the plan for the future
14 April 2022 (latest revision: 2 June 2022)
Two decades ago, when I was discussing negative interest rates on a message board, someone asked me a question. Why would anyone lend me money without interest? I may not pay it back. You cannot trust strangers. At the time, I did not have the answer. This question touches on a core requirement for interest-free money and negative interest rates. It can only happen if there is a high level of trust in the borrowers and the currency.
At first glance, there is little difference between negative interest rates and inflation. Both reduce your purchasing power over time, and in doing so, they can help keep money circulating in the economy. There is, however, one difference of importance. Negative interest rates signal trust in money, while inflation promotes distrust. The strongest currencies have the lowest interest rates. That is why interest rates are low in Denmark and high in Turkey.
The interest rate also reflects the trust in society. A high level of trust means that the economy operates more smoothly. If people and businesses have to deal with theft, graft, lawsuits, unstable financial arrangements, and extortion, doing business become a high-risk adventure. To compensate for these risks, interest rates on investments need to be higher. Trust is important. Negative interest rates are possible when creditors are willing to lend at these rates.
The blog post Saving the Economy and Restoring Financial Sanity explains that is the price paid for distrust. Money is loaned into existence by a financial institution that charges interest. If the interest rate is 5% and there is € 100 in circulation, borrowers must return € 105. But there is only € 100. The extra € 5 has to come from somewhere. Otherwise, the financial system could be in jeopardy. That is a reason why central banks print money.
Pinting money promotes inflation. Creditors desire a higher interest rate as compensation for the loss of purchasing power. It explains, for instance, the difference in interest rates between Denmark and Turkey. People do trust the currency of Denmark more than the currency of Turkey. Strangely enough, the Turkish leader realises that interest causes inflation, but he does not understand that only trust in the currency can bring interest rates down.
Usury is the price paid for distrust. You cannot force creditors to accept negative interest rates. They must trust the currency enough to do so willingly, otherwise the currency can collapse. Many countries are not ready for Natural Money. The level of trust in their societies and currencies is too low.