Got a blister on your pinky? Let’s amputate your right arm.

There is a rising chorus in the economics community calling for the abolition of cash.  The argument is that cash is the cause of the zero bound problem—the fact that nominal interest rates cannot be cut (very far) below zero.  And, so it is claimed, this causes weak growth in aggregate demand.

Actually, the severe recession of 2008 had nothing to do with the zero bound, as interest rates were still above zero.  It was caused by tight money. And after 2008, Bernanke always insisted that the Fed could do more and that it simply chose not to do more.

I suppose one could argue that during 2009-15 the real problem was that the zero bound led to a need for unconventional monetary stimulus, and the major central banks are reluctant to do enough unconventional stimulus, even if in theory they could buy up the entire planet.  But in that case the solution would presumably be psychological counseling for central bankers, not abolishing cash.  Ironically, one of the few central bankers who did recently call for more aggressive monetary stimulus, Narayana Kocherlakota, has now joined the call for abolishing cash.

I believe that this is a bad idea on several different levels:

1. There is no good theoretical justification for abolishing cash.  That’s because abolition of cash is strictly dominated by an alternative policy option—a higher inflation target.  The usual argument against a higher inflation target is the so-called “shoe leather” cost of inflation, the fact that people will go to ATMs more often with high inflation, and this makes our monetary system slightly less efficient.  But this argument makes no sense if the inflation target is being raised due to a fall in the Wicksellian equilibrium real interest rate.  The whole point of a higher inflation target would be to simply keep nominal interest rates above the zero bound.  And since the nominal interest rate is the opportunity cost of holding cash, a higher inflation target would not hurt cash holders any more than they were hurt during the 1990s, when nominal interest rates were well above the zero bound.

But let’s say I am wrong and inflation hurts cash holders more than I assume.  I still say there is no justification for abolishing cash.  Try explaining this to the average America:  “We are concerned that if we raise inflation from 2% to 4%, you will have to go to ATMs slightly more often, and that will be annoying.  So our currency system would be slightly less efficient.  And so to spare you from this slightly less efficient currency system, we’ve decided to abolish all currency.  And by the way, those blisters you keep getting on your pinky finger—the doctor suggests amputating your right arm.”

2.  Now you might argue that the shoe leather cost is not in fact the major cost of inflation.  I agree, the biggest cost is the excess taxation of nominal investment income.  But the exact same argument applies there as well.  If the inflation target is increased merely to offset a fall in the equilibrium interest rate, then there will be no problem of excessive taxation of nominal investment income, at least relative to the 1990s, when most economists thought the inflation rate (2% at the time) was perfectly fine.

3.  If there is an argument for abolishing cash, it is to reduce tax evasion.  But I believe that intellectuals (who mostly live in a near cashless economy) underestimate the utility of cash.  Go to an antique show at Brimfield, Massachusetts in the summer, and you’ll see an entire economy of 5000 small time “antique” (i.e. junk) dealers, all operating in a cash intensive economy.  The poor often don’t have much access to banking facilities, and use cash for many transactions.  If you are an upper middle class professional, it’s easy to imagine operating without cash.  But for many people it is not.

4.  In a cashless economy with a ubiquitous internet, the government will know everything about you that it wants to know.  It will know where you drive your car, and what you purchase.  We will be living in a giant panopticon.

I’m not so paranoid that I think the government would actually pay attention to most of our transactions, there aren’t enough bureaucrats.  But the information will always be available, if they want to go after someone.  Fortunately, Hillary and Trump would never even think of using this information to go after their enemies.  They are not vindictive people, or so I’m told by their supporters.  But maybe in the future a “bad guy” will be elected President.

Most importantly, there are other much better solutions that are not susceptible to the zero bound problem.  Replace inflation targeting with NGDP level targeting, as distinguished monetary economists like Michael Woodford, Christina Romer, and Jeffrey Frankel have suggested.  Even some Fed officials have recently pointed to NGDP targeting as an option—it’s no longer a pie in the sky idea.  In contrast, taking away cash would be almost as controversial as taking away guns.  This country still has a strong libertarian streak, and the total confiscation of cash is not likely to occur for many decades, by which time we’ll have much better options available for the zero bound.

HT:  Stephen Kirchner



76 Responses to “Got a blister on your pinky? Let’s amputate your right arm.”

  1. Gravatar of Nick Rowe Nick Rowe
    1. September 2016 at 16:17

    Glad to see you on side with the Margaret Atwood Club for the Preservation of Currency! (Though actually Narayana Kocherlakota says on Twitter he is OK with privately issued currency, and appreciates the need for anonymity. Here’s the link to an interesting post

    I think you are right about the implications of the shoeleather cost argument. The stronger argument against raising the inflation target is that it will raise menu costs and/or the associated relative price distortions.

  2. Gravatar of Brian Donohue Brian Donohue
    1. September 2016 at 16:19

    I know you’re almost always right, because I almost always agree with you.

  3. Gravatar of Benjamin Cole Benjamin Cole
    1. September 2016 at 16:44

    I give a full-throated roar in support of this post.

    Intellectually, a cashless economy would be interesting—I think gold/silver coins would make a comeback.

  4. Gravatar of ssumner ssumner
    1. September 2016 at 16:46

    Nick, I never knew that Ms. Atwood had weighed in on this issue. Interesting.

    My views on the welfare costs of inflation is that it’s 80% excess taxation of nominal investment earnings, and 20% everything else (shoe leather, menu, etc.) Of course both the shoe leather and the excess taxation arguments correlate better with NGDP growth/nominal interest rates.

    Brian, I feel the same way about you—almost always right, even when you bash me for Trump Derangement Syndrome.

