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2016-01-14 10:59:35
Jan 13th 2016, 15:03 by B.L. | LONDON
Economists often think that cash is to blame for the zero lower bound. Official
interest rates can't fall far below zero because, the argument goes, people
would hoard cash rather than pay to keep money in their deposit accounts. That
has led some policymakers to suggest abolishing cash. In fact, hoarding
banknotes isn't the only way for depositors to get around negative interest
rates, as a story in yesterday's Financial Times shows. People can instead
start paying bills early.
Businesses usually like early payment, and sometimes offer discounts to
encourage it. Many tax authorities, too, offer discounts to those who pay in
advance and charge interest to those who pay late. Not so in Zug, Switzerland,
where the logic of negative interest rates has turned payment behaviour
upside-down. The canton once offered a small discount to people who paid their
tax bills early. Now, early payment is unwelcome, as it means the canton must
pay a charge for holding the cash. To reduce the number of early payments, the
canton has abolished the discount. It has even stopped charging interest on
overdue tax bills.
Zug's behaviour shows that there is more than one way to avoid negative
interest rates. Holding cheques without depositing them has the same effect as
pre-paying bills and taxes. Hoarding train tickets, vouchers or gift cards
works too. Paul Donovan, an economist at UBS, argues that companies are
stocking up on inventories and lending money to their customers in order to
avoid holding bank deposits. As long as it does not depreciate, holding surplus
inventory makes sense when interest rates turn negative. In fact, holding more
or less anything that has a fixed price is beneficial though one downside to
such a strategy is that these items, unlike bank deposits, do not benefit from
a government guarantee.
These examples show that it isn't just the existence of cash which generates
the zero lower bound. There are numerous ways in which bank depositors could
push the cost of negative rates off onto others. It is true that, in time, some
of these loopholes could be closed. More suppliers could start charging for
early payment, and the issuers of gift cards, train tickets and other
pseudo-currencies could incorporate an interest rate into their pricing. But as
John Cochrane, a professor at the University of Chicago, notes, our legal and
financial system "deeply enshrine the right to pay early." Getting rid of these
loopholes might be every bit as difficult as getting rid of cash.