the plan for the future

The End Of Usury

15 February 2017 - 3 February 2018
Figure 1: Interest versus total income
Figure 1: Interest
versus total income


Interest rates have gone down in recent decades and reached zero in recent years. Most economists think that they will go up again. But what if the opposite happens? What if negative real interest rates become the new normal? That seems unthinkable. Yet, negative interest rates are inevitable unless something bad happens. And that something bad can be an error from the part of our political and economic leaders. This is Thesis One of Natural Money and this article is about Thesis One.

Several factors contribute to the dynamic that drives down interest rates. These factors do not go away when interest rates reach zero. The most significant factor is the room for capital to grow. For most of history interest rates on capital were higher than the economic growth rate and most interest income was reinvested. This is unsustainable in the long run.

It would be wise to allow interest rates to go lower if that is where market forces push them. Lower interest rates make more projects economical so that there can be more capital and wealth. In this way lower interest rates can help to end poverty and make the economy sustainable. Lower interest rates are beneficial to most people as they pay more interest than they receive. Interest is hidden in rents, taxes, and the price of everything we buy.[1][2] Hence, lower interest rates should be welcomed. This is Thesis Three.

 Thesis One:
Low and negative real
interest rates can
become the new normal

 Thesis Two:
Natural Money can be
the money of the future
if Thesis One is true

 Thesis Three:
Negative interest rates
have great benefits and
should be welcomed

So why do we have interest? Interest was needed for the economy to operate. Lending and borrowing wouldn’t be possible without interest. If you lend money, you can't use it yourself. People want a compensation for this inconvenience. And if you lend out money, the borrower may not repay. People want a compensation for this risk. Finally, if you can make a profit by investing, then why lend money without interest?

In the meantime a few things have changed. You can lend money to a bank but still use it any time. This is convenient. Banks check the financial condition of borrowers and lend to many different people. This reduces risk. Central banks and governments can help out banks if needed. And so bank deposits are now considered safer than cash.

But what about the returns on investments? Throughout history these returns were mostly higher than the rate of economic growth. Most of these returns have been reinvested so a growing share of total income was for investors. This cannot go on forever because who is going to buy the stuff corporations make? A simple example can illuminate that.

Figure 1 shows how total income and interest income (in red) develop with an economic growth rate of 2% and an interest rate of 5% when interest income starts out as 10% of total income and all interest income is reinvested. After 25 years the economic pie has grown faster than interest income and wages have risen. At some point interest income starts to rise faster than total income, and wages go down. After 80 years there's nothing left for wages. Despite its simplicity, this model explains a lot about what is going on in reality. In other words, income inequality appears to hamper the economy.

This can be called usury for good reason. It also explains why interest rates went down in recent years. In the short run it was possible to prop up business profits and interest rates by letting people go further into debt to buy more stuff. In the long run, the growth rate of capital income cannot exceed the rate of economic growth. So why does it happen now and why didn't it happen in the past? The answer is that it already did happen several times. In the past economic crises and wars destroyed a lot of capital and this created new room for growth.

Most of us agree that economic crises and wars are not agreeable methods for solving problems. There is an alternative. It is allowing interest rates to go negative. Indeed, that would be a wise choice. This is why the era of low and negative interest rates may be upon us. The end of usury could be near, and that will be a good thing. People should become aware of this. There is also a lot of research that needs to be done. Negative interest rates will be the next big thing in economics.

The End Of Usury was one of two papers presented at the IV International Conference on Social and Complementary Currencies in Barcelona in 2017. The other one was Feasibility of Interest-Free Demurrage Currency that deals with implementing interest-free money with a holding tax in the global financial system. It states that interest-free demurrage currency can become the money of the future. This is Thesis Two.


Not so long ago more than 99% of the world population lived in abject poverty. Most people had barely enough food to survive. In 1651 the philosopher Thomas Hobbes depicted the life of man as poor, nasty, brutish, and short. It had always been that way. Yet, a few centuries later a miracle had happened. Nowadays more people suffer from obesity than from hunger while the life expectancy in the poorest countries exceeds that of the Netherlands in 1750, which was the richest country in the world at the time. This miracle can easily match multiplying five loaves of bread and two fish to feed five thousand people. So how could it happen?

 Low interest rates
mean prosperity and
high interest rates
mean poverty

This miracle is all about the epic battle between two giants that went on for centuries. It was the battle of 'The Spirit Of Capitalism' versus 'Time Preference'. If time preference prevails, interest rates are high and people are poor, but if the spirit of capitalism gets the upper hand, interest rates are low and people are wealthy. As interest rates went lower, more investments became profitable, and so an unprecedented amount of wealth could be created over the centuries.

Negative interest rates may scare you but there is nothing wrong with negative interest rates. On the contrary, low interest rates mean prosperity. Poverty can soon be gone and the economy can become sustainable. It only requires a lot of capital that lower interest rates can facilitate. Lower interest rates make more projects economical, for instance investments in renewable energy or the infrastructure in poor areas like Africa.

But can interest rates go lower? In the wake of the financial crisis, interest rates have hit the zero lower bound. Investors prefer liquidity because returns on other investments are deemed less attractive. In other words, many people, businesses and banks pile up cash, and don’t invest or spend. Time preferences are too low so that money and capital markets are in disarray. Central banks have created a lot of currency to meet the demand for liquidity, for example via quantitative easing. But they are running out of options. Ending next recession will probably require negative interest rates.

Only negative interest rates can clear the supply and demand for money and capital at the equilibrium level that matches planned savings and planned investments. Most economists think that negative interest rates are just a temporary phenomenon and that interest rates will go up again. But that is probably not going to happen, unless our political and financial leaders make a mistake. Capital is running out of room for growth. We can accept negative interest rates or opt for the destruction of capital in order to create new room for growth. Destroying capital means that we all will be poorer.


Thesis One is that low and negative real interest rates will become the new normal, unless something bad happens. Figure 1 demonstrates that capitalism can increase overall wealth via investments. It also shows that capitalism can contribute to wealth inequality via the mechanism of interest as long as interest rates exceed the rate of economic growth. This can happen when most capital is in the hands of relatively few people that reinvest most of their capital income. As a consequence, wealth induced income inequality will start to hamper economic growth and the creation of more wealth. We may be at this point now.

Silvio Gesell believed that efficient financial markets help to lower interest rates. He realised that the free play of economic forces was hindered by the zero lower bound. If interest rates fall below a certain threshold, money would go on strike, he observed.[3] In other words, money would be withdrawn from the economy, and this would cause a slump. Many economists fear the zero lower bound and consider it a threat to economic stability, so in the wake of the financial crisis of 2008 efforts were made to prop up the economy and promote inflation using fiscal and monetary policies in a desperate attempt to push up interest rates.

Fiscal and monetary policies have downsides such as the political business cycle where politicians try to make the economy perform well just before the elections.[4] Monetary policies can cause distortions in the financial markets by not pricing in risk correctly.[5] If banks expect to bailed out if things go wrong, then they take more risk than they otherwise would have done. The mispricing of risk contributed to the financial crisis of 2008. Moreover, there are powerful forces at work that can push interest rates even lower, most notably the 'Spirit Of Capitalism'. So where are interest rates heading? A picture is worth a thousand words.

Figure 2: US real interest rate versus natural interest rate
Figure 2: US real interest rate versus natural interest rate

Nearly ten years after the financial crisis the world economy has recovered, but interest rates are still near zero. The writing is on the wall. Deeply negative real interest rates seem unavoidable as soon as a new recession takes hold. And interest rates may well remain negative after this recession has ended. Figure 2 from the Federal Reserve shows that natural interest rates went down in recent decades.[6] The red line is the natural interest rate, which economic models assume to be the ideal interest rate for optimal economic growth. The trend towards lower interest rates is clear. The room for capital to grow is dwindling.

Most jobs currently done by humans may be replaced by machines in the coming decades. Nuclear fusion may bring us unlimited energy for a fraction of current prices. This could cause a massive price deflation that may only be manageable when interest rates are negative. In theory, if energy is unlimited and machines do all the work, prices might go to zero if our desires are limited. And our desires might well be limited as we may pass our time in our personal virtual realities in the future so that we may not need more stuff.

Is there a limit as to how low interest rates can go? It seems that investments on average must have a positive return, otherwise there is no point in making them. Yet, we can't be too sure, because of the Spirit Of Capitalism, and the possibility of a savings glut. Presumably, yields on capital will remain above zero. Most likely these yields will be close to the economic growth rate. The yields on loans could be close to zero but negative yields are possible. Risk-free money such as government bonds and bank accounts may have negative yields most of the time.


