Fiscal and Monetary Policies

11 May 202412 Nov 2025 nivtricLeave a comment

Economic cycles

Mismatches between supply and demand cause economic cycles. A harvest may fail, and food prices may rise, leaving us with less money to spend on other items. Mismatches can concern the supply and demand of money, capital, labour, raw materials or consumer products. Interest charges also contribute to economic cycles. Interest rates reflect the market for funds. If all markets were perfect, economists argue, supply could adapt to demand instantly, and there would be no economic cycles. Not unlike many others, economists love fairy tales about a Paradise where everything is perfect. And so, they may advise us to make markets perfect, so that an economic Paradise will ensue.

Economic cycles occur because mismatches between supply and demand emerge periodically and eventually resolve. Economists use the term equilibrium in their models to explain the relationship between supply, demand, and price, but these models are simplifications of reality. There is rarely a stable equilibrium, and fluctuations in demand and supply cause changes in prices, inventories, and employment. There are several theories and explanations regarding those mismatches, economic cycles, and their effects. Most notably, money, credit and interest deserve attention.

According to Say’s law, supply creates its own demand because we make goods and services to use ourselves or to acquire other goods and services. It is most applicable to a simple barter economy. When money serves as a medium of exchange, we can postpone our purchases, leaving producers with excess inventory. Money hoarding can be a serious problem as it interrupts the circular flow of money. When money loses value, we are less likely to postpone purchases. It is why central banks aim for a bit of inflation. However, inflation shouldn’t be too high, as that can undermine trust in the currency.

Expectations are another factor. When consumers feel good about the future, they are more willing to spend on big-ticket items. Likewise, when investors expect brighter prospects, they anticipate higher profits, making them more willing to invest. Conversely, when consumers and investors are pessimistic, the opposite happens. And so, expectations can become a self-fulfilling prophecy. Likewise, when people expect a bank to collapse, it may collapse because that expectation triggers a bank run. Policy makers try to instil confidence in the system because a lack of confidence can break it. The reason is that credit means trust, and trust is what keeps the system going.

During good times, businesses and individuals tend to be confident. Credit is often available because businesses’ and individuals’ future income projections serve as the basis for banks to lend money. And so, companies and individuals can borrow more in good times. When the economy slows and their incomes decrease, they may struggle to make their interest payments. Consumers would have more disposable income without debt, since they wouldn’t have to pay interest. Similarly, businesses can go bankrupt even when they are profitable overall because of interest charges. And so, interest charges can exacerbate and prolong the bust.

Leverage contributes to the overall risk in financial markets. Liquid financial markets make it easier to enter and exit positions, leading investors to believe it is safe to operate with leverage. If markets were not fluid, leverage would appear more dangerous, as it would be more difficult to exit a position. For example, if you aren’t sure that you can renew your mortgage after five years, you aren’t going to buy a home. Liquidity enables risk-taking, allowing the overall level of risk in the financial system to increase. That can become apparent during a crisis. People who have to sell their home during a housing crisis may end up selling it at a low price, leaving them with a debt that takes years to repay. Therefore, maintaining a liquid market is crucial for its safety, and limiting leverage further enhances its security.

Bureaucratic interventions

In the wake of the Great Depression and World War II, government and central bank interventions have become standard tools for bureaucrats to manage the capitalist economy. Fiscal policies involve steering the economy through government expenditures. Ideally, it works as follows. When the economy is performing poorly due to sluggish demand, the government increases spending to boost demand. Conversely, when the economy is overheating due to excessive demand, the government reduces spending to curb demand. Likewise, central banks can lower interest rates to promote borrowing and boost demand, or raise interest rates to discourage lending and curb demand. These policies can have the following undesirable consequences:

The timing of the measures may be off, so when the measure has been decided upon and is taking effect, the economy may already be on the desired path.
Politicians may interfere and press for increased government spending or lower interest rates to boost the economy and get them re-elected.
Central bank interventions cause market participants to take more risk because they expect the central bank to intervene.
Due to usury, debt levels increase, so once these policies are commonplace, there are no corrections to cleanse the system from its excesses.

By failing to periodically cleanse the financial system of its excesses, either through a debt jubilee or an economic depression, the economy becomes addicted to credit expansion, and the final collapse will be even more severe. As the US dollar is the world’s reserve currency, a collapse in trust in this currency can trigger a global economic apocalypse. Usury is the primary reason for fiscal and monetary policies, because interest on money and debts generates a money shortage, driving a demand for credit. Debtors must repay more than they borrowed, but that extra money doesn’t exist. And so, governments and central banks fill the gap to prevent the usury scheme from collapsing.

