Friday, May 21, 2004

More on The Future of Money

I've posted before on Bernard Lietaer's advocacy of negative interest rates, cited by George Monbiot as one of the major sources for the economic analysis behind "The Age of Consent".

The Fed research recommending negative interest rates is this paper published in 2001 by Richmond Fed economist Marvin Goodfriend.

I'd say this is the most totalitarian piece of economic analysis I've ever read. In it, Goodfriend proposes tracking the use of dollar bills, perhaps through embedded microchips, in order to minimise the "hoarding" of cash i.e. to encourage, none too gently, the population to spend their cash rather than save it. My reaction to this would be to hold cash balances in some form in a nice and stable currency like Mexican Pesos instead.

The rationale wasn't in order to limit transactions, although the proposal would in all likelihood effectively eliminate financial privacy for anyone paying with cash. Instead, the emphasis seems to be on pushing real interest rates into negative territory in order to escape a liquidity trap, that is the point at which monetary policy becomes ineffective because the central bank rates are already at or near zero, that Paul Krugman and others have suggested Japan is suffering at the moment.

However, this still isn't the same as the permanent state of negative interest rates that Lietaer is proposing.

If you’re suffering from severe insomnia anytime soon, and fancy figuring out how the warped minds of economists work, you might like to read a short survey on selecting appropriate discount rates, which apparently describes the interest rate methodology used for discounting in the IPCC reports.

Nobody as far as I can tell wants to use Lietaer’s approach of discounting at negative rates. In fact the authors say (note 6, page, 9)

The other authors would agree, we believe, that if per capita consumption were expected to decline rather than increase over time, one could justify a zero or even negative discount rate. Since all of modern experience is with gradually increasing per capita consumption, however, the most reasonable assumption seems to be that future generations will be better off than the present generation. This forms a rationale for a positive discount rate, incidentally, even if we are unwilling to discount because we feel a greater affinity for generations nearer to ours than for those far removed in time.
The Copenhagen Consensus papers on global warming seemed to focus on this issue of how high a positive interest rate should be for valuing future costs and benefits. I was surprised to read the objections to using a low rate with no time preference, chosen arbitrarily rather than through the use of a financial asset. I'll be interested to see the response of William Nordhaus, who Krugman characterises as a strong environmentalist, to the reports of the CC.

Having dipped into it a few times, I would probably be on for reading the entire Third Assessment Report, if only to practise my speed reading. It might be a good idea to do this as part of an apocalypse event.

To sum up, it doesn't look like Lietaer and Monbiot have a case.

Peter 笔德