Can bitcoin end Japan’s deflationary nightmare? This question may seem odd, considering Tokyo was site of the virtual currency’s biggest scandal. But as the Bank of Japan’s efforts to print trillions of dollars of cash backfire, it’s time to inject a dose of technology.
The BOJ’s negative interest rate policy is a case in point. Introduced on Feb. 16, the move shocked markets and had many Googling “NIRP.” While the European Central Bank had dabbled with it for some time, Japan’s step into the sub-zero world confounded many. None more so than Japan’s 126 million people, many of whom have taken to hoarding ¥10,000 bills to stash under tatami mats.
BOJ Gov. Haruhiko Kuroda’s claims negative rates are working smack more of denial than confidence, something in little supply before the BOJ made things worse. As growth evaporates, odds are that Kuroda will churn even more cash into markets. That would be akin to applying an analog solution to a digital-world glitch. The BOJ, you see, doesn’t have a financial problem, but an equipment one.
Perhaps the most intriguing remedy comes courtesy of monetary technologist Andy Haldane. No, Haldane, 48, isn’t an engineer or tech geek — he’s the Bank of England’s chief economist. Yet he’s carving out a place for himself as a futurist in an era of antiquated thinking. Haldane’s biggest idea? Central banks scrapping cash and employing block- chain mediums to influence business and consumer behavior.
Haldane began making this most undoctrinaire of arguments in a series of speeches in late 2015, mostly to rolled eyes and shaking heads. But now, the BOJ’s failure to translate billions of new high-denomination yen bills — and negative rates — into economic growth is vindicating them. Central banks, he argues, can really only lower rates so much, what economists call the “zero lower bound” problem, or ZLB. Pushing them negative is only encouraging consumers to pull paper money out of banks — and in the case of Japanese, buy household safes. Abolishing notes and coins could give central bankers the traction quantitative easing lacks.
The problem is that QE is now a semi-permanent feature of financial systems from Tokyo to Washington and expectations have been quick to adjust. That’s rendered rate cuts and massive bond buying programs useless. They’re maintaining current levels of activity, not stimulating new demand as consumers convert deposits into hard cash. A digital currency would remove that option.
“One interesting solution,” Haldane argues, “would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”
As Kuroda and his peers search for ways to gain traction, they’re looking to Adam Smith, John Maynard Keynes and Milton Friedman. More insights might be gleaning from the science fiction of Arthur C. Clark and Isaac Asimov than economic views based on outmoded facts. As of late 2015, Haldane points out, 40 percent of the globe had rates of less than 1 percent, about two-thirds under 3 percent and roughly 80 percent below 5 percent. Some of those nations, of course, have rates well below zero, with very little to show for it.
Talk about a monetary ammunition quandary. Recessions tend to occur at least once in a 10-year interval, never mind the secular stagnation that’s become the norm since 2008. Central banks need fresh firepower to combat each downturn. What happens if the global economy hits another rough patch? The question is especially acute for heavily indebted economies, which means most these days.
In the case of Japan, QE has fused into fiscal policy. As Haldane argues, “monetary policy credibility heads down the most slippery of slopes” when QE is perceived to be here to stay and loses potency. “What I think is now reasonably clear is that the distributed payment technology embodied in bitcoin has real potential,” he says. “On the face of it, it solves a deep problem in monetary economics: how to establish trust — the essence of money — in a distributed network.”
Building that trust is easier said than done, of course. Getting consumers to hand over all their notes and coins would be a tall task. The 2014 blowup at the Tokyo-based Mt. Gox exchange posed existential questions for virtual currencies. Not surprisingly, Haldane’s ideas have attracted their share of scorn. As former BOE policymaker Andrew Sentance tweeted in September: “Sorry to say but Andy Haldane’s spouting rubbish here.”
Perhaps, but hats off to Haldane for thinking out of the proverbial box. We can debate the methods, science fiction or other, but it’s an economic fact that the BOJ, Fed, ECB and BOE are getting little bang for the physical bucks their printing. In October, I argued that the BOJ should consider issuing debit cards to all Japanese consumers with amounts ranging from $8,000 to $10,000. They’d be forced to spend the full amount before getting a fresh dispersal. Supporting households rather than Sony and Toyota might precipitate the virtuous cycle Kuroda’s policies hasn’t.
Another idea: the BOJ converting its vast cache of government debt into perpetual, zero-coupon bonds. That would reduce Tokyo’s crushing debt load (about two-and-a-half times bigger than the economy), leaving more fiscal space for new stimulus and tax cuts. It would allow Prime Minister Shinzo Abe to scrap next year’s planned sales tax hike without provoking credit rating companies.
It’s in this spirit that Haldane is pushing the use of block-chain technology. Since what central banks are doing isn’t working, it’s time for some serious brainstorming. When economists do try to think out of the box, they often come back with unimaginative ideas like Friedman’s “helicopter money” theory. Hasn’t Japan shown over the last 15 years, though, that the supply of bank notes is less important than mechanisms to transit them?
Fed officials, it’s worth noting, have long known a cashless society is coming. Back in 1966, the heyday of Sci-Fi visionaries Clark and Asimov, U.S. Fed Gov. George Mitchell urged bankers to consider how “the computer can drastically change money and its use.” Thirty years later, in 1995, Janet Yellen, then a Fed governor, was giving speeches about how electronic money might affect monetary policy. Around that time, then Fed Vice Chairman Alan Blinder downplayed concerns that “what amounts to a form of private currency” might endanger the power of central banks.
The issue has now gone full circle. Rather than new advancements challenging the potency of rate moves, the real problem is our failure to harness them. Hence Haldane’s call for the banking world’s “own great technological leap forward.” It follows that the BOJ may not have a policy problem on its hands, so much as a technology one.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics. www.barronsasia.com
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