  5. Gravatar of Benjamin Cole Benjamin Cole
    1. September 2016 at 16:47

    Las Vegas would love the cashless economy. Casinos would issue chips by the billions….which would become currency….

  6. Gravatar of ssumner ssumner
    1. September 2016 at 16:59

    Ben, Big time! I should have mentioned that. Gold coins (non collectable type) would be widely used.

  7. Gravatar of Nick Rowe Nick Rowe
    1. September 2016 at 17:12

    Scott: in The Handmaid’s Tale they abolish currency, then invalidate women’s plastic. (But reading it will exacerbate your TDS!) JP Koning noted that Orwell’s 1984 still had currency, which is quite implausible. (Though it was written in the 1940’s.)

    I never really understood why investment income taxes can’t be indexed. (But whenever I speak to accountants, they seem to be stuck on the idea that a dollar is a dollar, which I think is symptomatic of the yardstick costs of inflation.)

  8. Gravatar of bill bill
    1. September 2016 at 17:20

    Before we try eliminating cash we should try the ZLB… for IOR (IOR has been above zero 95 months and counting)

  9. Gravatar of ssumner ssumner
    1. September 2016 at 17:42

    Nick, I see, I haven’t read Atwood’s novels, and I was thinking of her political advocacy.

    I do think accountants have a point, especially for portfolios that have a lot of churn. In principle, we could simply adjust the tax rate on capital to roughly offset the effect of changing the inflation rate, but of course that’s hard to get through our Congress. In better governed countries like Canada that sort of adjustment would be easier to make.

    Bill, Yes, and even a few basis points negative. But there are also far more powerful tools like level targeting.

  10. Gravatar of Philo Philo
    1. September 2016 at 18:19

    It would be fascinating to see what would happen if the U.S. government eliminated its currency. Maybe gold coins would be used (for rather large transactions; by the way, why aren’t gold coins used nowadays instead of $100 bills for criminal transactions?). Bitcoin would gain popularity. Perhaps people in America would switch to foreign currencies–Euro, pound, Canadian dollar, etc.; but it would be such a headache to quote all prices in both U.S. dollars and some other unit that I would expect privately issued U.S.-dollar currency–chips from Las Vegas casinos, or the like–to be favored. Might Travelers’ Checks have a role to play?

    Of course, as economic policy this would be stupid, but it would be entertaining and instructive.

  11. Gravatar of Benjamin Cole Benjamin Cole
    1. September 2016 at 22:23


    One ounce of Benjamin Franklins is worth $2,800 or so.

    One ounce of gold is worth $1,300 or so.

    There are E$500 euro notes, although I think they are being discontinued.

    For now paper money is worth more than its weight in gold, so I guess it makes sense to use paper money.

    Then also, paper money is easily used, but I doubt one can buy a round of drinks with a gold ingot.

    Lastly, gold can be 18 carat or 24 carat, or even gold-plated lead. One would have to assay gold for large transactions.

    I would prefer to have my $1 million in Benjamin Franklins. You know where the drop-off point is.

    My question: Okay, the word from macroeconomists is that 1/2 of US cash is offshore. As you know, the $100 BFs were redesigned a while back. You do not see the old ones anymore.

    If there were so many briefcases filled with BFs doing drug deals, what happened to that old BF cash? You mean to tell me guys went to a bank with $500k in old BFs and said, “Oh, we need new BFs”?

    There is something going on with cash in circulation, now at more than $4,500 for US resident.

  12. Gravatar of Larry Larry
    1. September 2016 at 22:34

    Get rid of pennies, nickels, 100s and 50s and we’d be better off in lots of ways. Keep the rest for small transactions.

  13. Gravatar of Ray Lopez Ray Lopez
    1. September 2016 at 22:43

    Surprised Sumner is not for abolishing cash, as it would support his monetary thesis. Ninety percent of purchases these days are with plastic, so only mobsters and traditionalists would be displeased with a cash ban. But banning cash would also expose monetarism for the fraud it is: what happens when interest rates are negative but still nobody spends? Let’s face it: this is a balance sheet recession/funk and Rogoff et al in their book “This Time is Different” point out that financial panics take about 20 years to clear. 2008 + 20 = 2028, another 12 years to go. And if Japan is any example, 20 years may be low. Blame demographics? Whatever the case, it’s not something simplistic like “money illusion” and “sticky prices”.

  14. Gravatar of Ray Lopez Ray Lopez
    1. September 2016 at 22:56

    I have a cash story: my relatives in Greece recently rather quickly went senile, unknown to us, and one died. They are wealthy and pulled their money from Greek banks from 2010 to 2013 and literally, as befitting octogenarians, put their money in ‘easy to find’ places (a sure sign of an old person), such as, under the living room table in a box (duh!, the part-time helper found that stash, and in his haste even left some personal effects behind, he must have been pressed for time), in a easy to find crawl space (I found that stash, first time I’ve handled bundled 500 Euro notes) and under the mattress (ditto, and based on bank statements the Albanian must have found more such stashes). Enough money for me to live on for the next 20 years and I was making low six figures before I semi-retired a few years go. The helper, from Albania, is also very pleased and we are his new best friends (he keeps coming around trying to find more; he does favors for us costing hundreds of euro but never asks for money anymore). Moral of the story: cash is king but not around the house. It’s dangerous. I wish my relatives had the wherewithal to had put the money in a Swiss bank. Also bad luck in that Greek banks have capital controls allowing only 420 Euro a week to be withdrawn, but these controls were only started in 2015, too late. BTW, money is short term neutral, do you know that? LOL, like preach to a choir.

  15. Gravatar of dtoh dtoh
    2. September 2016 at 04:42

    Freedom requires privacy. Privacy requires anonymity. Anonymity requires cash.

