Where is the federal reserve leading us?
June 19, 2003 8:58 PM   Subscribe

Monetary Policy in a Zero-Interest-Rate Economy [pdf] This report written by the Dallas Fed is amazing. Amongst other things, it outlines a plan to tax your savings as a way to continue to stimulate consumption should rates fall to zero. While opinions of the 'fed range from worship to outrage, their actions raise some serious questions. Why does this unelected group wield so much power? At what point are their actions (taxing savings) a violation of our property rights? If our economy is built on capitalism, why can we not be capitalists and embrace the opportunity presented by both boom and bust? At what point are we a command economy?
posted by H. Roark (16 comments total)
I work for the Dallas Fed. Don't worry -- we've got our collective head so far up our collective ass that nothing we say is likely to have much of an effect.
posted by LittleMissCranky at 9:04 PM on June 19, 2003

From the front page of the PDF:
"The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System."
This is just some people writing their opinions. What's the big deal?
posted by kfury at 9:45 PM on June 19, 2003

H.Roark, I hope you posted this as a joke, the document does a very good job at explaining possible (and impossible) Fed actions. You also missed the Eco 101 lesson: inflation ($US depreciation) is a tax on savings.

command economy: the Fed already controls the interest rates and the money supply, so until we are ready to accept each other's funny money, this will remain a "command economy"

At what point are we a command economy?
trust me on this (others may confirm): when you will have to use your ID card each time you buy food, just for the clerk to be sure that nobody else from your family made the purchase this week. (the scenario does not imply a "command economy", but these are the symptoms)

If you want to make fun about economists, use this paper: "Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity"
This paper examines data from U.S. federal tax returns to shed light on whether the timing of death is responsive to its tax consequences. We investigate the temporal pattern of deaths around the time of changes in the estate tax system periods when living longer, or dying sooner, could significantly affect estate tax liability. We find some evidence that there is a small death elasticity, although we cannot rule out that what we have uncovered is ex post doctoring of the reported date of death. However, the fact that we find that postponement, rather than acceleration, of death is more likely to occur suggests that this phenomenon is at last partly a real (albeit timing) response to taxation.
posted by MzB at 10:27 PM on June 19, 2003

I seemed to have missed any mention of taxing savings accounts in that report (maybe it wasn’t in the html version I read). But even so, as unpleasant as that tax would be, getting stuck in a deflationary cycle like Japan would be much worse. And Paul Krugman has been sounding the alarm lately that the American economy is taking the same steps toward the conundrum of deflation.
“When the stock bubble of the 1980's burst, Japan's economy didn't fall off a cliff. By and large the economy continued to grow, if slowly, and the nation didn't have a severe recession until 1998. But year after year, Japan underperformed, growing less than its potential. Though the Japanese government tried to stimulate the economy using the usual tools -- deficit spending, interest rate cuts -- it was never enough. By 1995 or so the economy had slid into a liquidity trap; by the late 1990's it had entered into a deflationary spiral” (krugman 5-24-03 NYT).
And since even now, years later, Japan’s economy is still in the crapper, it seems prudent for the fed to develop ways to help avert or correct the economy even when the interest rates fall to zero. Even though some gold-standard nuts or “virtue of selfishness” fans may dislike the Fed, Greenspan seems to be doing a pretty good job.
posted by spork at 10:57 PM on June 19, 2003

jeez MzB, sorry to offend you but I did not intend this to be some sort of joke - I actually found the article interesting.

There were explicit references in it to circumstances in which the fed wanted to explore alternative should 'the rules' change. I read the comment 'extreme times require extreme measures' as a window to change the rules.

Thank you for assuming I have a total lack of understanding of economics. Regardless, I am well aware that inflation is a tax. However, in a more traditional environment, a real return is possible on savings. What the article speaks to is forcing cash to be trash by actual negative returns, which is new, particularly in a deflationary environment.

As for the command economy bit, my point is that if money is a commodity like anything else, why does the fed feel it needs to have total control over it? The natural expansion and contraction of money and credit are crucial elements of a normal business cycle. What is so wrong with just letting the free market dictate the cost of money?

making fun of economists? is that the source of all this hostility in your post - you think I am making fun of you? Im not sure where this is coming from but I have no intention of discrediting economics - I would not spend a considerable portion of my life studying it if I was so intent on discrediting it.
posted by H. Roark at 11:28 PM on June 19, 2003

As a note, property tax (on land) is a tax on savings, even more so than inflation.

posted by effugas at 1:03 AM on June 20, 2003

Tax my savings? I'll close my accounts. Not that that means I'll be spending more-- I'll probably spend less (or more accuratly, zero all my debts, and stuff the rest in cans buried in the yard).
posted by Cerebus at 5:38 AM on June 20, 2003

Cerebus: if it's good enough for Tony Soprano, it's good enough for me!
posted by dash_slot- at 6:14 AM on June 20, 2003

Cerebus: I've even read methods of dealing with that situation: Expiring cash. It would be fairly hard to do with paper money. (letting certain serial numbers expire or what not), but as we move into a digital cash society, it would be very easy to do.
posted by reverendX at 7:35 AM on June 20, 2003


The point of cash is that it's permanently negotiable. In other words, we accept that there's some monetary policy that might manipulate the value of our funds, but they'll be never be zero'd out (and indeed, we really do assume if we leave bills in our mattress for sixty years, they'll still be worth something...and it turns out we actually deserve compensation sixty years hence, for slightly increasing the value of the remaining money supply for sixty years).