Due to usury, it has become a permanent requirement. To prevent a shortage of money or a liquidity crunch from materialising, governments borrow, and central banks print money. The shortage arises when the private sector fails to borrow enough to cover the interest on existing debts. To counter the problem, the government can borrow and spend this money. Central banks can lower interest rates to make borrowing more attractive. They do so by buying up government debt, thereby decreasing the supply of government debt and increasing the supply of currency, which lowers interest rates because there are fewer debts and more currency to buy them with.

Economists assume that there is a natural interest rate at which the economy grows at its trend rate while inflation is stable. There is no direct way to measure or calculate the natural interest rate. Economists estimate it using their theories and models. The elusive natural interest rate is a crucial element in central bank decisions. The natural interest rate may differ from the actual interest rate due to credit in the financial system. Deviations from this rate trigger booms and busts. The interest rate below the natural rate can generate a boom. In that case, people borrow too much because interest rates are too low, leading to overspending and overinvesting. An interest rate above the natural rate can lead to a bust, resulting in underinvestment and underspending. By setting short-term interest rates and thereby influencing long-term rates, central banks steer credit creation.

The economy can do well by itself

With Natural Money, the economy can manage itself, making fiscal and monetary policies redundant. The holding fee removes the zero-lower bound, providing stimulus during economic slumps. The maximum interest rate curbs lending during economic booms, providing austerity. That mitigates business cycles. And so there will be fewer debt overhangs and financial crises. The market, combined with the price control of the zero upper bound, steers interest rates and the money supply, thereby reducing the role of central banks. The central bank’s currency will then become a unit of account or administrative currency. Natural Money has the following favourable consequences:

The holding fee on currency allows for negative interest rates to provide a stimulus, while the maximum interest rate provides austerity by curbing lending.
As interest is also a reward for taking risks, a maximum interest rate will take away the incentive to take risks and limit lending to the safest borrowers.
In the absence of usury, debt levels don’t increase, while only the safest borrowers can borrow, resulting in fewer bad debts.

There is no need for governments to engage in deficit spending, except to provide liquidity in financial markets, as government debt, rather than administrative currency, serves as a form of liquidity. The holding fee makes it unattractive to own administrative currency. Provided their finances are sound, governments can borrow at negative interest rates and earn interest on their debts. They could aim for the debt level giving the highest interest income. If market participants are willing to lend at -1% when government debt is 100% of GDP and at -2% when government debt is at 70% of GDP, the government could harvest 1% of GDP in the former case and 1.4% of GDP in the latter case.

It will be the end of fiscal and monetary policies. The economy will manage itself. Interest payments don’t create a need to add additional debts. Governments may step in during a crisis to restore trust in the financial system and the economy, but whether such intervention will be necessary is unclear, as there will likely be fewer crises. Natural Money also doesn’t require central banks to do more than handle the daily transactions between banks, as the holding fee terminates the demand for the central bank’s currency.

Latest revision: 12 November 2025

Joseph in Egypt

27 Sep 202214 Jan 2024 nivtricLeave a comment

Money with a holding fee existed in ancient Egypt for over 1,500 years. Egypt had storehouses of grain run by the state. Grain was the primary food source for the Egyptians. When farmers came with their harvest, they would get a receipt telling how much they brought in and on what date. A baker could return the receipt and exchange it for grain after paying for the storage cost and loss due to degradation.

The origins of the grain storage remain unclear. The government collected taxes in kind, thus a portion of the harvest, and had to store it. The government storage probably proved convenient for farmers as they didn’t have to keep and sell their grain, which was a significant convenience. And it made sense to have a public grain reserve in case the harvests failed.

The Egyptians used these receipts as money, as grain was a commodity everyone needed. Because of the storage costs, the receipts gradually lost value. With this kind of money, you might have interest-free loans. Someone in possession of this money who likes to save it will lose by storing it and can keep his capital intact by lending it without interest. There is no evidence that this happened.

The grain storage relates to a story in the Bible. It is fiction but might tie money with a holding fee to the Abrahamic religions. As the story goes, the Pharaoh had dreams his advisers couldn’t explain. He dreamt about seven lean cows eating seven fat cows and seven thin and blasted ears of grain devouring seven full ears of grain.