    Ergo, anyone who favors abolishing cash is an opponent of freedom.

    Also FWIW, if you think the zero bound is actually a problem, it’s simple to solve just by having the Fed charge a fee on net “withdrawals” of cash by banks from the Fed.

  16. Gravatar of Njnnja Njnnja
    2. September 2016 at 04:51

    Although I agree with your defense of cash, I think ultimately it is a losing battle. Paper cash is just a technology for money. As you point out, it is a really good technology with lots of positive characteristics.

    However, there are not many areas where the federal government does retail work (eg the Army Corps of engineers won’t repave your driveway), so the only reason they do retail paper cash is because of historical reasons and inertia. If it was easier at the beginning of paper fiat money for governments to set up checking accounts than to print bills they would have given everyone checking accounts instead.

    As you point out, nowadays many people “who matter” (i.e. coastal elites) are already post-cash, so they will not demand that the government stay in the retail “easy to store and give away, guaranteed 0% return, difficult to counterfeit” financial instrument business. And since there are lots of disadvantages to cash (from the government’s perspective), a public choice argument would say that the government is going to stop providing that service sooner or later.

    But if it goes that way, I think you will see more interest in cash substitutes such as casino chips, gift cards, gold, cryptocurrency, and Tide.

  17. Gravatar of bill bill
    2. September 2016 at 05:47

    I support level targeting 100%. I’m surprised/disappointed that the Fed hasn’t changed to a level target, though I think that’s because they don’t like its power. That for instance they’d right now be trying to push for a year of 8% inflation to make up for all their past errors – it would be embarrassing. So I see where a bureaucrat would want to avoid that sort of accountability. The weird thing with the continued payment of IOR is that it seems like a mistake from an institutional perspective as well as from a monetary policy perspective. It’s actually quite powerful – I lay most of the 75 bps drop in the 10 year T after the Dec 2015 rate hike on that hike. And if they stopped paying IOR they’d be able to start normalizing their balance sheet. In fact, they’d have to start selling assets to offset the stimulus from no more IOR. I definitely think negative IOR should be part of their toolbox too. But I will be pleasantly surprised if this timid Fed uses it soon. I’d also like to see them use tools like moving by numbers that aren’t round fractions. For instance, in Dec 2015 they could have moved IOR from 25 bps to 30 bps to observe what happened. I would have preferred the Dec 2015 move to have been to 20 bps with the goal of getting it to zero while starting to unwind the oversized balance sheet. It boggles my mind that the Fed ever started paying IOR in 2008. Actually, the move should have been negative back then, but beggars can’t be choosers. Watching the Fed for the last 9 years has been painful. I fear it will become even more painful if a political consensus forms that fiscal policy is what we need.

  18. Gravatar of JP Koning JP Koning
    2. September 2016 at 05:49

    “…excess taxation of nominal investment income.”

    Scott, can you flesh this out a bit?

  19. Gravatar of LK Beland LK Beland
    2. September 2016 at 06:32

    My understanding is that Narayana Kocherlakota’s acknowledges that cash is necessary to ensure anonymity/privacy, but that he questions the idea that government must issue it. Why not let the private sector issue cash and cash-like alternatives?

  20. Gravatar of LK Beland LK Beland
    2. September 2016 at 06:35


    U-6 seems to have stalled. It’s still at a pretty high level. Is this because of monetary tightening, or because of structural factors?

  21. Gravatar of Justin Justin
    2. September 2016 at 08:03

    “Get rid of pennies, nickels, 100s and 50s and we’d be better off in lots of ways. Keep the rest for small transactions.”

    I think this would certainly help, though I’d tweak this slightly. We have 12 denominations of currency and coin that I can think of, 10 of which are in regular use (13 and 10 counting dollar coins). I’d get rid of pennies, nickels, quarters, 2s, 20s and 100s, and eliminate the hundredth place altogether. That would take us down to 6 denominations:

    Dime = $0.1
    Half = $0.5
    Dollar = $1.0
    Five = $5.0
    Ten = $10.0
    Fifty = $50.0

    I’d also go to all coins, because coins are very durable and because it would be a lot more difficult carrying out illicit activities (at least in USD) if you had to lug around a whole briefcase full of $50 coins. However, if you wanted to carry around $150 for small transactions, you’d only need a pocketful of coins (though in fairness I suspect criminals would then use euros, bitcoins or privatized cash).

    Since we’re getting to the point that most of what is normally stored in a wallet can be stored on a smartphone, going back to coins we can easily carry around in a pocket, this might allow us to ditch the wallet at some point in the near future. Sure, you can keep some cash in your front pocket, but it seems more natural to have a couple of coins in your pocket rather than a wad of cash.

  22. Gravatar of Justin Justin
    2. September 2016 at 09:06

    I’m in favor of retaining cash for three reasons, in addition to privacy already mentioned: redundancy and for alms.

    Once all money is electronic, if anything happens (either to you or the broader system), there isn’t a fallback alternative. If you can’t access your electronic money, then you’re essentially broke for the duration. If you have $100 or $200 stashed, you can ride out the emergency, and (if its a broader disturbance) essential trade can continue. Maybe I’m just too much of a worrywart but I like the idea of having a backup.

    Secondly, as a Catholic, I use cash for almsgiving. I suppose I could transition to almsgiving only in kind or indirectly via charitable organizations, but I don’t always have the time to purchase something on behalf of someone else, and there’s something to be said about helping the people you actually meet rather than indirectly.

  23. Gravatar of Justin Justin
    2. September 2016 at 09:23

    “U-6 seems to have stalled. It’s still at a pretty high level. Is this because of monetary tightening, or because of structural factors?”

