Instant Insanity

Willem Buiter, chief economist for Citigroup provides another example of why shares of Citigroup are sitting in the gutter at $4 a share in spite of trillions of dollars in bailouts to banks.

The fact that Buiter entertains “innovative and unorthodox” measures such as “expiring currency” proves he is off his rocker even though he states “the mere fact that something has not been done before often is sufficient grounds for not doing it now.”

Any chief economist, anywhere in the world, should be able to come up with better rationale than that.

Before a major rebuttal, please consider the Wall Street Journal article Is this the Right Time for the Fed to go Negative? by Willem Buiter.

To restore monetary policy effectiveness in a low interest rate environment when confronted with deflationary or contractionary shocks, it is necessary to get rid of the zlb [zero lower bound] completely. This can be done in three ways: abolishing currency, taxing currency and ending the fixed exchange rate between currency and bank reserves with the Fed. All three are unorthodox. The third is unorthodox and innovative. All three are conceptually simple. The first and third are administratively easy to implement.

The first method does away with currency completely. This has the additional benefit of inconveniencing the main users of currency—operators in the grey, black and outright criminal economies. Adequate substitutes for the legitimate uses of currency, on which positive or negative interest could be paid, are available.

The second approach, proposed by Gesell, is to tax currency by making it subject to an expiration date. Currency would have to be “stamped” periodically by the Fed to keep it current. When done so, interest (positive or negative) is received or paid.

The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars