Negative Interest – hoping in vain for a miracle tool  

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The zero lower bound

In 2008, the short-term central-bank interest rate in America and Europe was reduced to 0% or close to this lower bound. Long-term sovereign bond rates also fell to 0–1.5%. This was the end of a long-term decline in interest rates that started in 1980 at about 15%. As interest rates cannot naturally slip below the 0% lower bound there was then no more room for conventional monetary policy manoeuvre. That situation was new. Never before had interest rates fallen so far. Even in the years after the Second World War, the Fed rates were over 2%.

At the lower bound, central banks cannot continue with what they are used to: lowering the base rates when general levels of interest and prices disinflate or even deflate, and raising the base rates when general levels of interest inflate. In the advanced stage of an upswing this is supposed to dampen money and credit creation, economic overheating and undesired high levels of consumer price inflation (CPI), while lowering the rates is supposed to facilitate additional money and credit creation, supporting a turn-around to economic recovery and a desired CPI rate, which is nowadays set at 2–3%.

Following the prevailing logic, the lower bound is seen as a nuisance, even as 'monetary paralysis'.[1] The zero per cent rate is not accepted as the natural limit that it is but is considered to be a hindrance that needs to be overcome, and some economists have a ready suggestion for accomplishing that: breaking through the lower bound by imposing negative interest.[2] This means making a creditor pay interest to the debtor, rather than the debtor paying interest to the creditor, or, in the case of money or money surrogates which normally yield no or little interest, making the money holders pay interest to the issuer of the money rather than the other way around. For example, holding a sight deposit in a bank, rather than yielding deposit interest, would cost the customer, say, 6% per annum, broken down into an account's daily overnight position. The proposals of negative interest have not been entirely clear on whether they apply just to sight deposits (i.e. liquid bankmoney) or perhaps also to savings and time deposits.

The general aim of negative interest is to regain a higher degree of effectiveness of conventional monetary policy and stimulate expenditure (in the attempt to evade negative interest) that would result in demand-induced growth, counter-acting disinflationary or even deflationary tendencies.

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Cash – the inconvenient remainder

The most obvious snag with the negative interest proposal is still-existing cash. Applying negative interest to coins is next to impossible, and applying it to notes would be disproportionately cumbersome. According to Gesell (1916), to whom the idea of an artificial loss of purchasing power dates back, banknotes would periodically be devalued by a fixed percentage. Making up for the loss would require people to buy stamps of the same amount to be put on the notes. Otherwise, the notes would no longer be valid; therefrom the term stamp scrip.[3] Then as much as today, this would hardly appear to be particularly practical. Negative interest would thus be applied only to deposits, while cash would be exempt. Should negative interest be implemented at a significant rate, people could and will sidestep the loss by switching to cash. This, however, is bound to result in dysfunctional shortages of cash and may even trigger bank runs – an in-built emergency in present-day fractional reserve banking which policy makers will not wilfully want to provoke.

Not surprisingly, policy makers pressing for the adoption of negative interest are also pressing for the abolition of cash, rather than leaving the foreseeable, even if not so fast, disappearance of cash to the preferences of the money users.[4] Bankmoney now accounts for up to 90–95% of the public money supply, and the share of cash has correspondingly fallen to 10–5% and even less. Most of the cash, moreover, is not in active circulation but held as a safety buffer or, in the case of the U.S. dollar and the euro, used as a parallel currency abroad.[5] In this situation, banks too would prefer to see cash disappear. Financing and handling solid cash are more expensive for banks than just the fractional financing and digital handling of bankmoney. The prospect of a run on cash alone motivates the banking industry to push ahead with driving out cash – which in turn weakens the remaining central-bank control over today's megabanks all the more.

A reaction to this and other developments by upholders of legal tender are plans to introduce central-bank digital currency into public use (in the form of central-bank money-on-account or cryptocoin) as a replacement for the dwindling cash base. Currently the most prominent proposals are the CBDC concept of the Bank of England and the e-krona approach of the Swedish Riksbank.[6] At the same time, and certainly not by chance, these otherwise welcome plans for digital currency – that is, sovereign money – fit nicely together with negative interest.[7] An IMF study on the subject expressly states that central-bank digital currency 'would eliminate the effective lower bound on interest rate policy'.[8]