    I’m guessing primarily monetary tightening. Over the past 4 quarters, NGDP growth has slowed to +2.4%, compared with +4.1% during the prior 4 quarters, and we saw a corresponding deceleration in real growth from +3.0% to +1.2%. Payroll and employment growth have also grown relatively slowly over the past 6 months compared with the prior year (+90k/mo for employment since February vs. +237k/mo for the prior year). Very low rates, even at the long end of the curve, suggest tight money.

  24. Gravatar of bill bill
    2. September 2016 at 09:37

    I like cash. The other day I found a $20 bill next to an outdoor trash bin.

  25. Gravatar of Max Max
    2. September 2016 at 11:13

    NGDP level targeting has a similar problem – you can set the growth rate too low, and interest rates will hit zero.

    Whether targeting inflation or NGDP, I don’t think it’s desirable to frequently change the growth rate target, because for one thing, it reduces policy credibility.

    So if you want a policy that guarantees never hitting 0%, you have to live with high inflation (and high interest rates) most of the time.

  26. Gravatar of Nick Rowe Nick Rowe
    2. September 2016 at 15:51

    JP: assume a 4% real return, and 50% tax rate.

    With 0% inflation you earn 2% real after tax.

    With 2% inflation (so 6% nominal return) you earn (1-0.5)x6%=3% nominal after tax, and 3%-2%=1% real after tax

  27. Gravatar of Nick Rowe Nick Rowe
    2. September 2016 at 16:00

    Max: true. But an NGDP level target shifts the trade-off, so you have lower risk of hitting ZLB for any given average inflation rate (or lower average inflation for any given risk of hitting ZLB).


    1. The level path thing makes it an automatic stabiliser.

    2. Real GDP growth is probably positively correlated with the real natural rate of interest.

  28. Gravatar of Jerry Brown Jerry Brown
    2. September 2016 at 16:05

    I don’t know what your definition of high inflation is Max, but if the central bank was able to target a 5% NGDP growth rate and actually hit it then inflation would exceed 5% only in a recession. I think. And usually, with normal growth, it would be quite a bit less than that. I think. Scott Sumner has said that he would do a post about the different effects of different NGDP target levels eventually. And I’m sure he has done one before, but I can’t point you to it. I need to read it again for sure myself.

  29. Gravatar of Jerry Brown Jerry Brown
    2. September 2016 at 16:08

    Ahh, Max, Nick Rowe has a better handle on this subject than I do. I would disregard my comment and listen to him.

  30. Gravatar of Gary Anderson Gary Anderson
    2. September 2016 at 17:41

    It is clear that Kocherlakota is in bed, monetarily, with Larry Summers. These totalitarians are diabolical, and I thank Scott for clarifying that which I already defended him for, his position against a cashless society. He won’t thank me, but that’s ok. We live in a parallel universe, but more people are curious about MM thanks to my articles than did before I wrote them!

    I think NGDP targeting is probably inferior to helicopter money, but anything is better than negative bond rates, which are different than negative IOR. People are confused about that.

    As Scott has said, and as I have interpreted him to say, negative IOR and negative bond rates are totally different and people discuss the negative without understanding the difference leading to much confusion. Negative IOR is expansionary and negative bond rates are not so much unless the bonds are used for financing real business, and they are more used for betting in the casino of derivatives.

    Maybe Benjamin will thank me, or somebody. 🙂

    I used to write about the fallacy of the benefits of the invisible hand of self interest (when it applied to the repeal of banking regulation) and got way more abuse on Business Insider than I do from Scott. Calling me stupid is nothing compared to what I was called on BI by hundreds of libertarians. Lol.

  31. Gravatar of ssumner ssumner
    2. September 2016 at 17:46

    JP, See Nick’s reply below.

    LK, Yes, I suppose private currency might work.

    The slowdown in the decline in U6 is partly due to tight money, as commenter Justin mentioned. There is also some randomness in the data—it might well fall a bit more over the next year.

    Justin, Agree about the slowdown in NGDP.

    I might go with nickels, quarters, dollars, 5s, 20s and 100s.

    Max, You said:

    “NGDP level targeting has a similar problem – you can set the growth rate too low, and interest rates will hit zero.”

    But it’s much less of a problem with level targeting.

  32. Gravatar of Ray Lopez Ray Lopez
    3. September 2016 at 01:22

    Off-topic: how many of you have seen Ferguson’s “Inside Job” (2010)? Downloading it now, looks good, have read his book “Predator Nation”. E-CON-o-mists are mouthpieces is one theme. Seems Sumner is more or less neutral, though he does have Big Business Mercatus Center ties.

    OT: nice graphic in this week’s Economist. It shows Brazil’s GDP growth and inflation are *inverse relationships*. When inflation was low until 2013, GDP grew around 4%/yr. Then, after 2013 until now, GDP declined dramatically -4%/yr while inflation rose 8-10% a year. Stagflation. Paging Ben Cole, paging Dr. Sumner! I realize Sumner’s views are more nuanced than Cole’s but it’s a big blow to the theory “inflation is good, it creates money illusion and cures recessions” (NOT).

  33. Gravatar of H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner) H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner)
    3. September 2016 at 02:57

    Regarding inflation cost of capital income

    I buy just index futures under higher inflation circumstance (with low interest rate)

    too much I-word?

  34. Gravatar of H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner) H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner)
    3. September 2016 at 03:00

    The paper suggests inflation do not matter so much,about effective tax rate (vs nominal tax rate)

  35. Gravatar of Benjamin Cole Benjamin Cole
    3. September 2016 at 03:08


    Dude. I think 3% inflation is about right. Maybe a tad higher. The Fed claims to target 2%.

