Rogoff’s law – the opposite is usually true

Punning on Kenneth Rogoff’s surname is proving irresistible. He has just launched a new economics blog, which should prove rich in thought-provoking missives. Confronted by Rogoff’s economic ideas, I frequently find myself compelled to turn them upside down. His latest tome, The Curse of Cash, suggests that we should abolish physical cash, replacing it with a purely electronic version. This would allow central banks to pay interest on all money. Rogoff goes further: in recessions or deflations, interest rates could go sharply negative, because the option of holding ‘zero interest money’ – physical notes and coins – would not exist.

What I expect most non-economists reading The Curse of Cash are confounded by is not the idea of abolishing physical notes and coins – on many levels this is appealing, particularly its consequences for criminal activity. No, what’s bizarre is his insistence on charging negative interest rates on cash to stimulate demand under deflation. The obvious common-sense query is that replacing zero-interest cash with negative interest rate cash makes the holders of cash worse off.

Perhaps surprisingly, the non-economists’ concern is valid, and shared by none other than Mervyn King. The obvious way to stimulate demand in the current monetary system is to use dual interest rates. In fact, to raise deposit rates and cut lending rates. This is an unambiguous stimulus. Of course, the private banking system left to its own devices tries to do the opposite, in order to maximise profits. This is why the central bank should take the lead, and we have seen the first steps in this direction, with tiered reserves and a series of new central bank lending schemes. The sooner there is focus on the ability of the central banks to cut their lending rates further, leaving deposit rates unchanged, the better.

From this perspective, Rogoff’s central thesis can be up-ended. Simply cutting official interest rates in a world without physical cash has ambiguous consequences for demand. Setting a negative net interest margin on deposits relative to loans in the current system is an unambiguous stimulus. Furthermore, eliminating physical cash would in fact be incentivised.

Let’s think this through. In Rogoff’s futuristic world, we don’t have physical dollars, pounds, or euros in our wallets. Our digital wallets will contain digital cash. Now there are two options, this digital cash could simply be bank deposits – the current world without physical cash – or there could be a new category of deposit, created by the central bank and directly held by households, the quantity of which is determined by the central bank, analogous to bank reserves. This money could be fixed in quantity, would be credit risk free, fixed in nominal value and not convertible. The only substantive difference between this and physical cash, other than its electronic nature, is that bank deposits would not be convertible into electronic money.

In this world, reserves held by households and corporates held at the central bank would be a distinct category of base money. As we have seen with tiered reserves, these holdings could be remunerated at interest rates independent of those held by banks which are borrowed and lent into money markets and determine market interest rates. Surely if we want to boost spending we should set a sufficiently high positive interest rate on digital cash held by households in order to raise their spending? This indeed is a great reason to have digital cash – people would voluntarily swap physical for digital cash if it was remunerated at, say 5%.

The initial response to this suggestion is that raising interest rates in a recession would kill the economy. But I am not suggesting that we raise market interest rates at all. The stock of digital cash is fixed by the state. Payments, positive or negative, on this cash are not really interest rates at all. Money market rates are set by the availability of bank reserves and the rate of interest on ‘excess’ reserves. Why should the interest rate on bank reserves be the same as the rate on digital cash? In other words the distinction between physical cash and bank reserves, which exists when cash is physical could persist in the fully virtual world – the rate of remuneration would depend on the holder of these reserves. Central banks could set one interest rate on digital cash held by households and another on banks’ excess reserves, which determines money market rates and market lending rates.

This also deals with the basic flaw in Rogoff’s thesis – the assumption that negative policy rates would raise spending. This is a questionable, probably false, assumption. But Rogoff’s innovation remains profoundly valuable. Don’t abolish physical cash, drive it out of business by paying people to hold electronic cash. Oh, and deflation can always and everywhere be reversed with a stroke of the pen (or the click on a keyboard).

It is tempting to dismiss the case for abolishing cash with a trivialising ‘Bog off, Ken’. But that is childish. Keep blogging, Ken. This time is no different. Your ideas are always thought-provoking, and the (almost) opposite of what you suggest remains true.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

4 Responses


    Would Gresham’s Law apply or would Thiers’ Law?

    There might be people who will not trust their financial reserves to the banks because there is always the risk of a bank default. There are those people who just hate banks. So to replace the cash in the mattress stash these people will seek to hold their non-bank financial reserves in the form of assets such as gold.

    Gold in some forms is relatively transactable. It is of course durable. There might arise a defacto gold in specie standard.

    And of course it would be a way of avoiding negative interest rates. Negative interest rates on bank money might be avoided by purchasing assets rather than goods – negating the demand stimulating effects of negative interest rates.

    steve from virginia

    Maybe Bro-goff or Throw- goff or just plain ol’ Slow-goff. i dunno.

    – A shift to electronic funds is (fairly) permanent but the negative nominal rate environment would be (assuming the stimulus works) … temporary. That asymmetry has a cost (hard to calculate what it is.)

    – The cost of managing paper money would be reduced but the but not for all users. Retailers and banks would save but hidden costs including (negative carry) would accrue to holders => give them incentive to hold more (to cover the carry). This defeats the ‘stimulus’ idea (and is happening in Japan). It is never good to have economic agents as either counterparties or at odds: merchants always lose (so do the banks).

    – Slow-goff’s anti-crime argument fails on its face: tens of billion$ of dollars were laundered electronically narcotics cartels by Wachovia and HSBC! BTW: the biggest crooks are the banks, themselves (see Deutsche Bank).

    – Customers might not grasp the plan in detail but neither the context nor the player inspires confidence: “Every banker knows … ”

    – Dicey legal exposure to actual collection of carry by banks. (Taking without compensation.) The banks would also cheat (Wells-Fargo).

    – Ambiguity about blockchain money by central banks: ***coins are intrinsically difficult to steal (good) but allow holder to act as their own central bank (bad for the central bank). It is hard to see a central giving up authority. See Silvio Gesell’s demurrage money experiment in Austria in 1930s and the central bank reaction.

    – Demonetization fiasco underway in India, also deflationary impacts in Japan. Strongenoff does not grasp deflation (not really his fault b/c he’s prospered from inflation for his entire career.)

    – All of these (quasi) repressive strategies backfire: the customers are pauperized by blizzard of costs. As with other banking tactics, this is another way to loot.


    That’s a very good point about negative interest rates. Certainly zero interest rates or slightly above are not stimulative – in fact just the opposite because when you have $100k in a portfolio or a retirement account, you now have to save even more money to make up for the non-earnings. Lower interest rates only serve to push money into riskier assets, moving from cash to bonds to blue chips to growth stocks – but still not into the broad economy because the purpose of the account is to save and grow, not to spend.

  4. Mr@b-o-c-K-L-e-r.NET'
    Erwin Böckler

    While the discussion of cash – or cashless – states remains mostly an academic exercise; we worry that the growing influence of un-elected central bank planners upon clueless politicians to implement drastic “solutions”. In this whole Rogoff expression of arrogance, you get the distinct feeling that people are just inanimate, inhuman reactants in the great formulaes and models put together by these PhD fools. That is, the elected political class (at least many of them) are transferring their power to the unelected bankster tricksters in a great experiment! For the greater good of the people, mind you.


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