Several readers disagreed with my statement that “negative interest
interest rates cannot occur naturally“.
Most of the disagreements involved “safekeeping”. Let’s take a look at one
such comment along with my reply.
In response to Negative Interest Rates: Can They Ever Occur Naturally? What
is the “Natural Rate”? Reader Thomas commented ….
I rarely disagree, but here I am. Safekeeping is an important function.
Storage costs (for silver, not so much gold or fiat) can also be important.
Bitcoin would be more expensive if bitcoin safekeeping and storage weren’t
problematic. If bitgold proves itself over time, it may put a floor on
interest rates. GLD would, if not for rehypothecation, various frauds on
commodity accounts, etc. Of course if interest rates go negative enough,
people will find cheaper ways to secure their wealth.
Email Exchange With Acting Man
Pater Tenebrarum at the Acting Man blog responded to my article
with this Email thought …
If the natural rate were to fall to zero or into negative territory, we
would all cease to consume altogether – all our activities would become
future-oriented. In other words, we’d starve to death. So it is literally
impossible for the natural rate to become negative, as long as time passes
for us, i.e., as long as there is a “sooner” and a “later”.
I pinged back “Some confuse negative interest rates with storage fees.
There is a legitimate role of paying a safe-keeping fee. But nothing is being
kept safely. And there are already checking fees, statement fees, ATM fees,
etc.”
Pater pinged back “Exactly, the storage fee analogy is not applicable in
this case! It would only be applicable if the bank is 100% reserved, which
almost no bank is. You are quite correct that the perverse move of the other
gross market rate components into negative territory is a function of the
fiat money system and what it enables the authorities to do.”
Both Pater and I would welcome 100% reserves and reasonable safekeeping
fees. But let’s not confuse that with negative time preference.
Not Natural
As long as we are discussing what’s natural and what’s not, here’s a ping
from Sitka founder Brian McAuley.
There is nothing natural about a purely fiat currency that can be inflated
at will by a central bank. There will undoubtedly be a number of “unnatural”
elements of that system that become visible over time, and negative interest
rates may be one of them.
For most of human history, we used tangible things as a medium of exchange
that were hard to replicate on demand, or at least took a lot of work to
replicate or find: silver, gold, beaver pelts, even cigarettes in prison.
Negative interest rates were impossible.
What we have now is just the latest modern innovation in finance, which
not only enabled the inflation of a credit bubble over the past 40 years, but
has also created the perceived need for negative interest rates to just keep
the whole thing from collapsing. Incredible.
Is the Vault Empty?
In absence of central bank or government manipulation of fiat monetary
systems, it is impossible for interest rates or time preferences to be
negative.
Don’t confuse negative interest rates in a fiat world with safekeeping
fees in a 100% reserve system.
Mike “Mish” Shedlock