Instead of the outright abolition of cash, another approach is to 'decouple' cash from bankmoney and reserves, imagining cash as a sort of 'parallel currency'.[9] Putting it this way is quite misleading, because this approach, rather than 'de-coupling' cash, aims to achieve the 're-coupling' of cash under conditions of negative interest. The idea is not to discontinue the 1:1 parity between cash and reserves/deposit but – in parallel with negative interest – to levy a special 'conversion rate of cash' (CRC) equal to the negative interest rate. That rate would be charged, for example, when cash is withdrawn from an account, that is, when electronic or digital money is converted into cash. Such a CRC is assumed to cancel out the exemption of cash from negative interest. In the first instance, the CRC would apply to banks when they take up cash from the central bank or already-existing cash from other providers. The banks are then expected to pass on the CRC to their customers when they withdraw cash from their bank accounts.  However, as most banks receive the cash they need from cash-depositing customers for free, even a CRC would still come with a considerable fractional-reserve advantage for the banks.  

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Recent evidence about negative interest

Because of the cash worry, negative interest has so far not widely been imposed on nonbank money users. Some banks, however, charge negative interest on major customers with large deposits, albeit at low rates, for example, 0.4% p.a. on all accounts containing more than 100, 250 or 500 thousand euros, depending on the bank and whether the customers are private or institutional. Swedish banks have generally applied low negative interest to deposits.

The Swedish Riksbank was the first to introduce a negative overnight rate of -0.25% on bank reserves in 2009. The ECB raised negative interest rates on its bank-deposit facility from 0% in July 2012 to -0.4% in March 2016. Thereafter, the central banks of Denmark, Switzerland and Japan also applied negative interest rates. A special reason for the Danish and Swiss central banks' decision was not CPI or the economy but an attempt to defend their foreign exchange rate, in the Danish case its peg to the euro.[10] The U.S. and the UK, by contrast, have decided to dispense with negative interest. Meanwhile, the ECB has announced to end its negative interest-rate policy in January 2020. This cannot be taken for granted, as the return to normal (i.e. higher CPI and interest rates) pursued by the Fed since 2015 has for now reached a standstill – which in turn has revived the calls for negative interest.

Even compromising reports on the subject by authors who obviously wanted to avoid a collision with official policy doctrines have reported more or less clearly what was known in advance: negative interest did not bring about noteworthy positive or negative effects. Two reasons were given, firstly, negative interest was for the most part imposed by central banks on banks, not however by banks on customers; secondly, the rates applied are much too low to have made a difference, while applying higher rates was out of the question for fear of a run on cash with regard to customer deposits, and due to reluctance to burden the banks with regard to the reserve balances of banks.[11]

It became clear nevertheless that banks try to reduce their exposure to negative interest by reducing their reserve holdings as much as possible. Rather than holding excess reserves, they purchase easy-to-liquidate assets, even if these carry low or no yield. This contributes to non-GDP finance, while not being conducive to GDP-contributing finance and a higher CPI. Would that effect occur to a greater extent due to higher negative interest rates, this would then truly be counter-productive. Furthermore, banks have complained about their limited ability to pass on the cost of negative interest to their customers.[12]

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Weak transmission owing to generally weakened effectiveness of conventional monetary policy

The reason why negative interest has not brought about the desired effects so far is not only still-existing cash. More importantly, there are a number of systemic reasons inherent to today's financial economy and the present bankmoney regime based on fractional reserves.

To start with, the final rise of bankmoney since the 1940/50s was accompanied by a corresponding decline in the effectiveness of conventional quantity and base-rate policies, including weakened transmission of conventional policy measures from central banks to banks and from these to finance and the economy. With cash disappearing and reserves down to a very small percentage or even close to 0% of bankmoney, the lever of central-bank base rate policy has become worryingly short. In consequence, conventional instruments of monetary policy have increasingly lost effectiveness, resulting in a far-reaching loss of monetary control and unleashed excess dynamics inherent in the bankmoney regime. A central bank without important amounts of central-bank money in circulation might look somewhat redundant, a little like King Lackland.

Central banks cannot set interest rates in general. They can only set their own central-bank rates. These are usually very short-term and allow the central banks to control the overnight rate on the interbank money market. How the latter, however, would transmit to banks' lending rates and general capital market rates, given the small fractional base of central-bank money, remains rather enigmatic – unless banks, in an act of corporate central planning, administer their lending rates according to a mechanical formula adding a markup to the average of recent interbank rates.  