Now, the erosion of acceptance of cash is problematic, but unnoticed because it's only affecting those who usually have credit cards anyway (business travelers). But if cash expired, the logical thing to do would be to acquire goods with some kind of long term, semi-stable value (i.e. precious metals, art pieces, certain capital goods, etc.) The point is that, as bad as deflation can be, the ability for an outside force to simply zero out the value of your goods without an associated cost may, in a risk calculation, exceed the inefficiency of self-generation of currency (barter).

posted by effugas at 9:02 AM on June 20, 2003

H. Roark -- on just about every FPP I make there is some joker who will make personal attacks. Usually it's someone who doesn't contribute many FPPs. In any case not being an economist I learned a lot from this post thanks.
posted by stbalbach at 10:53 AM on June 20, 2003


they're talking about real cash...about stamping your cash every year, and having a fee for the stamp itself. that would be an effective "tax" on the actual note.

but you've hit the nail on the head...people would buy negotiable items like precious metals, etc., with their cash.

but isn't that the point? to get people spending it instead of hoarding?
posted by taumeson at 11:39 AM on June 20, 2003

Exactly so. Tax my cash, and I will take it out of circulation, because that's the only way I can protect it. Expire my cash, and I'm going to be buying gold instead.

I'm not going to spend in the normal sense of the term-- i.e., on consumer good, services, and consumables; I have to plan for my future. I know the current crop of 'cut and spend' politicians don't know what that means, but I do.
posted by Cerebus at 11:58 AM on June 20, 2003

Tax my cash, and I will take it out of circulation, because that's the only way I can protect it.
Maybe you would, but most of us would spend our savings if it were taxed. Indeed, that might be an effective way to combat deflation. In fact, I would submit that, during a deflationary spiral, hoarding one's money would be an immoral act because it would deepen the spiral. Hoarding your money during deflation would be like refusing to buy medicine for your sick children because it would spoil your saving plan. You gotta have common sense and flexibility.

the Fed already controls the interest rates and the money supply
The Fed controls the federal funds rate and the discount rate. It indirectly controls the prime rate. It doesn't control long-term rates, such as those for 15- and 30-year mortgages. The Fed doesn't control the yield on long-term Treasury notes. Those rates are set by the bond market. I don't know a whole lot about money supply, but I think it's inaccurate to say that the Fed "controls" money supply. Congress, the bond markets and regular everyday borrowers influence the money supply, I believe.

Why does this unelected group wield so much power?
The Fed doesn't have the power to tax savings, and it wouldn't impose a "carry fee" on money without Congressional approval. Congress is elected.

inflation ($US depreciation) is a tax on savings.
A tax is a government levy. Inflation isn't a government levy.
Would you say my savings are taxed if the value of my home rises? Would you say my savings are taxed if my income rises?

I get a little confused when people say inflation is a tax on savings, and taxes are theft, and so on. Does that mean inflation is theft? If the value of my home rises, who, then, did I steal from? If my income increases, who, then, did I steal from? Because I'm guilty of theft if inflation is a tax and taxes are theft.

It's safer to say that inflation is inflation, taxes are taxes, and theft is theft.
posted by Holden at 12:51 PM on June 20, 2003

H. Roark, I do have to apologize for not making my comment clear enough. The "inflation tax" argument was meant to add to your "tax on savings" argument; the result, however, was a disaster. *pledges not to post late in the night again*

Free market dictating the cost of money:
con: fed acts (arguably) to reduce the fluctuations in the business cycle.
pro: same interest rates for a continent create problems at a regional level, see EU.

We could eliminate both types of control (supply of money and interest rates) by using funny money. The main concern is the "local inflation", as people will issue too much currency. However, I can make the assumption that people in charge of a local currency are able to perform as well a national bank (small community, electronic transactions, good understating of local economics). Looking at inflation rates in the last 50 years worldwide, it can be seen a lognormal (or maybe two power laws = 'phase transition') distribution with a peak (mode) around 3%. Indeed, there are many cases where inflation goes over 100%, but I think there still is hope.
posted by MzB at 2:07 PM on June 20, 2003

In fact, I would submit that, during a deflationary spiral, hoarding one's money would be an immoral act because it would deepen the spiral. Hoarding your money during deflation would be like refusing to buy medicine for your sick children because it would spoil your saving plan.

But what if your child were making life miserable for millions and millions of people? Would it then, finally, be moral to throw it into the river?

Subsistence farming, kids. It's the wave of the future.
posted by kaibutsu at 12:05 AM on June 22, 2003

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