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IMF: Cash & E-Money

Hi Cullen,

Do you find it feasible for a dual system: Cash & e-Money to facilitate negative interest rates to soften recessions? (report below)

Also, is it correct to view negative interest rates as having a similar effect as inflation? To me, negative rates devalue your cash, as does inflation. Since technology is driving down inflation, Central Banks want to force Inflation upon our cash by implementing negative rates.

Cashing In: How to Make Negative Interest Rates Work

They seem to misunderstand the basic tenet of lending. Making rates negative will not necessarily increase lending because lending is not controlled from the supply side. So, you have a bank that is being charged a negative rate by the Central Bank and the bank then has to offset this cost by trying to make it up in other ways. So, they might try to lend more, but they’ll need to raise their other costs. Negative rates are just a tax on banks that they need to pass on. So I don’t see why there’s this infatuation with negative rates.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche


On this you seem to be making up new math, or at least new economics.   If "negative rates are just a tax on banks" then positive rates have to be a negative tax for banks (you can find the underlying mathematics on many sites for teaching negative numbers to primary school students).   This is a mathematical fact.    You are arguing that negative rates from the central bank are a cost to banks: "you have a bank that is being charged a negative rate by the Central Bank and the bank then has to offset this cost by trying to make it up in other ways".  By your logic and basic mathematics a positive rate is then a negative cost to the bank, i.e. a gain.  Or are you saying that -1 = 1?

In fact it is easy to prove that negative rates are not a cost to the bank but a gain using the limiting case of a single bank and a Central Bank imposed reserve requirement.  When the single bank increases it's balance sheet by issuing new loans net it must increase its reserves.  The central bank is charging a negative rate on reserves.   The bank and the CB likely would do this through a repo facility (but could do it at the discount window).  The mathematics of the repo transaction are that the bank pledges a security in exchange for reserves and then receives the security back by exchanging a smaller amount of reserves than it received (the negative interest rate).   The mathematics are that the bank now has both the security and the small differential in reserves.   The net effect is the asset side of the banks balance sheet has been increased with no change to the liability side.  In the world of math used in math and science this increase to the bank is a positive number and in the world of business I'm familiar with this is a business gain to the bank.

Please explain how, given the facts above, the negative rate is a cost to the bank, and also given all known mathematics,  if a negative rate is a cost then a positive rate must be a gain, which makes classic monetary policy exactly the opposite of how it is practiced.






A positive rate is a negative tax for banks. Interest on Reserves is literally an interest rate paid for holding reserves. It is + net income for the banks. A negative rate on reserves would be a tax on bank assets. This is very basic banking.

Perhaps consider this source if you'd like. That source happens to be the St Louis Federal Reserve which EXPLICITLY calls negative rates a tax on banks.


And please, don't ever write such a condescending comment on this website ever again. I will have zero patience for it next time. Thanks.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche


Pointing out obvious logical flaws is in the world I have lived in (Physical Chemistry) is not condescending but required.  Every time you write a paper or give a talk you expect to be challenged.  All of the highest level physical sciences operate in this manner.   I asked you to explain the apparent logical contradictions in your thinking and you got upset, but failed to address the logic.

The fact is arguing that negative rates are a tax on banks is, most of the time, wrong.  The fact is if you argue that negative rates are a detriment to lending then you have to argue that high rates are a benefit to lending.  If true, then monetary policy throughout modern history has been upside down.

The linked article is a bit of an embarrassment for the Fed.  Yes, negative rates for IOR are a cost (a tax).  But you have to acquire reserves.  The cost (ignoring transaction costs) is the difference between the two rates.  It's a "tax" if the cost of acquiring reserves is higher than the IOR.  Negative rates by themselves mean nothing.

If you follow the logic of the article then high positive rates are stimulative (since negative rates are a tax).    This is true in the lack of logic in the article where the IOR dominates and there is no cost of acquiring reserves.   But in the real world this is not true.

As you like to state there is always a counter party.   Even when Cbanks pay IOR there is a market for acquiring reserves balanced against this.  Negative rates in reality mean nothing.  It is the competition between asset classes that result in prices. It's always the relative prices that matter.  Our ability to impose negative rates across a broad range of assets is imperfect.  But eventually the math will win out and negative rates will be common.



No one is "upset" about being challenged. You wrote an unnecessarily churlish comment and it included some rather basic misunderstandings of banking.

If you want to have a mature discussion about this topic then start a new topic and try again with a more constructive attitude.




"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche