More Cash and Zero Bound

In my last post I started thinking about how options other than currency enforce a zero bound. Imagine there is no more currency, and the Fed tries to impose -5% interest rates. You put in a dollar, you get out 95 cents. What other ways are there to guarantee that if you put in a dollar you get back a dollar? (In my last post, I also pointed out that in each case rules or laws could be changed, but that the magintude of the required changes was pretty big.)

 From Kenneth Garbade and Jamie McAndrews in a nice Liberty Street Economics blog post

• Certified check. Go to the bank, tell the bank to write you a $10,000 certified check. Put it in your sock drawer. (More: "Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees.")

Or, inspired by that: 

• Don't cash checks. Every 90 days, call up, say you lost the check, ask them to reissue it. 

Clumsy. But as Ken and Jamie point out, it's very easy for a company to get started that does this, and offer fixed-value accounts to clients, beating the -5% at banks. Or, even in today's super-regulated environment, maybe banks could figure out to do this. After all, the Medici figured out in the 1400s to write offsetting bills of exchange to synthesize interest.

So, the project will mean changing the rules and laws governing checks, going back hundreds of years.

An earlier post by Todd Keister:

• Money market mutual funds.

Currently money market funds promise fixed value, and pay positive interest.  They are not set up to charge negative interest, or to allow capital losses. Maybe they should -- I've argued for floating NAV -- but they don't. The Fed kept the 0.25% rate on reserves precisely so banks and money market funds didn't have to reinvent themselves in ways that allow capital losses or negative rates. 

Miles Kimball has also been writing in favor of negative nominal rates and thinking about the zero bound. One post is here.