    And I am as delicate and nuu-anced as Scott Sumner.

    But for now I suited up, game-face on, ready to send in the helicopters.

  36. Gravatar of Jeff Jeff
    3. September 2016 at 03:31

    According to the Fed, money stock currency is about $1.4 trillion. To pull that out of circulation, the Treasury would have to come up with that much money from somewhere else. Assuming the Fed makes it back to 2 percent inflation, nominal short rates will eventually get back to the 4 percent range. That means the value of the seigniorage value of the existing currency stock is around $56 billion per year. Do I hear some great clamor for raising taxes by that much to pay for this?

  37. Gravatar of engineer engineer
    3. September 2016 at 03:31

    Many advocates also want to ban bitcoins, gold coins, etc (Krugman has been on a crusade against ‘evil” bitcoins).

    If it is not covered by the current bill of rights, then the next amendment to the constitution should be the following:

    “The right of the people to be perform private peer to peer commercial transactions shall not be violated”

    I would have thought that Money Laundering Control Act would have violated the 4th amendment, so I am sure that a new amendment is required.

  38. Gravatar of Negation of Ideology Negation of Ideology
    3. September 2016 at 03:32

    ” In contrast, taking away cash would be almost as controversial as taking away guns.”

    Taking away cash would be even more controversial than taking away guns. I believe so much more so that any politician who proposed it would lose in a landslide.

    Wouldn’t the excess taxation of nominal investment be eliminated by moving to a progressive consumption tax? By the way, we are already pretty close to a progressive consumption tax for anyone who puts less than the maximum in their retirement accounts.

  39. Gravatar of Thiago Ribeiro Thiago Ribeiro
    3. September 2016 at 04:02

    “I realize Sumner’s views are more nuanced than Cole’s but it’s a big blow to the theory ‘inflation is good, it creates money illusion and cures recessions” (NOT).’ It probably holds better for countries with no giant structural problems and not engulfed by political chaos.”

    It probably will get better with the new president and his Brazilian wife less than half his age (eat your heart out, Ray Lopez!).

  40. Gravatar of engineer engineer
    3. September 2016 at 04:11

    Ray, enjoyed your story about your Greek relatives (I wish I had some like that)…but I can’t help thinking that taking your money out of Greek banks sounds like the act of some very sane people…keeping it in the banks would have proven their senility…

  41. Gravatar of ssumner ssumner
    3. September 2016 at 05:15

    Ray, Yeah, that’s what I’ve been preaching over here—inflation is good!

    Jeff, At 4% interest, demand for currency would be much less than $1.4 trillion. But you have a point. They might argue they’d make it back in less tax evasion.

    Negation, You said:

    “Wouldn’t the excess taxation of nominal investment be eliminated by moving to a progressive consumption tax?”


    “By the way, we are already pretty close to a progressive consumption tax for anyone who puts less than the maximum in their retirement accounts.”

    I think the technical term for those people is “idiots”.

  42. Gravatar of Jose Romeu Jose Romeu
    3. September 2016 at 05:32

    If cash is abolished, people will find other forms of cash. Want to guess how many crypto currencies there are ? 3, 30 or 70? Check this out…

  43. Gravatar of Geoff Orwell Geoff Orwell
    3. September 2016 at 06:20

    I love your blog and I think you are an important voice in the current debate on monetary policy, but I have a gripe. People who read your blog are mostly highly educated; in my experience highly educated people are split pretty much down the middle in terms of political bias’. Thus, I expect your flag waving against Trump is just irritating to half of your readers. This election is a social and political debate, economics is largely irrelevant, as it was in the UK’s Brexit vote.

  44. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. September 2016 at 06:55

    I think that if you take cash from people they will find out other menas of exchange. There are more than 700 crypto currencis out there, I would suggest you google “crypto currencies” in order to find out how many there are ….

  45. Gravatar of JP Koning JP Koning
    3. September 2016 at 07:56

    Nick, got it. Thanks.

    Scott, Kocherlakota’s response:

  46. Gravatar of ssumner ssumner
    3. September 2016 at 08:29

    Geoff, I mostly agree, although highly educated people tend to oppose Trump.

    So what is the gripe?

  47. Gravatar of Gary Anderson Gary Anderson
    3. September 2016 at 10:27

    There is a guy on Yahoo, or the a money site who said that raising short term rates will cause the 10 year yield to decline. That will lower mortgage rates. Anyone care to explain that position?

  48. Gravatar of ssumner ssumner
    3. September 2016 at 11:11

    Everyone, Please stop responding to Gary, it just encourages him.

  49. Gravatar of Gary Anderson Gary Anderson
    3. September 2016 at 11:16

    Here is the link:

    The author of that article is arguing that a small rate hike will provide stability regarding rate hikes. That means 10 year yields will go down again. This is why Jeremy Stein wants big increases in rate hikes, to force the 10 year up.

    But I don’t think the Fed will allow the conundrum to go away, because bond prices are more important than Prof Sumner or most people understand.

    I don’t need an answer.

  50. Gravatar of Art Deco Art Deco
    3. September 2016 at 13:57

    I’ll wager the economic theory is mere trumpery. There is a culture abroad in our society which insists on technological applications even when they create more problems when they solve (including causing a market segment serious inconvenience). Hence, computer controlled voting machines, electronic medical records, hopelessly complicated videophonic equipment, “smart phones” and the disappearance of antecedent options. The abolition of cash is just another project the technophiles are hatching to harass the rest of us.

  51. Gravatar of Art Deco Art Deco
    3. September 2016 at 14:04

    so I am sure that a new amendment is required.