Low and negative real interest rates can be a long term development that may become permanent. Central bankers already admit that low interest rates will persist for a longer period of time.[7] Nevertheless, they don’t think that this situation will persist. The aim of this study is to come up with a narrative that explains the trend towards lower interest rates in recent decades, to make a prediction with regard to the general direction of future interest rates, and to explore the preconditions for the prediction of low interest rates in the future to come true. The aim is not to investigate some specific causal relationship or to make exact predictions.

The research starts out with a few definitions of usury and a short trip into history to illustrate relation between interest rates, inflation and financial capital stock, in order to see the importance of the room for capital to grow. Then it examines existing economic theories to discover which factors contribute to lower interest rates, and whether or not these factors are in place. If these factors are still in place then it can be inferred that negative interest rates can become the new normal, unless something bad happens.

The following factors contribute to the trend towards lower interest rates:
• rule of law, political stability and economic stability;
• time preference versus spirit of capitalism;
• fractional reserve banking and central banking;
• globalisation, liberalisation and derivatives;
• a growing indebtedness related to lower interest rates;
• retirement savings and population growth.

Some apparent logical contradictions disappear after closer investigation. For example, the rule of law, political stability and economic stability can lead to lower interest rates, but also to higher economic growth, which promotes higher interest rates. This appears to be contradictory. However, as lower interest rates can improve the economy, it is the rule of law, political stability and economic stability that are dominant, so that the net effect is lower interest rates. If the interest rates had been higher, the additional economic growth wouldn’t have been possible in the first place.

What is usury?

When you ask what usury is, most likely the answer will be charging an excessively high interest rate. What is excessively high is a matter of debate. If you investigate the issue more closely, there are two types of arguments used against it. Usury is deemed undesirable from a social justice perspective or a sustainability viewpoint. Social justice is a political topic and it will be hard to find any agreement on this point. The argument of sustainability is more convincing because the calculus isn't very difficult so that objections can be easily dismissed.

The following definitions of usury might be worth considering and will be discussed shortly:
• paying for the use of money;
• charging an excessively high interest rate;
• compounding to infinite;
• charging a fixed interest rate;
• interest as a reward for risk;
• capital growing faster than the economy.

The traditional definition of usury that is around for thousands of years is paying for the use of money. This applies to any form of interest on money and it was forbidden by some major religions like Christianity and Islam. The modern definition of usury is charging an excessively high interest rate because high interest payments can push people into poverty so that they become debt slaves. An important argument against interest is that it compounds to infinite. For example, a gold coin weighing three grammes at four percent interest yields an amount of gold weighing six million times the mass of the Earth after 2,000 years.

There are more subtle forms of usury, such as charging a fixed interest rate. That can be a problem because incomes fluctuate. For example, a corporation thinks of starting a project and expects to make 8% per year and it borrows in the market at 6%. If the project then turns out to generate 4%, it will make a loss because of the interest payments, even when the project is profitable overall. In this way viable corporations can get into trouble because of interest payments. And because interest is a reward for risk, people and corporations in trouble need to pay the highest interest rates, while they often need lower interest rates to get out of trouble.

The most interesting definition is capital growing faster than the economy. This might happen when interest rates on capital are higher than the economic growth rate and most of interest income is reinvested. This is unsustainable in the long run so that the room for capital to grow dwindles. This might explain why interest rates could go negative, at least if negative interest rates are possible. The assumption of capital growing faster than the economy is probably valid because wealthy people save and invest most of their income. This often was what made them rich in the first place.

A short trip into history

In 1910 the amount of capital relative to national income in Europe and the United States was close to where it was in 2010.[8] The world had just been divided between the European imperialist powers and this put a constraint on capital growth. Interest rates may have gone to zero in the 1910s if it wasn't for World War I. The war destroyed a lot of capital in Europe. The economy recovered in the 1920s but in the 1930s the Great Depression took hold. The amount of capital relative to national income in Europe hadn't recovered to pre-war levels so the Great Depression wasn't the result of a lack of room for capital to grow.