Joseph explained those dreams to the Pharaoh. He told the Pharaoh that seven years with good harvests would come, followed by seven years with crop failures. He advised the Egyptians to store food. They followed his advice and built storehouses for grain. In this way, Egypt survived the seven years of scarcity (Genesis 41):

When two full years had passed, Pharaoh had a dream: He was standing by the Nile when out of the river, there came up seven cows, sleek and fat, and they grazed among the reeds. After them, seven other cows, ugly and gaunt, came up out of the Nile and stood beside those on the riverbank. And the cows that were ugly and gaunt ate up the seven sleek, fat cows. Then Pharaoh woke up.

He fell asleep again and had a second dream: Seven heads of grain, healthy and good, were growing on a single stalk. After them, seven other heads of grain sprouted–thin and scorched by the east wind. The thin heads of grain swallowed up the seven healthy, full heads. Then Pharaoh woke up; it had been a dream.

In the morning, his mind was troubled, so he sent for all the magicians and wise men of Egypt. Pharaoh told them his dreams, but no one could interpret them for him. Then, the chief cupbearer said to Pharaoh, ‘Today I am reminded of my shortcomings. Pharaoh was once angry with his servants, and he imprisoned me and the chief baker in the house of the captain of the guard.

Each of us had a dream the same night, and each dream had a meaning of its own. Now, a young Hebrew was there with us, a servant of the captain of the guard. We told him our dreams, and he interpreted them for us, giving each man the interpretation of his dream. And things turned out exactly as he interpreted them to us: I was restored to my position, and the other man was hanged.’

So Pharaoh sent for Joseph, and he was quickly brought from the dungeon. When he had shaved and changed his clothes, he came before Pharaoh. Pharaoh told Joseph, ‘I had a dream, and no one can interpret it. But I have heard it said of you that when you hear a dream you can interpret it.’ ‘I cannot do it,’ Joseph replied to Pharaoh, ‘but God will give Pharaoh the answer he desires.’

Then Pharaoh said to Joseph, ‘In my dream, I was standing on the bank of the Nile, when out of the river there came up seven cows, fat and sleek, and they grazed among the reeds. After them, seven other cows came up–scrawny and very ugly and lean. I had never seen such ugly cows in all the land of Egypt. The lean, ugly cows ate up the seven fat cows that came up first. But even after they ate them, no one could tell they had done so; they looked just as ugly as before. Then I woke up.

‘In my dreams I also saw seven heads of grain, full and good, growing on a single stalk. After them, seven other heads sprouted–withered and thin and scorched by the east wind. The thin heads of grain swallowed up the seven good heads. I told this to the magicians, but none could explain it to me.’

Then Joseph said to Pharaoh, ‘The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. The seven good cows are seven years old, and the seven good heads of grain are seven years old; it is one and the same dream. The seven lean, ugly cows that came up afterwards are seven years old, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.

‘It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. Seven years of great abundance are coming throughout Egypt, but seven years of famine will follow them. Then, all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe.

The reason the dream was given to Pharaoh in two forms is that the matter has been firmly decided by God, and God will do it soon. ‘And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt.

Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.’

The plan seemed good to Pharaoh and to all his officials. So Pharaoh asked them, ‘Can we find anyone like this man, one in whom is the spirit of God?’ Then Pharaoh said to Joseph, ‘Since God has made all this known to you, there is no one so discerning and wise as you. You shall be in charge of my palace, and all my people are to submit to your orders. Only with respect to the throne will I be greater than you.’ So Pharaoh said to Joseph, ‘I hereby put you in charge of the whole land of Egypt.’

During the seven years of abundance, the land produced plentifully. Joseph collected all the food produced in those seven years of abundance in Egypt and stored it in the cities. In each city, he put the food grown in the fields surrounding it. Joseph stored up huge quantities of grain, like the sand of the sea; it was so much that he stopped keeping records because it was beyond measure.

The seven years of abundance in Egypt came to an end, and the seven years of famine began, just as Joseph had said. There was a famine in all the other lands, but in the whole land of Egypt, there was food. When all of Egypt began to feel the famine, the people cried to Pharaoh for food. Then Pharaoh told all the Egyptians, ‘Go to Joseph and do what he tells you.’

