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The Central Banks of Japan and Europe have imposed negative interest rates on deposits. Would these blunt monetary tools of Central Bankers be effective if bitcoin adoption becomes widespread?
Christine Lagarde, International Monetary Fund Managing Director, says:
"We see the recent introduction of negative interest rates by the ECB and Bank of Japan as net positives in current circumstances, though not without side effects that warrant vigilance."
Negative interest rates are the emergency tools of Central Banks - they spur lending and investment in the economy when traditional measures have failed. Investors may tolerate marginal negative yields on sovereign debt because it is a safe investment, and they may be forced by their investment mandate into holding it.
However, the efficacy of negative interest rates is limited by an alternative safe asset - cold cash. Central bankers would be horrified if their monetary policy forces people to hoard cash and hence would not venture too much into negative territory.
Governments have perfected the art of covertly robbing citizens of their purchasing power, through inflation. Inflation has eaten away the return on bonds, resulting in negative real interest rates.
According to the Wall Street Journal, the 10-year US treasury yields are below inflation, resulting in real US 10-year yield of -0.58%. Negative nominal interest rates are a new and rare phenomenon and can be construed as an overt robbing of the citizens' purchasing power.
What would happen if Bitcoin becomes an internationally accepted currency? Given that the number of bitcoins in circulation is limited, inflation will not be a concern and purchasing power would be retained.
Interest rates would be market driven and negative interest rates would be impossible. Investors would be loath to pay for the security of sovereign debt, because cold storage of bitcoins has zero marginal cost. Governments could introduce a tax on all bitcoin holdings, which could have the same effect as negative interest rates.
Ensuring compliance to such a measure would be difficult, unless the government has knowledge about the bitcoins held by its citizens. Increased bitcoin adoption would pose problems from central bankers across their world and may render some of their monetary tools toothless.
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