Dealing With The Psychological Consequences Of Negative Interest Rates

September 25, 2019

The prospect of negative interest rates is making people angry. They don't like the idea. For that reason some politicians call for a ban on negative interest rates because that will make voters happy. This is a price control and that doesn't bode well for financial stability. Psychologists might be able to explain why people prefer 5% inflation to a negative interest rate of -0.5%, but it is a fact that can't be denied.

It is a problem that can be fixed with Natural Money. This short article explains how. Natural Money has the following characteristics:

⦁ Central bank money carries a holding fee of approximately 10% per year, so if you hold central bank money then € 1,00 turns into € 0,90 after a year, which can make it attractive to lend out money at negative interest rates.

⦁ Interest rates on bank accounts might be around -2% per year in terms of cental bank money, so people don't pay the holding fee but the interest rate in the market.

⦁ Cash is a short-term loan to the government and carries an interest rate equal to short-term government loans in the market. Cash and central bank money have different rates to prevent cash from being hoarded when interest rates are negative.

⦁ It is expected that interest rates go negative and will remain in negative territory, so once most interest rates are negative, positive interest rates can be phased out to forestall a quest for yield leading to irresponsible risk taking.

Interest rates may go negative and remain negative because of the supply and demand for funds and capital balance at a negative interest rate. In that case a price control like a minimum interest rate of zero can cause financial mayhem. Why interest rates may go negative and remain negative is explained in detail here:

A detailed explanation of the Natural Money proposal can be found here:

To solve the psychological issue of coping with negative interest rates, it is important to realise that central bank money and cash can be separate currencies, and that a negative interest rate can be applied to cash as is explained here:

If people see the number of monetary units in their account go down, even if it is by a small amount, they might panic or become angry, but if their monetary unit loses value, they don't seem to care. With Natural Money cash loses value relative to central bank currency at a rate equal to the interest rate on short-term government debt so it might be better to express the value of bank accounts in cash rather than central bank money.

The interest rate on short-term government loans is one of the lowest, so banks must be able to offer at least this interest rate so that people won't see the number of monetary units in their account go down. Inflation is expected to be low while there might even be deflation in terms of central bank money so that cash would have a low inflation rate too. Prices may be expressed in cash only so that cash will be the currency in people's minds.

Critics might argue that people will be fooled by this scheme, just like they were fooled before by inflation. They won't notice the negative interest rate, just like they didn't notice the inflation previously. But separating cash and central bank money and expressing prices and the value of bank accounts in cash can clear the psychological barrier that stands in the way of adopting negative interest rates by the public.

In order to avoid misunderstanding it must be stressed that central bank money remains the accounting unit in the financial system. Bank accounts should be accounted in central bank money, just like debts and interest rates as well as prices of financial assets. A similar situation existed in Europe after the introduction of the digital euro in 1999 and before the introduction of the cash euro in 2002.

Featured image: Ara Economicus. Beverly Lussier (2004). Wikimedia Commons. Public Domain.


Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.

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