Basically, bank rates are not determined by central-bank rates. The latter are just one of a number of factors influencing actual bank rates and, contrary to common belief, not the single outstanding factor, because – it must be repeated as it is skated around all too often – the banks' need for reserves is only a very small fraction of the stock of bankmoney they create and maintain.

The respective fraction of bankmoney amounts to 2.5–3% of the stock of bankmoney in the euro area, consisting of 1.4% vault cash, a 1% largely idle minimum reserve requirement and 0.1–0.6% excess reserves (active interbank payment reserves, depending on a bank's size). In the countries of the British Commonwealth and a number of other countries, minimum reserves no longer exist. In the U.S., there is still a formal reserve requirement of 10% minus vault cash. However, the majority of banks (the smaller ones) is unbound by reserve requirements, certain positions such as large time deposits are generally exempt from the requirement, banks are allowed to temporarily 'sweep' deposits into accounts that are not subject to reserve requirements and the Fed, furthermore, pays deposit interest on reserve balances (as most central banks normally do). As a result, the actual U.S. reserve requirements have 'rapidly been losing relevance' and are now near the vault cash.[13] At the same time, cash does not count for much any longer, even though it may feel different in some people's pocket.

Expecting significant degrees of monetary transmission is all the more unfounded, as the banks are not financial intermediaries who would pass on central-bank reserves or customer deposits as loanable funds to other customers.[14] Non-monetary financial institutions, such as investment trusts that operate on bankmoney, act in this way, but banks, that are creators and extinguishers of bankmoney in their dealings with nonbanks, cannot. Banks need central-bank reserves for the settlement of interbank transactions, and for doing so banks need just those fractional small amounts of reserves. The reason is that electronic payments are carried out extremely quickly today in mutual inward and outward payments and much of it also within large megabanks, whereas nonbank expenditure occurs in partial amounts scattered over longer periods of time.[15]

The current appearance of central banks as the overly powerful rulers of money and banking and even finance in general is deceptive. That image owes much to the unconventional rescue measures of recent policies of quantitative easing (QE). These created a reserve flood for banks and a bankmoney flood for non-monetary financial firms, in this way stabilising threatened creditor/debtor positions, including government debt. This was indeed effective, but not without problematic co-effects. QE has been QE for finance rather than QE for the real economy. It has helped to maintain the existing over-sized positions of financial assets and debt without solving related problems. The truly painful parts of a severe crisis have largely been postponed, while the people in a number of European countries have nonetheless had to suffer painful austerity.

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The so-called savings glut – the real cause of depressed interest rates

A case in point regarding the fact that central banks follow rather than determine wider interest trends is the so-called savings glut. The continued decrease in CPI and interest rates from around 1980 is commonly attributed to globalisation in that it included strong competition from low-cost products from low-wage countries as well as weakened bargaining power of the unions. That view has some merit. Another equally decisive cause, however, was the parallel shift towards global financialisation. At the beginning that shift was based on much-increased industrial wealth, while later on it was increasingly based on money creation, credit and debt for financial leverage, including credit for investment bubbles in real estate and housing. The development was, and still is, based on the dynamics of a house-of-cards-like structure of second-level bankmoney, fractionally refinanced by base-level central-bank money, and multiplied by third-level MMF shares; all used at an accelerating velocity of the financial circulation of money due to new securitisation practices. GDP-disproportionate growth of money and credit, rather than boosting real-economic CPI, thus fed asset inflation and bubble building. As an entrenched pattern, this indicates 'too much finance' to the detriment of the real economy, also including a bias towards financial income to the detriment of earned income.[16]

What is harmlessly called a 'savings glut' is in actual fact a glut of financial excess capital chasing non-GDP-contributing investment opportunities, in other words, over-abundant supplies of money and credit, producing a demand market that depresses interest rates. Over-abundant money creation for finance thus creates the single most important condition for a continued series of financial booms – and busts.

As the last sharp reduction in central-bank base rates was made in the hot phase of the banking and debt crisis, the crisis was taken to be the cause of the reduction.[17] This is not wrong, but rather short-sighted. The crisis, as well as the decline in CPI and interest rates, was caused by the secular finance mega-bubble, which is rhetorically belittled as the 'savings glut'. Once more, central banks could not help but following and adding to the disinflationary and even deflationary tendencies by sharply cutting the base rates and creating an additional flood of money supply through QE. This further enlarged the 'savings glut' and lowered interest rates all the more. What conventional weakened base rate policies can no longer achieve is easily accomplished by the unconventional measures of QE, that is, by massive quantity policy supporting the maintenance of financial assets. The result, though, is deliberate financial repression; put more precisely, interest-rate repression.[18] At the same time, the money, credit and debt 'glut' is still the main obstacle facing central banks in their attempts to return to normal.

