Category: finance

Fiscal and Monetary Policies

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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 interpreting the Pharaoh's dream

Joseph in Egypt

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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

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.

Diocletian's Aqueduct in Split, Croatia

The Great Collapse

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Lessons of history

Societies and even entire civilisations have collapsed in the past. That the same might happen to us is a scary prospect. The definition of collapse is an involuntary, uncontrolled simplification of an organisation. That organisation can be a civilisation. Perhaps you get the word ‘collapse,’ but not its definition. The definition highlights the process ‘simplification,’ whether those affected chose for it, in this case ‘involuntary,’ so not, the degree to which the process is controlled, in this case ‘uncontrolled,’ so not, and the affected component, ‘an organisation,’ which can be a civilisation, making it a helpful definition for engineers to work with. Typically, collapse brings with it a breakdown of order.

Engineers solve problems other people create. A solution begins with looking at the phenomenon in a particular way, thus in terms of processes, affected components and degree of control. We can aim for a voluntary, controlled simplification of the organisation. Voluntary is perhaps a bit too rosy a term, but at least we can try to manage the process so that it becomes somewhat more ‘controlled,’ and begins to look more like a graceful decline. That requires order to be maintained. The problem is solvable if everyone cooperates, but that requires a fairy tale we all believe in, so a new religion. And there you have the outline of the solution.

Environmental depletion or overstretching has caused most past collapses. It happened when people were using more resources than their environment could sustainably provide. That is also the case today, so we are heading towards a collapse. History can teach us what awaits us and how we can manage our problems, but today’s situation differs from the past due to technological innovation, leading to a widespread belief that technology will solve our problems. That probably is a fatal mistake. Instead of letting technology drive our destiny, it should support our goals. Theories about collapse are speculative. While the experts debate, time is running out, and it is time to act.

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 Western Roman Empire had a long border to defend and faced rebellions, so emperors became increasingly desperate for revenue to finance the military. Over time, taxes, currency debasement, and measures to ward off invasions became intolerable for Roman citizens, and the Western Roman Empire broke down. Most were better off with a simpler life under the rule of the Barbarians.1

The population of Rome declined from 1,000,000 around 500 AD, many of whom lived on welfare, to less than 50,000 around 600 AD, a drop of 95%. Today, more than half the world’s population lives in cities, whereas it was about 20% in the Roman Empire. A collapse today could lead to mass relocations. Cities do not provide much that we truly need. We don’t know the future, but economics drives migration. When people can’t make a living in cities, they move out. Whether that will happen remains to be seen. It may require fewer resources and less energy to keep most city dwellers where they are now.

The Western Roman Empire was underpopulated, and taxes had become a burden. Its collapse was a relief for most. Other collapses were more disastrous because they had different causes. In fact, the collapse of the Western Roman Empire was an outlier. The Mayan civilisation collapsed because the Mayans reached the limits of their environment. State planning and control had increased the efficiency of food production and distribution. It allowed the Mayans to feed more people who would otherwise have starved. Measures to increase food production had pushed their environment to the breaking point, making it increasingly difficult to keep up agricultural output.1

As a result, the Mayan states reverted to warfare to plunder each other’s crops, making it even harder to maintain agricultural output. The Maya weakened due to malnutrition and warfare, and their states collapsed. In the short term, the peasants were better off as they didn’t pay taxes to support the state. In the long run, with irrigation works and granaries abandoned and defences neglected, agricultural output collapsed, and the population dropped by 90%.1 Most collapses resemble those of the Mayans more than the Romans, so they are generally unfavourable to those who live through them. So, what will happen if our civilisation collapses? You can think of:

  • Money becomes worthless, and many products become unavailable.
  • Governments cease to function, and government services shut down.
  • Businesses go bankrupt. We don’t need Netflix, nail salons, and call centres.
  • There is more violence and crime, and simpler justice systems.
  • Electricity from the grid becomes intermittent, and the Internet disappears.
  • International trade will drop. We will use more local products.
  • Manual labour will replace machines.
  • We may crowd together in heated rooms when it is cold.
  • There may be gang warfare, or religion takes over the role of providing order.
  • And above all, billions of people might die.

If the collapse is uncontrolled and worldwide, and there is a breakdown of order, billions of people could die. That is why we should dread collapse. Had the Mayans not waged wars but cooperated peacefully to use resources more efficiently and reduce population, their civilisation might have declined gracefully and survived. That was unthinkable given the intense competition among the Mayan states and the absence of contraceptives.

Causes of collapse

Populations grow until their environment can’t support them, or until the environment changes so it can support fewer people. Usually, it led to fewer food surpluses to save for harvest failures, and more harvest failures. Eventually, the population would succumb to disease, an invasion by neighbouring tribes, or civil war. A crucial difference with today is that in the past, there was no technological change. In recent centuries, innovations, most notably our improved ability to acquire energy, have outpaced the forces driving collapse, enabling humankind to grow far beyond previous limits. It can make the coming collapse, in terms of numbers, worse than previous ones. If only 10% of the world’s population were to die, that would be nearly a billion people. And it could be 90%. Modern technology can help us simplify in a more controlled way while allowing us to live more agreeable lives.