When the famine had spread over the whole country, Joseph opened these storehouses and sold grain to the Egyptians, for the famine was severe throughout Egypt. All the countries came to Egypt to buy grain from Joseph because the famine was severe in the whole world.

The story further tells how the Egyptians became the serfs of the Pharaoh (Genesis 47):

There was no food in the whole region because the famine was severe. Both Egypt and Canaan wasted away because of the famine. Joseph collected all the money found in Egypt and Canaan as payment for the grain they were buying and brought it to Pharaoh’s palace.

When the money of the people of Egypt and Canaan was gone, all of Egypt came to Joseph and said, ‘Give us food. Why should we die before your eyes? Our money is used up.’ ‘Then bring your livestock,’ said Joseph. ‘I will sell you food in exchange for your livestock since your money is gone.’

So they brought their livestock to Joseph, and he gave them food in exchange for their horses, their sheep and goats, their cattle and donkeys. And he helped them through that year with food in exchange for all their livestock.

When that year was over, they came to him the following year and said, ‘We cannot hide from our lord that since our money is gone and our livestock belongs to you, there is nothing left for our lord except our bodies and our land.

Why should we perish before your eyes–we and our land as well? Buy us and our land in exchange for food, and we, with our land, will be in bondage to Pharaoh. Give us seed so we may live and not die, and the land may not become desolate.’

So Joseph bought all the land in Egypt for Pharaoh. The Egyptians, one and all, sold their fields because the famine was too severe for them. The land became Pharaoh’s, and Joseph reduced the people to servitude from one end of Egypt to the other.

Joseph told the people, ‘Now that I have bought you and your land today for Pharaoh, here is seed for you so you can plant the ground. But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children.’

‘You have saved our lives,’ they said. ‘May we find favor in the eyes of our lord; we will be in bondage to Pharaoh.’ So Joseph established it as a law concerning land in Egypt -still in force today- that a fifth of the produce belongs to Pharaoh.

A settlement of storage costs took place when someone brought in the receipts. The receipts gradually lost value over time to cover the storage cost. It was similar to buying stamps to keep the money valid, like in Wörgl. The grain money remained in circulation after the introduction of coins around 400 BC until the Romans conquered Egypt around 40 BC. The grain money survived for over 1,500 years. It was not a financial crisis that ended it, but the Roman conquest. It suggests a holding fee on money or negative interest rates can be the basis of a stable financial system that lasts for eternity.

Finally, there is a wisdom that we can easily overlook. Storing food makes more sense than saving money, even when you make losses on the storage. Today, the weather grows increasingly unpredictable due to global warming, so massive harvest failures become increasingly likely. Storing food makes more sense than ever in a time when people cling to money more than ever, and there is only enough food in storage to feed humanity for a few months. It doesn’t require a rocket scientist to figure that Joseph’s advice to the Pharaoh to store food for meagre times makes more sense than ever.

Latest revision: 13 January 2024

Featured image: Joseph interpreting the Pharaoh’s dream. Illustrations for La Grande Bible de Tours. Gustave Doré (1866). Public Domain.

The Spider’s Web

7 Jul 202210 Jul 2022 nivtric1 Comment

The Spider’s Web is an informative documentary about the hidden world of offshore finance.

This is a documentary that everyone should watch to understand what is going on behind the scenes.

If you have Netflix, you can also watch it there.

The Great Collapse

23 Feb 202220 Oct 2025 nivtricLeave a comment

Lessons of history

Societies and civilisations have collapsed in the past, so history can teach us something about what awaits us. Theories about collapse are speculative. Different explanations are possible. Whereas the debates between the experts are still raging, time is running out. Collapse could be coming. It will be brutal if we don’t prepare. We should heed the lessons from history. It may turn out we were wrong. But that is for the critics in their armchairs to observe someday when their lives aren’t at risk. And they will have the benefits of hindsight. We can only make the best decisions with our present knowledge.

The fall of the Western Roman Empire is the most well-known example of collapse. In the second century AD, diseases reduced the Roman population, eroding the empire’s tax base. The empire had a long border to defend, so emperors became increasingly desperate for revenues to finance the military. Over time, taxes and measures to ward off invasions became intolerable for Roman citizens, and the Western Roman Empire broke down. Most Romans were better off with a simpler life under the rule of Barbarians.¹

The population of Rome declined from 1,000,000 around 100 AD, of which many lived on government welfare, to a scanty 30,000 around 1000 AD, a drop of 97%. Most of that decline occurred in the fifth century when the empire collapsed. More than half the people live in cities today, so a possible collapse is something we should dread. Many of us depend on markets and public services. We don’t know the future, but economics drives migration. If our civilisation doesn’t collapse and living in cities is more resource-efficient, cities may not depopulate, provided people in cities can earn an income.

