Denmark positively goes negative

The FT reports that the Danish central bank (Nationalbanken) goes into negative territory:

Of all the many striking policy measures taken since the financial crisis, one of the most extraordinary has gone almost unremarked – the introduction of negative official interest rates by Denmark.

In an attempt to maintain its strict currency peg to the euro, the Danish central bank lowered its main deposit rate for banks – the certificate of deposit or CD rate – to -0.2 per cent last month.

The interesting thing to mention here is that going below zero seems to actually tighten lending:

“When we are at zero [for customers’ deposits], we can’t go any lower. We have to recover that money in other ways, so we do that by increasing our margins on loans,” Eivind Kolding, chief executive of Danske Bank, the country’s biggest lender, said this month.

This is perhaps a restriction coming from the balance sheets that can only be understood by, well, looking at them, If banks want to make profits and they lose some money on whatever front, they will try to recoup it somewhere else. So much should be clear. Once more reality can be better understood by looking at balance sheets than by looking at some old models that more or less dodge the question. Of course, Willem Buiter has written extensively on negative interest rates. (He now seems to prefer a quite drastic solution to the financial problems.)

If you think that this is exciting, you might want to vote Republican in the next presidential elections if you’re an US citizen:

In early 2011, Mr. Ryan, newly installed as the chairman of the House Budget Committee, gave Ben Bernanke, the Federal Reserve chairman, a hard time over his expansionary policies. Rising commodity prices and long-term interest rates, he asserted, were harbingers of high inflation to come; “There is nothing more insidious that a country can do to its citizens,” he intoned, “than debase its currency.”

Since then, inflation has remained quiescent while long-term rates have plunged — and the U.S. economy would surely be in much worse shape than it is if Mr. Bernanke had allowed himself to be bullied into monetary tightening. But Mr. Ryan seems undaunted in his monetary views. Why?

Well, it’s right there in that 2005 speech to the Atlas Society, in which he declared that he always goes back to “Francisco d’Anconia’s speech on money” when thinking about monetary policy. Who? Never mind. That speech (which clocks in at a mere 23 paragraphs) is a case of hard-money obsession gone ballistic. Not only does the character in question, a Galt sidekick, call for a return to the gold standard, he denounces the notion of paper money and demands a return to gold coins.

For the record, the U.S. currency supply has consisted overwhelmingly of paper money, not gold and silver coins, since the early 1800s. So if Mr. Ryan really thinks that Francisco d’Anconia had it right, he wants to turn the clock back not one but two centuries.

source: Paul Krugman’s blog