    You’re assuming a degree of professionalism among the appellate judiciary and the law professoriate which is gone. The judiciary will generally ignore the constitutional provisions which the elite bar does not care for and invent others out of whole cloth to impose policies the elite bar prefers contra popular opinion. The only discordant note in recent decades has been the recent series of opinions which have recognized a personal right (with fuzzy boundaries) to own and carry firearms.

  52. Gravatar of Major.Freedom Major.Freedom
    3. September 2016 at 15:59

    The “economics community” is largely financed and the narrative controlled by the Rockefeller and Rothschild families. They want to abolish cash and implant microchips with tracked and controlled digital money into everyone, whereby if you don’t obey and follow along, they’ll just turn off your chip. That is their end goal.

    This information was disclosed by Nick Rockefeller to producer Aaron Russo.

    One reason they can do this is because most people are psychologically unable to accept such a fate for them, and therefore dismiss it as a “conspiracy theory” (which is by the way a term coined precisely as a tool to counter any questioning).


    Sumner wrote:

    “I suppose one could argue that during 2009-15 the real problem was that the zero bound led to a need for unconventional monetary stimulus, and the major central banks are reluctant to do enough unconventional stimulus, even if in theory they could buy up the entire planet. But in that case the solution would presumably be psychological counseling for central bankers, not abolishing cash.”

    So called economists who recommend the government printing money buying everything up in sight if it means keeping AD from ever falling, are the people who need psychological counseling. This is the solution rather than abolishing economic freedom.

    This blog is in perpetual jump the shark mode.

  53. Gravatar of Benjamin Cole Benjamin Cole
    3. September 2016 at 16:41

    Unless outlawed, I suspect in mandated cashless economies then casino-chip type operations would pop up. So you buy $1000 in chips, legally purchased digitally and redeemable.

    If the chips become widely accepted, you then are able to conduct private untaxed transactions. The velocity and economic impact of the chips would be difficult to measure.

  54. Gravatar of Geoff Orwell Geoff Orwell
    3. September 2016 at 16:59

    I think you’ve spent too much time in a university.. In the real world there are a lot of very smart people who will vote for Trump. My gripe is that I love this blog but I switch off when you stray into politics. I’ve read every blog post of yours since day 1, it’s getting harder to keep coming back. Love your work [on monetary policy].

  55. Gravatar of Gary Anderson Gary Anderson
    3. September 2016 at 17:06

    @Art Deco, in the battle between Texas and California, California just hit the nation with prosperity for them and costs for the rest of us. They have the power to do stuff like that when they raise most of the vegetables. Read this by Tyler Durden:

    And for God’s sake, don’t answer me. 🙂

  56. Gravatar of Gary Anderson Gary Anderson
    3. September 2016 at 17:24

    I just googled the shelf life of mary jane. Turns out that the THC will last forever if it is frozen.

    I am thinking that pot could replace treasuries as collateral in the derivatives markets. We have to free up the treasuries or the conundrum will be with us until the end of time, which isn’t that far off.

    If we don’t want a cashless society with negative bonds, we have to replace treasuries with something. There is too big of a demand for treasuries and that demand will not go away. Unless of course, we go to pot. While that is funny, a cashless society that Major talks about is no joke.

  57. Gravatar of Ray Lopez Ray Lopez
    4. September 2016 at 04:42

    @engineer- if my Greek relatives had withdrawn money and put it into a Swiss bank, which before 2015 was legal, that would be sane. But to withdraw and put it under the mattress, when you have domestic helpers with keys to nearly all the rooms in the house, that’s mad.

    @ssumner – “Ray, Yeah, that’s what I’ve been preaching over here—inflation is good!” – no you have not. You have a complicated world view that’s hard to pin down, but it’s along the lines that if NGDP is low the central bank should print money until it rises. Why anybody would spend this printed money in a Koosian Balance Sheet recession as we have now is not clear. What would you do in Brazil now? Helicopter drop? (fiscal + monetary policy working together is helicopter drop, as in print money and give it to Treasury to spend, or mail it to people). Anyway, I look forward to reading more of your columns. You’re so wrong you’re right.

  58. Gravatar of ssumner ssumner
    4. September 2016 at 06:50

    Geoff, You said:

    “In the real world there are a lot of very smart people who will vote for Trump.”

    That’s true, and some of them read this blog. It’s even possible that Trump would be a better President that Hillary. But here’s what people don’t seem to understand. There are very few people who are EXTREMELY smart and also well versed on public policy that plan to vote for Trump. I’m thinking of the Krugman and Mankiws of the world. They recent interviewed 45 former members of the CEA, and a grand total of zero planned to vote for Trump. Keep in mind that this group includes both Democrats and Republicans.

    It’s not just professors, go to any group of people who are extremely well versed on public policy (elite reporters, think tankers, etc.) and there is overwhelming opposition to Trump.

    I don’t even teach anymore–I retired from Bentley a few months back) and I still don’t meet any Trump supporters in my new job. People are just horrified by him.

    No one who is extremely smart can fail to understand that the words that come out of his mouth are just garbage, totally unmoored from any sort of reality. We’ll pay off the national debt in 8 years, the real unemployment rate is 40%, crime is soaring, Mexico is stealing our jobs, we can just default on the debt, immigrants increase the crime rate–it just goes on and on.

    It’s all just drivel, total nonsense. I watched his recent speech on immigration, and it was just one lie and inanity after another. Day one, the bad guys are gone. This is kindergarten level discourse. Sometimes smart people tell me that Hillary is exactly the same. Well, they may be smart, but they certainly are not wise.

  59. Gravatar of Gary Anderson Gary Anderson
    4. September 2016 at 07:22

    So, Jeremy Stein argues for more private label paper in the absence of enough treasury bills and bonds. That could be better than fiscal deficit spending required to create more treasuries.

