Rod Serling Redux: Negative Nominal Interest Rates Part II

But it's not possible!

Oh yes it is!!!! (Coming Soon to a Central Bank Near You)

Negative Nominal Interest Rates: You Get Back Less Than You Invest but by Design Rather Than Surprise

This introduction to my favorite TV show from the 60's still creeps me out 40 years later:

Is  Washington starting to run out of ideas?  As every conceivable monetary, fiscal and taxation policy tool has been thrown up against the wall including the kitchen sink,here's one they haven't floated that may be worth a look: Now may be the perfect time to  implement a bold new experiment utilizing a theoretically  heretical policy tool-- Negative Nominal Interest Rates (NNIR). You get back less than you invest but on purpose.  What a welcome relief to investors who have become used to getting back less than they invest as a matter of standard operating procedure. At least they would know what they weren't getting back!  No surprises which as we know: just as nature abhors a vaccuum all investors hate surprises.

Take a look at our  entry from December 11, 2008 where we initially discussed this  theortical possibility of  negative nominal interest rates. I have been intrigued with this theory for nearly 20 years and see it as a real possible anti-dote to a financially necrotic set of policy tools.  This powerful prescription has little prededent (but some-- check out 1947 in Chicago) and I am pushing it around to radicapitalists and trend setters to take a second serious look. One of the leading ecomomic theorist is Marco Bessetto . Here is his research paper presented to NBER in 2004.  http://www.nber.org/~bassetto/research/negrates/negrates.pdf

So as a thought experiment imagine a 400 bp yield curve starting at -2% sloping upward to +2%.  Then imaging the discontinuity of using 0% as the rate of discount.  NPV of periodic cash flows would equal the aggregate undiscounted summation through infinity. It's a little bit like the speed of light. Alternating cash flows as fiancial geeks represent multiple internal rates od return.  Kind of like  imaginary numbers in algebra  (very different than the imaginary numbers they use at the rating agencies).  We are approaching a new zone of a post-Newtonian framework where really weird things start to happen.  Stay tuned as you will here a lot more about this unprecedented monetary tool , a secret weapon of sorts, as we move further and deeper into the twilight zone.

Here is a replay of an EPD article  from nearly six weeks ago written back in 1999

By Daniel L. Thornton

January 1999

Can nominal interest rates be less than zero? Many people would argue not, reasoning that no one would invest $100 today with a promise of receiving only, say, $99 in one year, given the alternative of simply holding the $100 in cash. Yet, rates on short-term Japanese government bills recently were negative, and several foreign-owned banks in Japan have paid negative nominalinterest rates on yen deposits.

Read Full Article at: http://research.stlouisfed.org/publications/mt/19990101/cover.pdf