John Cochrane writes:
So, quiz question for your economic classes: Suppose we have substantially negative interest rates — -5% or -10%, say, and lasting a while. But there is no currency. How else can you ensure yourself a zero riskless nominal return?
Here are the ones I can think of:
- Prepay taxes. The IRS allows you to pay as much as you want now, against future taxes.
- Gift cards. At a negative 10% rate, I can invest in about $10,000 of Peets’ coffee cards alone. There is now apparently a hot secondary market in gift cards, so large values and resale could take off.
- Likewise, stored value cards, subway cards, stamps. Subway cards are anonymous so you could resell them.
- Prepay bills. Send $10,000 to the gas company, electric company, phone company.
- Prepay rent or mortgage payments.
- Businesses: prepay suppliers and leases. Prepay wages, or at least pre-fund benefits that workers must stay employed to earn.
Comments section: how many more can you think of?
The zero bound is not just cash.
More generally, he is discussing work by Kenneth Rogoff.