Money With An Expiration Date: A Primer on Negative Interest Rates

Issue #21 November 4, 2019

Should money have an expiration date? This long-forgotten economic theory from the 1930s is making a comeback. Today’s post will be a primer on negative interest rates- The tool du jour by monetary policymakers looking to avoid liquidity traps, and what the underlying power and purpose of sovereign-backed cryptos may really be.

What problem do negative interest rates solve?

First, let's talk about the problem that they are trying to solve. In times of very low-interest rates (i.e. like the last 10 years) which are monetary policies designed by central banks to stimulate consumer and business borrowing to expand the economy, the preference for “staying liquid” may become virtually absolute. This means that almost everyone prefers holding cash (saving/hoarding) rather than holding a debt which yields so low a rate of interest. It probably seems counterintuitive then as to why setting rates below zero (i.e. negative) would be a solution out of this kind of liquidity trap.

The truth is th…