The depression probably was caused by a lack of demand and policy failures from central banks. Deflation took hold and interest rates became stuck near the zero lower bound. The success of the local currency in the Austrian town of Wörgl suggests that negative interest rates could have ended the depression.[2] Sadly it was World War II and not negative interest rates that brought the Great Depression to an end. This war probably wouldn’t have happened without the Great Depression. The enlistment of soldiers and the production of war goods brought the economy in the United States back to full employment.

At the same time inflation in the United States picked up. Prices in the United States doubled between 1939 and 1948.[9] Owners of financial capital incurred serious losses. In those years the S&P 500 stock index rose less than 20%, which wasn’t enough to keep up with inflation by a wide margin. Bond holders fared even worse. Even though the infrastructure of United States was largely unaffected by the war, a lot of financial capital had been destroyed. Yet, inflation pushed interest rates away from the zero lower bound, and the loss of financial capital cleared the space for positive real interest rates in the years ahead.

After the war Europe had to be rebuilt. This also created new room for growth and positive real interest rates. And when capital ran out of room to grow again in the 1960s and 1970s inflation picked up, and this destroyed a lot of financial capital. Prices in the United States more than doubled between 1972 and 1982 and owners of financial capital incurred significant losses similar to those of World War II. Yet, this destruction of financial capital created new room for positive real interest rates in the years ahead. The inflation could be halted by cranking up interest rates so that real interest rates in the 1980s were the highest in recent history.

There were other places where investors could make good returns on their capital. In the 1970s and 1980s growth in Japan and the Asian Tigers was high. In the 1990s and the 2000s Eastern Europe and China built their economy while consumers in the United States and Western Europe went into debt. Lower interest rates combined with globalisation, efficient financial markets and innovations in risk management, allowed for more debt to exist. This propped up growth for a while but debt fuelled spending is not a sustainable path to growth. In this respect the financial crisis of 2008 was a warning sign.

The distinction between physical capital and financial capital is noteworthy. The Great Depression destroyed physical capital as many businesses closed down while financial capital remained largely intact. Even though stocks fared poorly, money and bonds increased in value. Inflationary war spending became the way out of the Great Depression. This led to a destruction of financial capital. Without the war spending it may have been difficult to get the economy moving again. Yet, if interest rates could have gone negative, the Great Depression may just have been a shallow recession, and World War II may never have happened.

Rule of law, political stability and economic stability

Trust in the future is the basis of the capitalist economy. This means that investors imagine that the future will be better so that their investments will turn out to be profitable, or at least not loss making. Credit, or alternatively financial capital, is essential to make that happen. Credit is given because of this trust in an imagined future. Most of our money is credit so the value of our money depends on imagination. Some people argue that credit, banking, and central banking are a fraud, because they are based on a fantasy. One could also say that the capitalist economy demonstrates what the human imagination can bring about.[10]

In order to have trust in the future, investors must believe that their investments are safe. The rule of law, political stability, absence of graft, and economic stability are such elementary factors for the economy to function, that we often take them for granted. Political stability affects policy uncertainty, which is the risk that a government annuls earlier commitments. Policy uncertainty tends to impede economic growth.[11] Government actions like confiscating or taxing assets can harm businesses and add to policy uncertainty. Inflation is a way of confiscating assets so government deficits are a cause of policy uncertainty.

A wealth tax is a way of confiscating assets. It could increase the minimum interest rate investors require in order to make good on the tax. For example, investors who accept 0% on their investments if more attractive options are absent, might demand 2% if the wealth tax is 2%. This reduces the available amount of capital as fewer projects become viable at higher interest rates. And so the economy might suffer from the tax while similar benefits could be attained via lower interest rates. Alternatively, a wealth tax could help to reduce wealth inequality and bring higher interest rates so that fewer people go into debt.

Interest rates are the lowest in stable countries with low inflation rates as stability and trust influence the risk premium associated with investments. The greater the perceived risk, the more the future is discounted, and the higher interest rates are likely to be, and the lower the living standard is likely to be. It is therefore not a coincidence that negative interest rates happen in Switzerland and Sweden, and not in Argentina or Mozambique. It is also not a coincidence that interest rates in Europe are lower than in the United States as the Stability and Growth Pact puts a constraint on government deficits and debts.