The Western Roman Empire was underpopulated, and the state had become a burden. Its collapse thus was a relief to many. Other collapses were worse. The Mayan civilisation broke down because the Mayans ran into the limits of their environment. The immediate cause of their collapse was drought due to a lasting drop in rainfall. State control led to increased efficiency in food production and distribution. It allowed the Mayans to feed more people who would have starved otherwise. However, the measures to increase food production had stretched their environment to the breaking point, so improving agricultural output became increasingly difficult.¹

The Mayan states then reverted to warfare to plunder each other’s crops, making it even harder to maintain agricultural output. The Mayans weakened from malnourishment and warfare, and the Mayan states collapsed together. In the short term, the peasants were better off as they didn’t pay taxes to support a state. In the long run, with irrigation works and granaries abandoned and defences neglected, agricultural output collapsed, and population numbers dropped by 90%.¹

That is why we should dread collapse. There will be a lack of order, and people will organise themselves in gangs. Your and your group’s survival depends on assessing other people’s intentions and killing those who might kill you. And you don’t know, so you must guess what others are up to. And it is better to be safe than sorry, so you might decide to kill people as a precaution. That may be a good script for a thriller. However, most of us prefer to live less adventurously. Had the Mayans not waged wars but cooperated peacefully to use resources more efficiently and reduce population, their civilisation might have declined more gracefully and could have survived. That was unthinkable because of the intense competition between the states and the absence of contraceptives.

Causes of collapse

History shows a repeating pattern of overshoot and collapse. A population would grow until it reached the carrying capacity of the environment. As a result, there would be fewer food surpluses to save for harvest failures. Eventually, civilisations would succumb to disease, an invasion by neighbouring tribes, weather fluctuations, or civil war. The crucial difference with the present situation is that technology stayed the same in the past. In recent centuries, technological innovations, most notably our improved ability to acquire energy from fossil fuels, have outpaced the forces contributing to collapse. The danger is that the overshoot and the coming collapse can be worse than previous ones. The advantage of new technology is that it doesn’t need to be terrible and that we can lead agreeable lives.

Jared Diamond sees five factors contributing to past collapses: climate change, which also occurred in the past, hostile neighbours, the loss of trading partners, environmental problems, and society’s response to these challenges. The underlying cause is often overpopulation.² Increased resource extraction efficiency allowed more people to survive, worsening the situation. That was true for the Mayans but not for the Romans. The Romans had hostile neighbours but not overpopulation. Higher population numbers could have helped the Roman Empire survive.

Joseph Tainter argues that in both cases, the costs of the state exceeded the benefits. The Western Roman Empire was underpopulated, so the Romans couldn’t afford the taxes required to defend their long border. The Mayan states organised agricultural production and were initially successful. However, at some point, additional state interference didn’t generate more crops or better management of surpluses and deficits. Overpopulation or overstretching the environment puts a premium on organising, but it postpones the inevitable. And it makes the collapse worse. Had the Mayans not organised themselves in states, they would have had less food, fewer people, and no collapse.

Our predicament looks more like that of the Mayans than the Romans. Competition between states and corporations for resources may intensify, and the collapse could be brutal. Simplification and having fewer children is a way out, and we can be better off if we cooperate globally to limit consumption and reduce our populations. That doesn’t happen because it is a collective action problem only a world government can solve. Governments compete and try to boost population numbers. Ending the competition between states is paramount because power, in the form of a prosperous economy, population and military, requires resources and energy. If one state pursues power in this way, others follow.

In times of decline, even the best leaders look bad as they can only make things less lamentable than they otherwise would have been. As we notice the deterioration but don’t experience the alternative, anger and frustration can take over, and people will look for scapegoats, resulting in political instability, a breakdown of order, civil war and mob rule. Managing and turning the decline into a more graceful simplification is the best option, but that requires commitment and discipline from everyone.

