If you thought that central banking could get ridiculous, just wait. Greg Mankiw who was the chairman of Bush’s Council of Economic Advisors, wrote the following piece of nonsense in the New York Times:
Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.
This is effectively proposing that the Fed steals your money. Great policy proposal. Sounds like a bad joke to me.
Sadly, the bad jokes continue:
If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.
Gee! That sounds like the best way of stimulating the most productive sectors of the economy!
I have a feeling that Greg Mankiw also has a secret formula for turning lead into gold that he is hiding from the rest of the world.
Hat tip to Michael Shedlock.