Considering banks, interest-rate repression counteracts the central banks' intention to prop up banks. The reason is that not only the deposit and borrowing rates that banks pay are reduced but also the lending interest and investment yields banks can earn. Negative interest rates, too, add to the reduction of the banks' overall interest margin. In Germany, for example, that margin narrowed from 4.5% in 2000 to 1.1% in 2017.[19]

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Why negative interest does not achieve what it is supposed to achieve

The ECB motivates the actions it takes with a mantra-like reference to the inflation target of 2%, as if this was not just an arbitrarily set value and as if central banks had the magical power to make that happen as desired. Other central banks, including the U.S. Fed and the Bank of England, more often refer to 'the economy' they want to get up and running again. The ECB too is required to contribute to economic policy by Art. 119 (2) TFEU (Lisbon Treaty). But among the numerous measures the ECB has taken in the course of the crisis, only the TLTRO program (Targeted Longer-Term Refinancing Operations) is directly geared to fostering real-economic capital expenditure.

The TLTRO program is the one exception from the rule that central bank policies support banking and finance in the first place rather than the real economy. The program currently totals over 700 billion euros and offers reserves at literally zero cost. This has helped weaker banks from weaker euro economies to fund lending that would otherwise have cost them something to refinance. Even though many banks in the euro area are still in a lamentable condition, it is difficult to see why banks would deserve such an extraordinary subsidy. Should banks and other financial institutions really want to increase investment in the real economy, they could easily do so without such a program, since the central banks accommodate the banks' fractional demand for reserves anyway, let alone the fact that QE has flooded the banks with reserves – which they certainly needed during the hot phase of the crisis, when the interbank money market had collapsed, but which they would prefer not to have under conditions of negative interest.

It thus remains unclear why negative interest would be an answer to the problem of suboptimal economic capacity utilisation and a disinflationary rather than reflationary overall tendency. Even if the transmission lever of central-bank money were much stronger and banks imposed high negative interest on all their customers, why would such a noticeable loss of purchasing power incentivise firms to take up more credit for capital expenditure and consumers to accelerate their spending?

Spending the money to avoid the demurrage comes up against borders of the velocity of money circulation and thus tends to tail off. Individual citizens may try to avoid the demurrage, but the community overall cannot. Should there be noteworthy attempts to avoid demurrage payments, they are likely to result in earlier, but not necessarily more, transactions, similar to the end-year spending panic in public households that are not allowed to carry funds over to the next year. Even if there was a degree of the imagined accelerating effect, would there really be more or continuously accelerated spending?

The expectation of negative interest causing people to spend their money faster is not as well founded as supporters of negative interest assume. Negative interest might even cause the opposite. People react in different ways. Negative interest, rather than spurring faster or additional expenditure, is also likely to trigger compensatory spending cuts. If money is confiscated from people, many or even most will not hurry to spend what is left but try to make up for what has been taken away (except under conditions of runaway inflation). During the 1950–70s, when CPI was high and temporarily even in the double-digit range, did people hurry up to spend their income? No. Instead, they demanded higher wages and more social security. It was the times of the spiral of rising prices and wages.

For banks, too, it does not make sense to spend reserves on some next best thing to avoid negative interest, because the entire system of 'co-operative' credit or bankmoney creation is based on in- and out-payments largely offsetting each other. The reserves they expend will return. Accordingly, the banking industry in a currency area cannot avoid paying negative interest by spending or lending reserves. If they nevertheless feel compelled to act in some way, and as practical evidence quoted above has already shown, banks will prefer to put money into non-GDP financial investment in real estate, stocks or similar, increasing the risk of new bubbles.

Some supporters of negative interest expressly refer to Gesell's 1916 concept and the 'Wörgl miracle' of 1932.[20] Gesell thought in terms of a cash economy, the cash certainly as freely created fiat money (Freigeld) but cash nonetheless. He almost equated holding cash with hoarding it, which in turn inspired Keynes's notions of liquidity preference and the liquidity trap. To stimulate spending for money to 'make the world go round', Gesell considered a demurrage rate of 6% p.a. to be appropriate, from which savings accounts (at the time most often deposited cash) would be exempt.