Organising to solve problems

Tainter sees societal collapse as an economic calculation. Societies and civilisations collapse when the cost of their institutions exceeds the benefits. If the soil depletes due to overuse, measures to improve crop yields or manage surpluses and deficits become increasingly expensive and have lower returns. The Mayans didn’t make these calculations by keeping ledgers of incomes and expenses. At some point, their measures became ineffective, and people started starving. There is an upside to an economic view. It can help us decline gracefully and make the most of what we have.

We organise ourselves in states and corporations to solve problems. We have police to solve a security problem. We have a car factory to deal with a transportation problem. Complex organisations, like states or corporations, have costs and benefits. When you solve a problem, you may get a bigger one in return, or one is more costly to handle. When societies are simple, expenses are low, while the benefits of solutions can be substantial. A doctor’s post in the jungle might lengthen the life of local tribespeople by as much as twenty years. As the level of organisation increases, the price of additional complexity increases while the benefits decrease.

As we cure easy-to-treat diseases, people grow older and get harder-to-treat diseases. If our medical knowledge increases, we can cure some of these diseases with expensive treatments, and people will die of even harder-to-treat diseases. Medical costs explode with only marginal gains in life expectancy. Replacing the doctor’s post in the jungle with a hospital might cost five times as much and add only three years to the lives of the tribespeople. Perhaps five tribes together could afford the hospital. In complex societies, many tasks require occupational specialisation, information processing and management. There are benefits to complex organisations, but they usually come with scale. Physicians who specialise can do better jobs when enough people share the costs.

Since the Industrial Revolution, markets and energy usage expanded. Abundant fossil fuels and increases in scale have reduced the cost of organisation. And so, the benefits outweigh the expenses at a much higher level than before, allowing us to specialise further than before. In the past, over 90% of the people worked in agriculture, tilling the land. Now machines do that work, freeing up labour for other purposes. The same happened in the production of goods and services. Technological development further increased these benefits. Computers use far less energy than forty years ago for the same amount of computing power and memory. That made more uses feasible, so we use far more energy for information technology than forty years ago.

It is the curse of efficiency improvements. When technology becomes more efficient and cheaper, we use so much more of it for frivolous purposes that, as a result, we consume far more resources and energy in the end. Efficiency improvements thus don’t solve our problems and even worsen them. Once resources and energy supplies dwindle, much of what we do now will lose its purpose, just like what happened to the Mayans. Still, technological advances allow us to do much more with the same resources and energy, so if we use new technologies for essential purposes, our future can be agreeable.

Diminishing returns: an example

Life expectancy in the UK rose from forty to eighty years between 1860 and 2020. However, the costs of new complex treatments increase while their effect on life expectancy decreases. These treatments can become a burden to the population at large. Comparing the United States with Cuba illustrates the benefits of simplification. Cuba is poor compared to the United States. Many essentials are hard to come by, and the country can barely feed its people. Cuba only has rudimentary healthcare, but it is available to everyone, while the United States spends more on healthcare than any other nation. Yet, life expectancies in Cuba and the United States are on par.

Cuban healthcare gives value for money because it is simple and equally distributed. US Healthcare underperforms because it is burdened with litigation, while pharmaceutical corporations sell unnecessary or even harmful treatments and medical professionals enjoy privileges they don’t have in other countries. And healthcare is not equally available to everyone. Lifestyle affects life expectancy as well. Obesity, homicides, opioid overdoses, gang violence, suicides, road accidents, and infant deaths come into the picture.

Americans use drugs, eat fast food and drink sodas unavailable in Cuba. Cubans are dirt poor, so it isn’t profitable for drug cartels to sell them drugs. The death toll from drugs, fast food and sodas in the United States exceeds that of famines in Cuba. Americans experience more stress as workers than Cubans because they need to be competitive in a market economy that is constantly economising and improving efficiency. Many Americans die of heart disease and drug abuse.

If you grow your food and your neighbours help you build your home, nothing gets added to GDP. Eating fast food, paying high rents, drinking sodas and being treated for obesity and other diet-related illnesses are good for profits and economic growth, as are working hard and taking drugs or seeing a psychiatrist for stress symptoms. Sodas, treatments for obesity, medication and therapeutic sessions all add to GDP. Economists call it wealth creation. It may help to explain why America is wealthy. In the United States, a small group of politically connected big corporations and specialists, such as lawyers, pharmaceutical corporations, and medical specialists, make lots of money.

