because they are so new. If you step back and look at what happened in the United States in 2009: Many conventional models about what central banks should do in 2009 said they should set the interest rate at a negative 5 percent. At the time it was thought to be impossible. Then what do you do?

The effect of QE and what had been done then was the same as an interest rate of negative 2 percent. Therefore, the recovery was slow and took longer than expected. If they had done more, they would have had a better recovery.

Joseph Gagnon (Epoch Times)
(Joseph Gagnon)

Epoch Times: What can central banks do now to get the inflation they want so badly?

Mr. Gagnon: They will try negative rates to some extent. I think it’s going to be hard to push the Fed Funds rate below negative 1. That’s going to be difficult. People can basically take out cash and put it in a vault and they get a zero return on it.

This is supporting the ban on cash rhetoric. This is a huge social debate that we should start having. One way of doing it is to ban cash. Banning cash is a social and political debate, which is going to happen increasingly. As long as we have cash, we can’t have rates of much below negative 1 percent. 

Epoch Times: What about the concept of helicopter money, printing money and giving it straight to the people, like Lord Adair Turner proposes?

Mr. Gagnon: Central banks are not legally allowed to hand out cash. But the Fed funded 75 percent of the tax cuts, revenue shortfalls, and public spending increases after 2009. We’ve done that already. Central banks and governments are effectively the same thing. The question is: Have we done enough?

The Fed has not made any promises about how long to hold the government bonds or how long it will pay interest on its reserves. Adair Turner said, “Never call in the bonds and don’t pay interest on the reserves.”

Base money is now  300 percent higher or four times larger than before 2009. If the Fed promised never to sell its bonds or pay interest on its reserves, that would be inflationary, and prices at one point would have to rise 300 percent over a span of years. It would be enormous inflation. It would be stimulative because everybody would want to spend their money before inflation eroded its value. 

But we don’t know how to calibrate that, and it will certainly raise inflation beyond a comfortable point. My fear is even if it is more potent, I don’t think we could reduce what we did by the amount needed. Even under an optimistic assumption, [Adair Turner’s] policy will require a significant burst of inflation.      

The interview has been edited for brevity and clarity. 

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