The best known test of the idea is thought to have taken place in 1932 during the Great Depression in Wörgl, a small town in Tyrol. After the two factories in the town were shut down and unemployment had reached 30%, the mayor resorted to issuing municipal emergency notes of an overall amount of 5,000 schillings, for free and at par with the official currency. Local emergency money was issued at the time in dozens of other places in Austria and Germany. The Wörgl notes, however, were subject to demurrage of 12% p.a., 1% at the end of each month.

It was a success. The local economy recovered to a degree, which was perceived as a little economic miracle.[21] After just one year, however, the Wörgl notes were suppressed, like all other local emergency currencies, at the instigation of the central banks, in this case the Austrian National Bank. This unnecessarily aggravated the economic situation, particularly in combination with the decision to stick to the gold coverage of currencies, thus denying the issue of additional money at a time when this would have been the only right course of action rather than in fact imposing devastating austerity – which paved the way for the Nazi's rise to power. 

To believers, the Wörgl experience is the irrefutable proof of concept. In reality, it is likely to have been a miracle that was not. The decisive point was that people had skills and resources but no money. They were given money, and that was it what did the trick. Without the 1% demurrage, the economy would have recovered just the same, as no one in town was sitting in a 'liquidity trap' and everybody was happy to buy what was available and to sell the goods and labour services they had to offer themselves.

In individual hierarchies of preferences from the absolutely necessary to the optional and further the luxurious, the liquidity preference becomes more relevant in the latter direction, while it is more or less irrelevant when it comes to the basic necessities of life. Equally, while richer people may ponder conditions and opportunities, poorer people cannot wait to spend. At the same time, richer people have a certain margin for manoeuvre, meaning that negative interest or somewhat higher taxes or prices do not necessarily trigger significant changes in their patterns of expenditure. Running a firm rather than a private household it is basically not too different. Some ongoing capital expenditure is indispensable, while other expenses can be postponed for a while. Consequently, negative interest is not a panacea but, if at all, has a rather limited impact. It is likely to hurt the poor while annoying the well-off without changing their behaviour much.

From another perspective, the liquidity preference loses in relevance when the economy is in an upswing and boom, becoming more relevant in a downswing and the bottoming of a cycle. It might thus be assumed that negative interest could be particularly helpful when the economy is in distress. The Gesellian demurrage approach was in fact born from the crises arising during and after the First World War and the Great Depression. The approach relies on the under-consumption theory of the business cycle from the 1910–30s. The core problem was seen as one of a lack of effective demand, caused by withholding rather than spending money, or of a stock of money and flows of income too small to support higher degrees of capacity utilisation.

Not by chance, the current revival of the idea under the heading of negative interest has occurred in the context of the 2008 banking and debt crisis. Like then, some over-indebted nation-states as well as people from the lower social strata in all the involved nations had to suffer austerity, albeit under conditions that were less miserable than was the case close to a hundred years ago. Unlike then, however, this time was different indeed in that the crisis only hit 'a little bit', so to say, and has for the rest been postponed by QE for finance, without solving any of the really relevant problems (out-of-control bankmoney creation and huge overhangs of credit and debt, holding back optimal economic development).

Even so, in no advanced country today is there a desperate situation of under-consumption. Instead, there are grounds for concern about widespread over-consumption in ecological terms, owing to an ecologically still ill-adapted technological basis of industrial production and products, extending from everything between raw materials and agroproducts to final services. It therefore seems very strange that many green-minded people are to be found among the most fervent supporters of negative interest with the aim of stimulating growth.

For the reasons given above, negative interest will for the most part miss its target of stimulating expenditure that would result in demand-induced growth for wanting to evade negative interest by spending the money as soon as possible. Rather than imposing dysfunctional negative interest, it would be much more appropriate to create money directly for real-economic purposes and use all possible ways of increasing the income of the population at large, including the further development of welfare transfers towards a universal basic income, thereby also reducing the all-important pressure of wage dependency.

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Is negative interest artificial 'inflation', a 'fee', a 'tax' or indeed 'interest'?