Jared Diamond identifies five factors that contributed to past collapses: changes in climate, hostile neighbours, the loss of trading partners, environmental problems, and society’s response to these challenges. The underlying cause is often overpopulation or environmental overstretching.2 Increased efficiency in resource extraction methods, such as agriculture and mining, allowed more people to survive, worsening the eventual collapse. That applies to most collapses, including those of the Mayans, but not of the Romans. The Roman Empire suffered from underpopulation and might have survived with a larger population.

Joseph Tainter argues that in both cases, the costs of organising in a 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 failed to deliver 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 worsens the collapse. Had the Mayans not organised themselves into states, they would have had less food, fewer people would have survived, and there would have been no collapse.

Our predicament looks more like that of the Mayans than the Romans. Competition between states and corporations for resources may intensify, making the collapse more brutal. Simpler lifestyles and having fewer children are the way out. We would be better off cooperating globally to curb consumption and population growth. That hasn’t happened so far, because it is a collective action problem. Most of us aren’t willing to contribute to the common goal when others don’t, so few people do. And governments compete to boost their economies and populations. 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 or wealth 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 deterioration but don’t experience the alternative, anger and frustration can take over, and people will look for scapegoats and strong leaders, 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 realism, commitment and discipline. Five centuries of economic expansion have fostered the widespread belief that growth will continue forever. We have learned to think of progress as becoming wealthier. Yet there isn’t enough to make that kind of progress, and it may require replacing humans with artificial intelligence.

Organising to solve problems

TTainter sees societal collapse as an economic calculation. Societies and civilisations collapse when the cost of their institutions exceeds the benefits they provide. If soil is depleted due to overuse, measures to improve crop yields or manage surpluses and deficits become increasingly expensive and yield lower returns. The Mayans didn’t make these calculations by keeping ledgers of incomes and expenses. At some point, their measures became ineffective, and they starved. The economic view can help us make the most of it by making a cost-benefit analysis of our activities. That can be painful because it forces us to make harsh choices. A simpler life means accepting things as they are, and helping each other rather than depending on solutions from complex organisations.

Due to pressures of competition, we optimise our systems to the current or an expected situation. If the environment changes in an unanticipated fashion, these systems become maladapted and may even suddenly collapse. And the steering parameters of our systems might prioritise profit or convenience over survival, so that we may suddenly find ourselves inept and helpless when they fail. People from simple societies, who have not specialised under optimising pressures from competition and have lived with few comforts, face better prospects in the event of a collapse of civilisation. That is also why the decline of a civilisation is accompanied by fear and anger. We fear that things will go wrong and are angry that no one fixes these issues. The problem is that we can at best turn the collapse into a managed decline. That begins with accepting that a decline is unavoidable and that we can only make the best of it.

We organise ourselves into organisations, such as states and corporations, to solve problems. We have the police to solve a security problem. There are streaming services that can help with boredom. And we have hospitals to deal with medical problems. Complex organisations, such as states or corporations, entail costs and benefits. When you solve a problem, you often get a bigger one in return, thus one that is more costly to handle. If you prevent famine by building granaries, more people survive, but you end up with even more hungry people. When societies are simple, expenses are low, while the benefits of solutions can be substantial. A simple 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 costs of additional complexity rise while the benefits decline.

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 tribespeople’s lives. Perhaps five tribes together could afford the hospital. In complex societies, tasks require occupational specialisation, information processing and management. There are benefits to complex organisations, but they usually come with scale and technological complexity. Specialised physicians can do better jobs with more advanced equipment.

Since the Industrial Revolution, our technological prowess and energy consumption have expanded dramatically. Abundant fossil fuels, innovations and increases in scale reduced the cost of organisation. The benefits outweigh the expenses more than before, allowing us to specialise further. In the past, over 90% of the people worked in agriculture, tilling the land. Now machines do that work, freeing up labour for other, less essential, purposes. The same happened in the production of goods and services. Technological development further increased these benefits. Computers use far less energy than they did 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 we did forty years ago.

It is the curse of innovation and efficiency improvements. As technology becomes more efficient and cheaper, we use it for more purposes, which, in turn, leads us to consume more resources and energy rather than less. And so, efficiency improvements and innovation increase resource and energy consumption as long as resources and energy are abundant. Once resources and energy supplies dwindle, much of what we do now loses its purpose. When that happens, efficiency improvements and innovation can help us do more with the same resources and energy, so we can have better lives than most people have had for most of history. And you can be happy if you have enough.

Diminishing returns: an example

Life expectancy in the UK rose from forty to eighty years between 1860 and 2020. As life expectancy rises, the costs of new complex treatments increase while their effect on life expectancy decreases. These costs become a burden, and the British healthcare system is in trouble. British healthcare is relatively efficient. Comparing the United States with one of the poorest Latin American countries, Cuba, demonstrates the law of diminishing returns even better. The facts are truly shocking. Cuba is a miserable place. Essentials are hard to come by. Homes are crumbling. The electricity fails. The country can barely feed its people. Today, Cuba is on the verge of collapse caused by economic mismanagement.