    That, folks, was an intelligent comment. It is worthy of Scott Sumner’s comment, even though Prof says that we don’t need a bigger repo market. But he doesn’t even comment about the shortage of treasury bonds, so….

  60. Gravatar of Chuck Biscuits Chuck Biscuits
    4. September 2016 at 10:14

    Not a Trump supporter, but anyone who thinks this election is about public policy is beyond clueless.

  61. Gravatar of dtoh dtoh
    5. September 2016 at 04:28

    “I still don’t meet any Trump supporters in my new job.”

    Gee that’s funny. I haven’t met any smart person other than those in government supported/subsidized jobs who isn’t a Trump supporter. (Admittedly a small sample.)

    And please stop being intentionally naive about the credibility of policy statements made by politicians. Nobody is that naive, and it just sounds silly. Really!

  62. Gravatar of ssumner ssumner
    5. September 2016 at 05:16

    dtoh, I’m not being naive. Trump is radically different from a normal politician. With a normal politician, it’s pretty easy to figure out their general views on the issues. I know Hillary would be a liberal, and Ted Cruz would be a conservative. No one has a clue as to what Trump believes.

    Even his defenders admit he can’t be trusted. When I point out all the inane things he says, his supporters tell me he doesn’t really believe that, he’s just saying it to get elected. Except for immigration, they think he really does oppose immigration. But now we don’t even know what he thinks of immigration. He flip flops every other day.

    It’s true that the people who are the most knowledgeable about public policy are often in government or government subsidized jobs, but so what? In the past, conservatives in those jobs generally supported the GOP candidate. The reason the Mankiws of the world have walked away from Trump is that they have a better understanding of just how bad Trump is than people who are less well versed on public policy.

    I think lots of Trump supporters see into Trump what they want to see. We all know that Trump won’t do what he says he’ll do. But which things will he jettison? The Kudlows of the world think he won’t do the massive spending increases that he promises, but will do the massive tax cuts. The unemployed construction worker thinks he won’t do the tax cuts for the rich, but will spend more in infrastructure and Social Security, as he promises. They all see what they want to see, and none of them has a clue as to what he’ll actually do, other than that he obviously won’t do both a massive tax cut and a massive spending increase, as we’d soon be bankrupt.

    In contrast, I have a pretty good idea what Hillary will do. Not exactly, but in broad outlines. Obama did pretty much what I expected. With Trump, we don’t have a clue. Does he believe the things he used to say when he was not running for President, or the things he says when he is running for President? With Hillary that’s a problem in a few areas, like TPP, with Trump it’s a problem everywhere.

    I think his supporters also overlook that his personality is completely unsuited to the serious responsibilities that a President has, such as making foreign policy decisions. He’s reckless and impulsive, a horrible quality for someone with his finger on the nuclear trigger. I saw his recent speech on immigration, which was absolutely sickening and appalling. You’d think he was a right wing thug running for President of Guatemala, not a serious candidate of the party of Lincoln. Just disgusting demagoguery.

  63. Gravatar of Gary Anderson Gary Anderson
    5. September 2016 at 07:58

    The neocons rule America. They are an extension of Israel and the globalists. America does not rule America. However, Clinton would limit neocon policy, slowing it down as did Obama, who was also a neocon.

    Trump says he is not a neocon. He says he is for peace or not depending on his mood. But the neocons will make him into a neocon and his desires could get the best of him, like yearning to use nuclear weapons in a limited war.

    Scott Sumner is dead right on this, even though he is wrong that Japan used helicopter money. Scott doesn’t want Trump’s finger on the nuclear buttons. Any sane and rational person cannot come to a different conclusion.

  64. Gravatar of Jerry Brown Jerry Brown
    5. September 2016 at 09:23

    Scott Sumner, your reply to dtoh is excellent. It is probably worthy of a post of its own.

  65. Gravatar of ssumner ssumner
    5. September 2016 at 10:33

    Thanks Jerry, But it’s only excellent if you despise Trump; otherwise it’s a moronic comment. That’s how these things work.

  66. Gravatar of flow5 flow5
    5. September 2016 at 15:03

    Pawn shops only accept cash. And they’re not the only ones that distrust credit/debit cards, checks, money orders, etc. I guess you don’t want you’re kids selling lemonade or mowing lawns either. And I’d rather lose a hundred dollar bill to a thief, rather than my debit card.

    But there are other obvious drawbacks. With electronic transmission, the oligarchs could collect transactions fees. Thus there would become a breakdown in the convertibility of money (free convertibility, par acceptance, and repayment in kind).

    Gov’t would have to have sound fiscal polices, and not abuse its sovereign power over money. Its store of value could become a money illusion. The unit of account could end up varying. But, perhaps most damaging, trade would perhaps end up being settled in other non-restricted national currencies. And if you think that the “black market” would shrink, think again.

    Lastly, don’t believe that a run on the electronic dollar couldn’t happen or wouldn’t be encouraged.

    p.s. Hillary is as dumb as a rock. Anybody else would know what “c” meant.

  67. Gravatar of dtoh dtoh
    5. September 2016 at 15:33

    I’ll reply later in some depth since I think your comment deserves a serious answer. Right now I have to focus on my day job.

  68. Gravatar of dtoh dtoh
    5. September 2016 at 15:34

    @scott Oh and BTW what do you think of my idea of having the Fed charge banks a fee on net withdrawals of cash.