What would actually happen if negative interest were imposed on bank customers on a broad basis is this: when nonbanks make a payment in bankmoney to their bank, that amount of bankmoney disappears. It is deleted from the current account of the customer as well as on the liability side of the bank, liquid bankmoney being an overnight liability of a bank to its customers. This means that negative interest cuts a bank's liabilities to the rate of the negative interest. At the same time, the respective amount is booked as an entry into the profit account in the profit and loss statement. If, by contrast, banks pay deposit interest to a customer, this results in an entry into the loss account. The balance of the profit and loss statement finally contributes to a bank's equity account. In this way, negative interest adds to a bank's profits, much like overdrafts or other interest payments of customers to a bank. In the relationship between the banks and the central bank, the process is basically the same, except that it involves reserves in lieu of bankmoney.

The removal of liabilities from the banks' balance sheets, that is, the deletion of bankmoney, would certainly contribute to reducing the existing overhang of money that is the inheritance of the bankmoney regime. However, this kind of reduction is wrongly targeted, as it hits the mass purchasing power in the form of the income and savings of the middle classes and the poor.

Sometimes negative interest is likened to inflation, a service fee or a tax. None of these apply. Inflation, to begin with, is an increase in the price level and thus far a general loss of purchasing power. From a money owner's point of view, paying demurrage or negative interest on the current account balance (or even on savings and time deposits) may seem to be the same. Inflation, however, affects all actor groups and does not one-sidedly burden bank customers while augmenting bank profits. This is tantamount to an illegal private 'tax' on deposit money to the benefit of the banks. At the same time, the stock of bankmoney and the mass purchasing power of the people are reduced, which is counter-productive in a time of crisis. Irrespectively, inflation is anything but economically functional. As far as inflation is attributable to money overshoot, it benefits the privileged creators and first users of money (the Cantillon effect), but has to be borne by everybody. Deliberately heating up inflation is as illegitimate as deliberately approving deflation.

As regards interpreting negative interest as a surcharge on top of the fees for account management and payments, negative interest in fact adds to a bank's profit account in much the same way as the fees payable by the customers. However, there is no additional service at all, rather a disservice. Furthermore, fees are charged for a specified service, not as a fixed-percentage deduction from an account balance. A service fee of 6% p.a. on an account balance would clearly be an unacceptable case of extortionate pricing.

Is negative interest then a money tax or similar to a money tax, as some authors state? Seen from the payers' side, it again seems to be all the same. It is not. A tax is a levy based on public law and decided by a legislative body, not by a bank or central bank or any other agency on the basis of a commercial-law contract. Tax receipts go into the public purse, not into a bank's or central bank's profit account. Paying taxes is basically legitimate, but can of course be dysfunctional or useful, unjust or just, depending on the tax under consideration and the overall volume of taxes. But any tax benefits the public coffers, while negative interest on customer deposits redistributes money from the people to the banks.

In the case of a central bank, negative interest might be likened to a tax insofar as most of the receipts from negative interest, like other central-bank profits, are delivered once a year to the national treasury. Central-bank interest-borne seigniorage, however, relates not to a tax, but to a commercial profit accrued on the balance sheet of the national monopolist of notes, domestic reserves and foreign-exchange reserves. Seen as a tax-like levy, however, negative interest would be an undeclared money tax without legal foundation and thus a transgression of competences on the side of central banks, confusing monetary and fiscal responsibilities. Taxing is not a central bank's business.

Therefore, might not the term 'negative interest' be the most appropriate after all? No, because interest is the price a debtor pays for obtaining funds of a specified amount for a specified time on specified conditionality from a creditor. Negative interest, however, is not tied to a credit-and-debt relationship and not individually negotiable, nor is any fund or any other service provided. By comparison, the nearest thing to negative interest is still a levy or tax – which, however, and as explained, it is not and collecting it is even unlawful.

What then is negative interest? It is an inappropriately expanded and hence distorted measure of conventional interest rate policy, a desperate step by central-bank policy makers lacking further options in an attempt to regain policy effectiveness, which has largely been lost in the present bankmoney regime. Functionally, negative interest is a technocratic folly, exorcising people's 'liquidity preference', a faulty design sui generis, blurring the boundaries between monetary and fiscal functions and adding to the quasi-neofeudal bankmoney privilege. If negative interest goes to the banks, it is about overt expropriation of customer money. If negative interest were a money tax enacted by parliament, the banks would have to deliver the receipts to the treasury or the central bank. A regular money tax, however, would be unwise due to its counter-productive and inequitable effects.