Cuba only has bare-bones healthcare, while the United States spends more on healthcare than any other nation. Yet life expectancy in the United States and Cuba had been roughly the same for decades.3 Only in recent years has the United States carved out a slight lead. How can it be? Cuban healthcare is simple but more evenly distributed, while Cubans don’t have unhealthy lifestyles marked by stress and fast food. U.S. healthcare is burdened with litigation and vampire capital. Pharmaceutical corporations sell expensive and unnecessary treatments, insurers don’t give coverage to increase shareholder profits, and medical professionals enjoy privileges they don’t have in other countries. Finally, and most importantly, healthcare is not available to everyone.

Wealthy people in the US live fifteen years longer than poor people. That is not only due to access to healthcare. Lifestyle affects life expectancy as well. Obesity, homicides, opioid overdoses, gang violence, stress, suicides, road accidents, and infant deaths come into the picture. But infant mortality among black children in the US is twice as high as that of white children. Poor Americans have much shorter lifespans than Cubans. Some believe American healthcare fails because it is not a free market. And that belief stands at the cradle of the failure. Other advanced economies spend 30 to 50% as much as the US on healthcare while achieving an additional 4 years of life expectancy. In those countries, healthcare is mostly public, like in Cuba.

Americans use drugs, eat fast food and drink sodas unavailable in Cuba. Cubans are poor, so it isn’t profitable for drug cartels to sell them opioids, cigarette manufacturers to sell them cigarettes, and fast food chains to sell them burgers. The death toll from drugs, fast food and sodas in the United States exceeds that of famines in Cuba. Overconsumption can be as deadly as underconsumption. Americans experience more stress than Cubans because they need to be competitive in a market economy that is constantly innovating and improving efficiency. Many Americans have two or three jobs. Cubans don’t work so hard, and Cuba is falling apart while Americans die of heart disease and drug abuse.

As a result of all that, Americans are equally fit as Cubans. And Cubans on the brink of starvation are healthier than poor Americans living off fast food. And so, life expectancy isn’t a good measure of overall well-being. Over a million Cubans have fled their country. Still, US private healthcare is extraordinarily inefficient and ineffective compared to Cuban state healthcare. Americans sense something is wrong with their healthcare system. It is a total disgrace. Only public healthcare generates no profit for the interest groups and billionaires that pay US politicians and think tanks, so that solution remains out of sight.

Managing excess

Excessive production and consumption create problems we think we must manage. That requires specialisms, laws, controls, and the like, and it becomes increasingly costly. We blame governments for taking away our freedoms when they impose limits. Still, most regulations address valid concerns. Complexity and specialisation, and that includes regulations, suffer from diminishing marginal returns. They all seem to make sense, but if you add more, the costs increase while the benefits decline. Consider the issues of food production and pollution control. Tainter used the figures of the Limits to Growth. Growing world food production by 34% between 1951 and 1966 required increasing tractor expenditures by 63%, fertiliser expenditures by 146%, and pesticide expenditures by 300%. We now deal with soil degradation, which can endanger our future food supply.1

Pollution reduction shows a similar pattern. Removing all organic waste from a sugar processing plant costs 100 times as much as removing 30% of it. Reducing sulphur dioxide in the air of a US city by 48% instead of 5% or particulates by 69% instead of 22% raises the cost of pollution reduction by 520 times. These figures from the 1960s are outdated, but the nature of the problem hasn’t changed. Allocating more resources to R&D can provide temporary respite from diminishing returns, but R&D also has diminishing returns.1 We invent increasingly useless products, and economic growth comes from successfully marketing them. We might increase output while containing pollution, but it can become prohibitively expensive. Terminating the production can be cheaper.

Like the Mayans, we have stretched our environment to its limits. When we simplify our lives, we depend more on our family and community and less on markets and states. We can do without automobiles, set up reliable public transport at a fraction of the cost, and save millions of lives. Without traffic congestion, public transport can be faster. We use local products where possible. And we need fewer specialists, thus elites, to run our lives. When we do it well, we can be better off than we would have been otherwise. The 80/20 rule states that 20% of the causes have 80% of the effects. So, 20% of our resources and energy consumption could cause 80% of our well-being.

People in wealthy countries, on average, live at 30 to 50 times the subsistence level. In other words, they could survive on 2-3% of what they consume now. They could live agreeable lives with 25%, which is ten times as much as nearly everyone had before the twentieth century. Giving up 75% seems extreme, but if everyone lived like people in wealthy countries, we would need four Earths, which is impossible, so 75% of the people would have to die. It is only reasonable. Those who use more steal from poor people or future generations, and even murder them by doing so. The same goes for those who have many children. Switching to a circular economy powered by renewable energy reduces the need for austerity.

Latest revision: 19 May 2026

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.
3. Americans Can Now Expect to Live Three Years Less than Cubans. Rob Minto. Newsweek (2022).

Wörgl bank note with stamps. Public Domain.

Cash for Negative Interest Rates

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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.