  69. Gravatar of Gary Anderson Gary Anderson
    5. September 2016 at 16:34

    Flow5 is right. Cashlessness is diabolical. And Scott Sumner, I didn’t write this but you should read it. If this article from Automated Earth cannot make you angry and confirm your opposition to cash, nothing can. 🙂

  70. Gravatar of flow5 flow5
    6. September 2016 at 02:21

    In a fiat system the volume of currency issued is dictated by the deficit-financing requirements of the issuing government (like the Civil War Greenback). Whereas in a managed-currency system (ours), the volume of currency in circulation is impersonally determined by the public, and the amount which meets the needs of trade.

    The basic process by which currency is put into and taken out of circulation is through the banking system. The volume of currency held by the public needs no formal or specific regulation since it is impossible for the public to acquire more of a given type of currency (or even less given current operating policies), without giving up other types of currency, or else bank deposits. In other words, under our managed system it is impossible for the public to add to the total money supply consequent to increasing its holdings of currency.

    This brings the “Scorpion and the Frog” fable to mind. Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation – which is why the Fed’s $5b “overdraft privilege”(direct purchases from the Treasury), was not extended or reinstated. And the Treasury could have taken advantage of the Thomas amendment to the Agricultural Adjustment Act of 19333 and issued “greenbacks” which the Act authorized, and if the Treasury had then spent the balance so acquired, bank reserves would have been increased by a like amount.

    MMT and Chartalism are engineered by the same people (Congress), that would mis-use it (i.e., they have a conflict of interest).

  71. Gravatar of dtoh dtoh
    6. September 2016 at 04:38

    Briefly as I can…

    1. In my view, the role of a representative (or President) in a republican form of government is not to implement their own views but rather to cobble together enough supporters with disparate views to get 51% of the vote and then to negotiate like hell with representatives of the other 49% to move things in a general direction that doesn’t piss off too many voters. (I think that’s a direct quote from John Locke.)

    2. So I don’t put a lot of faith in the policy specifics spouted during election campaigns. I don’t think many people do.

    3. That said, a big part of Trump’s popularity is that people have gotten tired of the professional political spin. People know a lot of what Trump says is BS, but the press, progressives and academics in places like Newton have spun such a surreal web of double speak and political correctness, that people are fed up with the professional lying class and would rather have an “honest” liar like Trump.

    4. I’m not sure what basis you have to judge his temperament. IMHO, no one succeeds in business, especially in real estate in NYC, without a lot of patience, a lot of smarts, and a lot of people skills. Are you sure you’re not biased by the general disdain in which business is held by academia.

    5. Do you really think Trump might raise taxes, or get an endorsement from the NEA for banning charter schools, or sign the TPP.

    6. Also, what was so objectionable about his speech on immigration. I read it but didn’t see it. I think you know my views on immigration are not illiberal. What was it that bothered you? Maybe it was the delivery.

    7. And we should listen to the “people who are the most knowledgeable about public policy.” Don’t you realize that’s why Trump enjoys the popularity he does. Really? “Trust us. We’ve been doing a great job. Nothing to see here. Move along we’re the experts.” Really?

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  73. Gravatar of ssumner ssumner
    9. September 2016 at 10:26

    dtoh, Not a fan of fees for cash withdrawals.

    You said:

    “honest” liar like Trump.”

    That went over my head–sort of seems like an oxymoron.

    It’s clear that when Trump supporters are interviewed they see him as a straight shooter, more honest than other politicians. You and I know that’s nonsense, so it’s probably not worthwhile trying to figure out the motivation of Trump supporters, in most case it’s ignorance. The smarter ones support him as a lesser of evils over Hillary (your view?), hoping he’ll somehow be less bad. I’m not willing to take that risk, with a sociopath in control of foreign policy.

    You said:

    “Are you sure you’re not biased by the general disdain in which business is held by academia.”

    Why would that “general disdain” of left-wingers affect me, a huge fan of capitalism? Yesterday I had dinner with a very conservative guy in the investment industry, who is donating to a campaign for the first time in his life—to Hillary (who he regards as being extremely corrupt. Go figure.)

    I’ve never met Trump, and he may be really smart about NYC real estate (although his “success” involved inheriting a fortune from his daddy at the bottom of the NYC real estate depression, going bankrupt numerous times, and refusing to offer any evidence that he is in fact a billionaire, even though he lied and promised the public to offer such evidence. You are impressed by that?) Despite his business “success”, it’s clear from his public utterances that he has a level of ignorance of public policy that is far beyond anything we’ve ever seen. For God’s sake, they are giving Johnson a hard time because he had never heard of Aleppo!?!? Trump doesn’t know ANYTHING about public policy. The Presidency is not the place for on the job training.

    You said:

    “Do you really think Trump might raise taxes, or get an endorsement from the NEA for banning charter schools, or sign the TPP.”

    Not likely, but yes, I think he might be capable of anything. But in any case, Hillary is not going to ban charter schools either. I think he is capable of pretty much anything that Hillary is, and in some areas (say government spending) he’d be far worse. His spending plans are bigger than hers. My best guess is that deep down he’s a sort of nationalist socialist. A guy who favors really big government and xenophobic policies. But who knows?

    Raise taxes? If he spends what he claims he will spend, then he damn well better raise taxes!

    He demonized illegal immigrants like they were a bunch of ordinary street criminals. He lied through his teeth, over an other again, making demagogic points with phony data. Remember that he learned about politics by reading a book of Hitler’s speeches, which is why he knows nothing about public policies, but knows how to whip up hysteria against unpopular minorities.

  74. Gravatar of dtoh dtoh
    9. September 2016 at 14:30

    I don’t believe in the ZLB so I don’t think it’s a problem, but if you did think the ZLB was real, it seems to me that the way to address it would be for the the Fed to charge banks a fee on net cash withdrawals. Seems like this would be a neat, clean and easy solution but maybe I am missing something?

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