It should be recognised that negative interest does not occur naturally and that its abstract arithmetic does not fit the real world. For example, 'real interest' is commonly defined as the actual interest rate minus the inflation rate. The result may be positive or negative. Either way, it is a matter of combining two different classes of operands. This makes sense when considering the actual-versus-nominal development of purchasing power, but this does not make the inflation rate an interest rate. An interest rate may be zero but is never negative. In a non-manipulative market environment, interest rates are always positive.

Seen from another perspective, an individual can have a greater or lesser income, or no income at all, but not a negative income; less than nothing does not exist. If people's expenditure exceeds their income, they have to liquidate wealth or take up debt to pay for the deficit. Breaking through the 'lower bound' is possible in the world of numbers, but not in the real world. Hence, as has been said often enough, negative interest is an unnatural concept. It refers to something that does not in fact exist. You pay interest to someone who has lent you money, but you do not agree to pay interest to someone who has borrowed from you. Similarly, it would be nice to go shopping and to have the shopkeeper pay you for the purchase. Apparently, this would be turning the real world upside down.

In the long-gone times of gold- and silver-based cash economies, hoarding money was a serious problem. Under present-day conditions of digital fiat money that can easily be created at any time in any amount, 'hoarding' is not a real problem anymore. Similarly, economic cycles are a phenomenon of structural change and a useful mechanism for readaptation in ongoing modernisation processes. In a recession, there is no need to panic, and a normal business-cycle downswing is no justification for impelling people to spend money that actually they would prefer to keep.

 The real problem is extreme booms and busts in financial cycles or financially superimposed business cycles. The core problem behind such 'irrational exuberance' followed by prolonged depressive and deflationary periods is: out-of-control non-GDP finance fed by overshooting money, credit and debt creation – a fundamental systemic problem that must be tackled, but certainly not just through measures of subordinate importance such as, for example, the Basle rules on bank equity, and definitely not by imposing counter-productive negative interest. What is really needed, instead, is to regain monetary control and thus the ability to conduct effective and output-conducive monetary policies. Central banks will finally no longer be able to avoid considering structural changes in the present system of money creation and monetary control.

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[1] Rogoff 2017.

[2] Buiter/Panigirtzoglou 2003, Buiter 2009, Rogoff 2017.

[3] In the 1920s and the first half of the 1930s, there was even a stamp scrip movement in continental Europe and America, to which I. Fisher adhered before adopting the reform approach of 100%-money, that is, a 100%-reserve on bankmoney consisting of cash and central-bank reserves. .

[4] Among the supporters of abolishing cash are Svensson 2003, Buiter 2009, Rogoff 2014, Ball/Honohan/ Gagnon/Krogstrup 2016.

[5] Esselink/Hernández 2017, Krueger/Seitz 2014 7, Rogoff 1998.

[6] Barrdear/Kumhof 2016, Kumhof/Noone 2018, Swedish Riksbank 2016, 2018.

[7] For example Bordo/Levin 2017 3, Bordo 2018 3. 

[8] IMF 2018 4, 29.

[9] Cf. Agarwal/Kimball 2015, Assenmacher/Krogstrup 2018, Rogoff 2017, IMF 2018.   

[10] Jurkšas 2017 27, IMF 2017 14–26.

[11] IMF 2017. Jurkšas 2017. de Sola Perea/Kashama 2017.

[12] de Sola Perea/Kashama 2017 47.

[13] Bennett/Perestiani 2002 53, 65.

[14] Jakab/Kumhof 2018,

[15] For a detailed description and discussion of the present money system see Ryan-Collins/Green­ham/Wer­ner/Jackson 2011, Werner 2014a, 2014b, Huber 2017a 57–100, 2017b, Graziani 2003 58–95, Rossi 2007 9–88, McLeay/Radia/Thomas (Bank of England) 2014, Deutsche Bundesbank 2017.

[16] Arcand/Berkes/Panizza 2012. Atkinson 2015 18–19, 82–109.

[17] For example by Assenmacher/Krogstrup 2018.

[18] The notion of financial represssion, or interest-rate depression, as a result also wage depression originates from Shaw 1973 as well as McKinnon 1973. Also cf. Reinhart/Sbrancia 2011, Diaz-Alejandro 1984, Hoffmann/Zemanek 2012, Smith 2014, Schnabl 2014. 

[19] Deutsche Bundesbank 2018 56.

[20] Buiter 2001 pp.32, Buiter/Panigirtzoglou 2003.

[21] Broer 2007, Lietaer 1999 ch.5.

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