Interest rates drivers: growth versus inequality

Time preference versus spirit of capitalism

For most of history, returns on capital were higher than the economic growth rate.[8] This cannot continue indefinitely unless a sufficiently large portion of the proceeds of capital is consumed. As the distribution of wealth in developed economies has become increasingly skewed in recent decades, this is not happening. Wealthy people invest a larger part of their income than people on average. Their inclination to save and invest was often what made them rich in the first place.[12] In recent decades people in Asia started to save more and this added to the savings glut. Consequently, interest rates could only go down.

Indeed, capitalists are special people. They believe that money spent on frivolous items is money wasted. If you invest your money, you will end up with more money that you can invest again.[12][13] Hence, capitalists often end up owning a lot of money when they die. What's the point of that? They invest in the businesses that make the items ordinary people enjoy. Ordinary people wouldn’t have invested their money, but spent it instead on frivolous items so that these items wouldn’t have been produced in the first place. That is because they suffer from time preference, a condition that makes them spend their income sooner rather than later.

Interest rates drivers: growth versus inequality
In a sense there is a battle between the spirit of capitalism and time preference. If the spirit of capitalism wins out, interest rates go down. If time preference wins out, interest rates go up. In a capitalist economy people with a lower time preference than the prevailing interest rate tend to save and invest, while people with a higher time preference tend to consume and borrow. At some point the people with the higher time preferences pay a lot in interest and can't borrow any more so that they have less money to spend.

And so the economy slows down because of a lack of demand and interest rates go down. Then people with a somewhat lower time preference start to consume and borrow until they can't borrow more. This cycle can repeat again and again as interest rates go lower because more and more people's preferences start to exceed the prevailing interest rate. But as the capitalists get wealthier, their time preferences go down even further because they can't spend all their wealth on consumption.

In most cases large estates do not last more than three generations, which is about 70 to 100 years. The heirs to large estates often don't inherit the spirit of capitalism from the founder. The fact that wealth is becoming increasingly concentrated suggests that the decline rate of large estates is lower than the rate in which they are built. As more and more people become indebted and can't borrow more, interest rates are driven down further, so that in the end interest rates are determined by the people with the lowest time preferences.

Income inequality can lead to political and social instability.[14] The highest incomes often come from large estates so Thomas Piketty argued that wealth should be taxed and redistributed.[8] Income inequality tends to coincide with social problems[15] so a redistribution of wealth can improve political and social stability. Yet, there is something else to consider. Many people are still poor. Real improvements matter more to them than wealth equality. Poverty is on the decline globally and nothing beats poverty like capitalism. That is because investments have proven to be the most powerful way of ending poverty.

The wealthy may evade taxes, bribe politicians to pass laws that favour them, offshore work to low wage countries, and lend out money at interest so that we become their debt slaves, but in the end it will be to no avail, because their acts reduce the demand for the stuff their corporations make, so that profits go down and interest rates must follow. If interest rates are allowed to go negative, the invisible hand of the market can help to solve this issue.

There are a few confusions about the effects of lower interest rates on wealth and income equality. First, lower interest rates allow for more debt to exist. As a consequence many people borrowed more and their interest payments didn’t go down as interest rates went down. This borrowing and lending contributed to wealth inequality as the lenders were often wealthy people so that negative as well as positive balances increased. Without ample data, the impact on income inequality is difficult to estimate. However, as soon as interest rates go negative, the interest on these debts can help to reverse income inequality.

Second, as interest rates went down, the value of investments such as bonds, stocks and real estate rose, so that it is often argued that lower interest rates contribute to wealth inequality. A fault in this reasoning is that these rising asset values are realised interest gains. If interest rates had remained higher, the owners of these assets would not have seen their assets rise in value, but instead have received more dividends, interest and rents, and they could expect to receive more dividends, interest and rents in the future.

Third, different investors make different yields on their investments. The interest rate on capital is some kind of average. On average, wealthy people make higher yields on their investments because they have better information and can afford to take more risk. This means that even at interest rates near zero, wealth inequality can contribute to income inequality. Interest rates may need to go even lower for this to end. And they may go even lower as a consequence, for wealth inequality reduces the potential for capital to grow.

In the end it is important to realise that most people pay more interest than they receive. The interest paid on mortgages and loans is the proverbial tip of the iceberg. Interest is hidden in rents, in taxes because governments pay interest on their debts, and the price of every product and service. German research has shown that 80% of the people pay more in interest than they receive, while only the top 10% of richest people receive more in interest than they pay.[2] Lower interest rates therefore benefit most people despite a number of side-effects that work in the opposite direction.

