Mainstream economists have hated cash since the Great Depression because in their business cycle “theory” they assume that people quit spending and decide to hold more cash. That stoppage in spending constipates the “circular flow” model of economics they pray to and causes recessions. They don’t ask why people might prefer cash to a new Ford Focus or more stock in Apple. Many main stream economists follow the thinking of Herman Minsky who simply thought people are irrational. The behavioral school in economics assumes people are pretty much nuts. In their brains, a large group of people wake up one day and decide they need to hold more cash for no reason and all hell breaks loose. I call that the “crap happens” theory of business cycles.
Of course, the solution to that problem, in mainstream thinking, is to force people to spend their cash at the mall. So they start with reducing interest rates to ridiculously low levels, which is supposed to discourage saving and motivate spending. But what if that doesn’t work? In case you haven’t noticed it hasn’t worked in Japan, Europe or the US for the past six years.
The next step is to punish people for holding cash. One way to do that is to force negative interest rates. Rates can become negative when the inflation rate is higher than the interest rate on deposits, or banks can charge customers for depositing money. Willem Buiter, an economist for Citibank has suggested that the Fed could have fixed the latest crisis sooner if it had pushed interest rates to a negative 6%. Buiter got the idea from Harvard economist Ken Rogoff. Both have been tried in Europe for the past year.
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