Paco is a dog who lives in Norman, Oklahoma. Recently I learned it costs $12 to store him for a day, with webcam services attached. In this sense there is a negative nominal interest rate on Paco.
You might store Paco for a day if you are going to the Thunder-Clippers game, and you see leaving him at home as too risky. For related reasons, you might pay 0.75% to put your funds in Danish currency.
If all resources are costly to store, rather than some of them yielding a return, you would expect an economy to shrink over time, just as your Danish holdings eventually will waste away. Similarly, Paco does not paint your house or make it more valuable, and so both he and the home decline as the clock ticks.
Some parts of the economy are productive, so why pay for storage rather than investing there? Either those sectors are very risky, or there is no free entry into those investments.
In many (but not all) countries, consumer confidence measures are reasonably high and VIX indices are low, indicating that expected volatility is probably not so high. If these safe-ish-looking numbers were wrong, however, we would have a lot of reason to worry. Negative nominal rates — with negative real rates even lower in most cases — would imply there is a great deal of risk.
Alternatively, perhaps there is no free entry into productive investments. That suggests productive investments are not being replenished over time, and we might expect the growth rate to fall, eventually, and in the meantime for inequality to rise. That is another story of decay and decline.
Right now there are about $2 trillion in eurozone bonds with negative yields, or so I am told.
I liked Paco (more importantly Paco liked me), but I do not enjoy living in a Paco economy. I think of the calm before the storm and wonder how to reconcile the observed calm and the potential for the storm. I do not like the most obvious attempts at reconciliation.
When it comes to policy: “Trying to keep nominal rates below the cost of currency storage and movement would convert bankers back into goldsmiths, tightening rather than loosening monetary conditions.” That’s not any fun either.