In complex societies, highly trained professionals earn much more than ordinary people. In some cases, we are better off without them. Imagine how much cheaper things would be if we eliminated lawyers and litigation. And think of what it will do to GDP. Indeed, Americans might be better off poorer. The Old Order Amish are happier than the average American worker. The causes of Amish life satisfaction are not a mystery. Being part of a supportive family, being a member of a well-integrated community, having a religion, and regular physical exercise all contribute to a happy life.

Managing excess

Excessive production and consumption create problems we must subsequently manage. That requires specialisms, laws, controls, and the like, and it becomes increasingly costly. And people get the impression that governments are to blame when they impose limits. Complexity and specialisation suffer from diminishing marginal returns. The costs increase while the benefits decline. Consider the issues of food production and pollution control. According to Tainter, rising world food production by 34% between 1951 and 1966 required increasing tractor expenditures by 63%, fertilisers by 146%, and pesticides by 300%. We now deal with soil degradation, which endangers our future food supply.¹

Pollution control shows a similar pattern. Removing all organic waste from a sugar processing plant costs 100 times more than removing 30%. Reducing sulphur dioxide in the air of a US city by 9.6 times or particulates by 3.1 times raises the cost by 520 times. These numbers may be outdated, but the nature of the problem remains the same. Allocating more resources to R&D can provide temporary respite from diminishing returns. But R&D also has diminishing returns.¹ We might increase production or contain pollution, but it can become prohibitively expensive, so it might be cheaper to produce less.

Like the Mayans, we have stretched our environment to its limits. New technology and control measures postpone the inevitable. The alternative is to consume less and have fewer children. We can do without many things, or we can produce things differently. Stable supplies of large quantities of fossil fuels sustain our current complex civilisation. Unstable supplies of renewable energy can drive a simplification. If we compensate for carbon emissions, fossil fuels become expensive, and it can be economical to reduce energy consumption and rely on renewable sources. As a result, pressures can mount to decentralise and live more simply. If we do not create problems, we do not need to fix them. For instance, what is the point of pollution legislation if there is no pollution?

When we simplify our lives, we depend more on our family and community and less on markets and states. We use local products where possible. And we have little need for people who manage the complexity. Nowadays, more than half the people live in cities, so we can’t switch overnight. Even if we simplify our lives, we can have more agreeable lives than most people for most of history. If we manage the collapse, we can be better off than we would have been otherwise. And we can adapt. The 80/20 rule states that 20% of the causes have 80% of the effects. So, 20% of our consumption might cause 80% of our well-being. Thus, our well-being might decline by 20% when we reduce resource and energy consumption by 80%. Those who lead excessive lifestyles should make the sacrifice.

Latest revision: 21 August 2024

Featured image: Diocletian’s Aqueduct in Split, Croatia, built around 300 AD. User: SchiDD. Wikimedia Commons.

1. The Collapse of Complex Societies. Joseph Tainter (1988). Cambridge University Press.
2. Collapse: How societies choose to fail or survive. Jared Diamond (2005). Viking Press.

Wörgl bank note with stamps. Public Domain.

Cash for Negative Interest Rates

1 Feb 202112 Nov 2025 nivtric2 Comments

The problem with cash

Dealing with cash is cumbersome for both businesses and banks, so they are increasingly opting for digital payments. It helps to reduce their costs. Increasingly, people are opting for digital payments over cash. Geezers might still prefer to pay with banknotes and coins, but youngsters often don’t. These are the primary reasons why banknotes and coins could soon go extinct. The authorities have also sought to reduce the use of cash because it has long been the preferred method of payment for criminals.

Cash still plays a significant role. In the European Union, people mainly use them for small transactions. Cash can become an attractive investment when interest rates are negative. In Switzerland, where interest rates have been the most negative at -0.75%, 1,000 franc banknotes and safe deposit boxes were in short supply. And so, interest rates below -1% seem impossible as long as cash yields zero.

When depositors take their money from the bank, the bank can run into trouble. That may happen when interest rates fall below zero. A holding fee on central bank money, including cash, of 12% per year, can make it attractive to lend money at negative interest rates, like -2%, as you don’t pay the holding fee on loaned funds. Bank deposits are money lent to banks, thus loaned funds. You may keep your money in the bank when interest rates are negative because cash has a lower interest rate.

Cash as a loan to the government

In Wörgl, the townspeople bought stamps and glued them to the banknotes to keep them valid. It would be more practical if we didn’t have to glue stamps on banknotes. And a holding fee of 12% per year would make cash unattractive. The charge doesn’t need to be that low to prevent people from withdrawing their money from the bank and putting it in a safe deposit box. If the interest rate on cash were a bit lower than the interest rates on bank accounts, that would be enough to stop people from hoarding banknotes.