Fractional reserve banking and central banking

Liquidity preference results in a demand for money because it is the most liquid asset. It can be exchanged for any other good or service the most easily so that money commands a position of power. People keep money on hand for their daily transactions, for unexpected large expenses, and for investment opportunities that may arise.[16][17] They are unwilling to lend this money unless they can call it in at short notice. Fractional reserve banking enabled banks to lend out money that can be withdrawn on demand. This freed up resources that were unavailable until then. This helped to lower interest rates.

Fractional reserve banks create money. Not only the loans can be spent like money, but so can the deposits that fund them. In this way, fractional reserve banking can made more funds available for lending, and at lower interest rates. Fractional reserve banks can run into trouble when too many depositors withdraw their funds at the same time. The quality of the fractional reserve money greatly depends on the possibility to exchange it for currency at any time. If debt can receive a status similar to currency and gold, this would greatly undermine the bargaining position of the owners of currency or gold.

To improve the stability of fractional reserve money, central banks were instituted to help out fractional reserve banks that ran into trouble. This safety net allowed interest rates to go even lower as central banks reduced the risk associated with bank deposits. It is not a coincidence that the Industrial Revolution started in England, just after the introduction of fractional reserve banking and the institution of the Bank of England, the first central bank in the world. Abundant credit at low interest rates facilitated the largest build-up of capital history ever witnessed.

Central banks can also add currency to the banking system. This may be needed to cope with the accumulation of interest. The money to pay for the interest from doesn’t always exist and may need to be created out of thin air, either by creating new debts or by printing currency. If there is a reserve requirement, central banks need to print currency to maintain a ratio between debt and currency in the banking system. In the absence of a reserve requirement it might be needed when depositors take out their deposits. A simple example can illustrate that.

Assume that Jesus' mother had put a small gold coin of 3 grammes in Jesus' retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose that the account was kept for this eventuality. Assume now that the end is near and that the money is about to be withdrawn. How much gold would there be in the account in 2016? The answer is a nugget weighing more than 10 million times the mass of the Earth. The banking system would collapse if Jesus came back to claim his gold. If instead Jesus’ mother had put one euro in the account, the ECB could print all the accumulated interest out of thin air.

An important criticism of fractional reserve banking and central banking is that lower interest rates promote bad investments and moral hazard. If interest rates go higher, some investments are not profitable any more. This argument rests on the assumption that interest rates will go higher. Central banks reduce the risk premium so it is also argued that central banks push interest rates below their free market level because risk is not priced in correctly. Indeed, there is a moral hazard attached to central bank guarantees, but until now the abundance of credit at low interest rates has proven to be more beneficial overall.

More recently it is argued that central banks, by their extraordinary measures like quantitative easing, have suppressed interest rates, for example by buying up government bonds. The problem with this reasoning is that when interest rates on short term funds are near zero, markets cease to operate in a normal way because of the zero lower bound and the emerging liquidity preference, so that central banks can print currency without creating inflation because the new currency is used as a substitute for the bonds. Had it been possible to implement negative interest rates on short term money, these measures probably weren't needed, and the market could have set the price for these bonds.

Globalisation, liberalisation and derivatives

The globalisation of financial markets in recent decades was made possible by advances in information technology and financial innovations. In the 1980s and 1990s financial markets were liberalised and capital controls were gradually removed. Capital controls can lead to higher interest rates and thus increase the cost of capital.[18] The globalisation and liberalisation expanded the available borrowing and lending possibilities throughout the world.[19] The supply and demand for money and capital could clear more easily. This reduced the cost of financial intermediation.

Globalisation and liberalisation of financial markets made financial markets more liquid. It became cheaper and easier to exchange financial instruments such as bonds and stocks, but also goods and services for cash. This development is more commonly known as financialisation. Financialisation makes it easier for people and businesses to rationalise their assets and income flows using financial instruments. Like fractional reserve banking financialisation undermined the position of money as the most liquid asset and hence the commanding position of the owners of money to demand interest.

