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Warning: Digital Currencies Portend Deeply Negative Interest Rates


Investors have been ignoring progress toward government-issued electronic money, even as many countries are progressing rapidly toward their own online cash. They should ask two questions: Will the Federal Reserve issue a digital dollar? And will it eventually replace physical bank notes?

I think the answer to both questions is yes, and those who agree should be assessing the impact on future monetary policy already, because dramatic change is likely within the timespan of the 30-year Treasury.

The main monetary power of the digital dollar comes from the abolition of bank notes. If people can't hoard physical money, it becomes much easier to cut interest rates far below zero; otherwise the zero rate on bank notes stuffed under the mattress looks attractive. And if interest rates can go far below zero, monetary policy is suddenly much more powerful and better suited to tackle deflation.

Before going on, a quick definition: I'm talking here about central bank-issued money usable by you and me, just as bank notes are. It might (or might not) pay interest, but it is different to money in an ordinary bank account, which is created by the commercial bank; the existing central-bank digital money, known as reserves, are used only to settle debts between banks and certain other institutions, not available for ordinary use.