When cash is a loan to the government, the interest rate on cash could be the same as the interest rate on short-term loans to the government. That rate would be better than the holding fee and could be as low as -3%. There can be an exchange rate between cash and central bank money. The value of cash would gradually decrease at a rate of 3% per year, and you don’t have to glue stamps on banknotes to keep them valid. The situation resembles 3% inflation, but it is a negative interest rate.

That difference is crucial because negative interest rate currencies may not require government or central bank management. They provide financial stability themselves. There is no money shortage due to interest charges, so there is no permanent need to expand debts to sustain the usury scheme, which requires government and central bank management. With negative interest rates, the money supply can be stable or even shrink without adverse consequences for the financial system or the economy.

Human psychology

Negative interest rates visibly reduce the currency balance in your account, while inflation operates more stealthily, by robbing you while you believe you get more. Wage changes are more noticeable than price changes, as some prices decrease while others increase in value. Even when negative interest rates and deflation are a better deal, and even if we all know it, we might not opt for them. The phenomenon is known as the money illusion. We resist a reduction in monetary units, even if it would make us better off.

It also affects how we look at negative interest rates. When interest rates are negative, money disappears, so inflation is likely to be lower, and prices may even decrease. That could be a better deal for depositors if their real return were higher, but most people dislike seeing their account balance decrease due to a negative interest rate. They might get edgy about their money vanishing into thin air. Negative interest rates sparked outrage among some Belgian depositors, who demanded a ban on these rates.

We prefer the illusion of a small gain that amounts to a loss in reality to the illusion of a similar loss that is, in fact, a better deal. It is not rational, but human psychology is the way it is. We are emotional beings that can think rather than thinking creatures with emotions. There is a fix: hiding negative interest rates and making them appear as inflation. To explain how we can look at the characteristics of Natural Money:

The administrative currency carries a holding fee of approximately 12% per year. If you own this money, €1.00 turns into €0.88 after a year. It can make lending at negative interest rates attractive.
Interest rates on bank accounts might be around -2% per year. Depositors don’t pay the holding fee, but the interest rate the bank offers.
Cash is a short-term loan to the government and carries the interest rate of short-term government loans, which might be -3%.
The administrative currency and cash become separate currencies. Cash gradually loses value relative to the administrative currency.

Making cash the money in people’s minds

When bank account statements are in cash currency rather than administrative currency, the public doesn’t notice that the interest rate is below zero. The interest rate on short-term government loans is one of the lowest. Banks must be able to offer at least this interest rate so that people won’t see their balance shrink due to negative interest. And if shops express their prices in the cash currency, it will become the currency in people’s minds.

If the interest rate on cash is -3%, its value decreases by 3% per year in terms of the administrative currency. If a bank offers an interest rate of -2% and settles the account in cash, the interest on the bank account appears to be +1%. And if the deflation rate is 1%, prices go down by 1%. Meanwhile, the value of cash decreases by 3% in the administrative currency, so prices in the cash currency increase by 2%. And so, the public experiences 2% inflation.

You can see it as a deception to prevent people from deceiving themselves. People get aggravated by negative interest rates, but largely ignore inflation. They also fall for the illusion of getting more when interest rates are positive. When the interest rate on bank accounts is 1% and inflation is 3%, you would lose 2% in purchasing power per year by holding a balance in a bank account. A 1% loss is a better deal for depositors. Natural Money can improve the economy, allowing real interest rates to be higher.

Critics might argue that we could be fooled by this scheme, just like inflation fooled us before. We won’t notice the negative interest rate, just like we did inflation before. Separating cash from the administrative currency and expressing prices and the value of bank accounts in cash currency can clear the psychological barrier that stands in the way of the public adopting negative interest rates.

The administrative currency remains the accounting unit in the financial system for bank accounts, debt, and interest, as well as the prices of financial assets, such as stocks and bonds. A similar situation existed in Europe between 1999 and 2002. After introducing the digital euro, cash continued to be the national currency. With Natural Money, the maximum interest rate of zero applies to the administrative currency and not to the cash currency, so interest rates in the cash currency may be above zero.

Latest revision: 1 November 2025

Featured image: Wörgl bank note with stamps. Public Domain.

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