The process of globalisation and liberalisation of financial markets wasn’t without troubles. It enabled money and capital to move more freely so that changing expectations could more easily cause financial instability. A number of financial crises in the 1980s, 1990s and 2000s were neutralised by central bank interventions. Some countries used capital controls to counter the financial instability caused by globalisation. Malaysia introduced capital controls during the Asia crisis of 1998 while China never stopped using them.

Better risk management allows banks to increase their lending. With more funds available, interest rates can be lower, so that better risk management can contribute to lower interest rates. Financial innovations such as credit derivatives improved the risk management of banks, which allowed banks to lend more money. This remains true after the crisis of 2008, despite the fact that a poor use of derivatives contributed to the financial crisis. Banks with larger gross positions in credit derivatives cut their lending by less than other banks during the crisis and had consistently lower loan write-offs.[20]

Debt and wealth constraint

Debt and wealth constraint

Lower interest rates allow for more debt to be serviced. On the other hand, higher debt levels give less room for interest rates to rise as higher interest rates will affect aggregate demand. This dynamic can contribute to lower interest rates in the future. Whether or not people actually go into debt doesn’t depend on interest rates alone. Nevertheless, as interest rates went down in recent decades, consumers in Western Europe and the United States took on more debt. This is often attributed to the wealth effect.

As interest rates went down, the value of investments rose, and many people started to feel wealthier so that they adapted their lifestyle. Most notably, rising house prices contributed to the wealth effect induced consumer spending.[21] The wealth effect is the result of the creation of financial capital by stabilising the financial system. This allowed interest rates to go lower and asset values to rise. This propped up spending at a time when labour incomes were lagging because capital income was taking up a larger portion of national income. The debt binge further contributed to wealth inequality as these debts became interest bearing assets for investors.

The consequence is a tug of war between creditors and debtors where debtors have the upper hand. As capitalists pile up capital, ordinary people don't have the money to spend to make this capital profitable, so that business profits go down. Interest rates then go down so that ordinary people can go deeper into debt. This props up business profits for a while but then the ordinary people can't borrow more to buy the stuff corporations make so that interest rates need to go down again and ordinary people can borrow more. Raising interest rates reduces aggregate demand so that interest rates can only go down.

It is sometimes argued that central banks have lowered interest rates in order to create asset bubbles so that wealth effect induced spending could prop up the economy. A more general criticism is that central banks distort the market mechanism and support irresponsible behaviour, most notably in the form of higher debt levels. This is because banks make funds available for lending and central banks reduce the risks associated with banking so that interest rates can go lower.

The risk premium that central banks eliminate was clearly visible after the financial crisis of 2008. At first interest rates spiked, only to go to near zero after central banks intervened so that a liquidation of debts never took place. In the absence of structural reforms, the Eurozone was at risk of unravelling in 2012. The President of the European Central Bank then stated that the ECB would do whatever it takes to save the euro. This reduced the risk premium on the government bonds of countries that were facing a debt crisis.

If creditors keep on accumulating credits interest rates will probably go negative, and debtors will have no problem servicing their debts. Probably a balance can be achieved where the ratio between capital stock and GDP is stable. An alternative is inflation, but inflation erodes trust in money and the financial system. Low interest rates are a sign of trust so that negative interest rates appear more attractive than inflation because negative interest rates imply even more trust in money and the financial system. This can increase credit and enable prosperity.

Retirement savings and population growth

People who have enough money for their consumption in the present may become concerned about retirement. This applies to the group of people that plans for retirement and to those who are enlisted in a retirement plan. In this way the law of diminishing marginal utility, which states that the utility of every extra unit of consumption diminishes, counteracts time preference, which states that people desire to consume a good or service sooner rather than later. This implies that under the condition of affluence, there can be more retirement savings, so that interest rates can go lower.

In Solow’s growth model, population growth contributes to economic growth.[22] This model is consistent with the available evidence.[23] More economic growth often leads to higher interest rates as the demand for funds increases. It is therefore not a coincidence that low population growth in Europe and Japan coincided with low interest rates in these areas. This can promote the case for immigration to prop up economic growth. The recent discomfort regarding mass immigration in Europe and the United States can promote the case for lower interest rates.


Income inequality appears to hamper the economy so interest rates may go lower. Low and negative interest rates can become the new normal. The factors contributing to lower interest rates will probably remain in place. Interest rates have never been negative so this is uncharted territory. That may scare you, but you should fear the alternatives. Our civilisation and wealth rest upon the trust that is reflected in low interest rates like never before. Most people don’t realise that. Higher interest rates mean a destruction of trust reflected in financial capital and this can have serious consequences.

Actions intended to stimulate the economy, such as deficit spending and printing money, promote inflation and can push interest rates higher. These actions are likely to do more harm than good. As soon as the inflation genie is out of the bottle, it may be hard to put it back in. Higher interest rates can hurt the economy, either by reducing aggregate demand or by undermining confidence in debts. Investors may then seek an additional risk premium when economic instability makes it more difficult to foresee future policy actions. Rising interest rates will therefore probably coincide with poor economic performance, inflation and economic instability.

So why don't economists see this great potential? They appear to be caught up in the concept of scarcity. Scarcity is the main pillar of economic thought. Yet, economists should raise some fundamental questions at a time when more people are dangerously overweight than underfed. Wealth makes the law of diminishing marginal utility overtake time preference. At least scarcity doesn’t apply to the wealthy top 1% of people who own most capital and have the largest influence on interest rates. They are running out of things to invest in. The economic world is turning upside down, and so are interest rates.


1. Henk van Arkel and Camilo Ramada (2001). Poor Because of Money: Our theory on interest, Strohalm: poorbecauseofmoney.html
2. Margrit Kennedy (1995). Interest and Inflation Free Money. Seva International:
3. Silvio Gesell (1916). The Natural Economic Order. Translated by Philip Pye, Peter Owen Ltd (1958): NaturalEconomicOrder.pdf
4. William D. Nordhaus (1975). The Political Business Cycle. The Review of Economic Studies Vol. 42, No. 2 (Apr. 1975), pp. 169-190:
5. Marcus H. Miller, Paul A. Weller and Lei Zhang (2002). Moral Hazard And The U.S. Stock Market: Analyzing The 'Greenspan Put'. Institute for International Economics Working Paper No. 02-01:
6. Thomas A. Lubik and Christian Matthes (2015). Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches. Federal Reserve Bank of Richmond Economic Brief October 2015:
7. Stanley Fischer (2016). Monetary Policy, Financial Stability, and the Zero Lower Bound. Federal Reserve. Speech At the Annual Meeting of the American Economic Association, San Francisco, California:
8. Thomas Piketty (2013). Capital in the Twenty-First Century. Belknap Press.
9. Milton Friedman & Anna Jacobson Schwartz (1980). From New Deal Banking Reform to World War II Inflation. Princeton University Press.
10. Yuval Noah Harari (2014). Sapiens: A Brief History of Humankind.
11. Scott R. Baker, Nicholas Bloom & Steven J. Davis (2013). Measuring Economic Policy Uncertainty. Stanford University.
12. F.P. Ramsey (1928). A Mathematical Theory of Saving. Economic Journal 38 (1929), pp. 543-559.
13. Heng-Fu Zou (1994). 'The spirit of capitalism' and long-run growth. European Journal of Political Economy 10 (1994), pp. 279-293.
14. Alesina, Alberto, and Roberto Perotti (1996). Income distribution, political instability, and investment. European Economic Review 40(6): 1203-1228.
15. Richard Wilkinson & Kate Pickett (2009). The Spirit Level: Why More Equal Societies Almost Always Do Better.
16. John Maynard Keynes (1936). General Theory of Employment, Money and Interest. Palgrave Macmillan.
17. Dieter Suhr (1989). The Capitalistic Cost-Benefit Structure of Money. Springer Verlag.
18. Sebastian Edwards (1999). How Effective are Capital Controls? Anderson Graduate School of Management, University of California.
19. Otmar Issing (2000). The globalisation of financial markets. European Central Bank.
20. Lars Norden, Consuelo Silva Buston and Wolf Wagner (2014). Financial innovation and bank behavior: Evidence from credit markets. Tilburg University:
21. Karl E. Case, John M. Quigley & Robbert J. Shiller (2005). Comparing Wealth Effects: The Stock Market versus the Housing Market. Yale University & NBER
22. Robert M. Solow (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, Vol. 70, No. 1 (Feb., 1956), pp. 65-94.
23. N.G. Mankiw, D. Romer, and David N. Weil (1992). A Contribution to the Emprics of Economic Growth. Quarterly Journal of Economics, Vol. 107, No. 2, pp 407-437.