Negative Interest Rate Perspectives

Negative, Interest Rate, Perspectives, Silvio Gesell, Macroeconomics, fx trader, forex

When Silvio Gesell an unknown German economist living in Argentina wrote the 1891 paper titled “The Reformation in Coinage as a Bridge to the Social State” and the 1906 book the “Natural Economic Order” based on his theories to revive economies and inflation by negative interest rates, he was widely criticized by John Maynard Keynes for exclusion of a liquidity preference and others yet accepted by an economist interest rate giant named Irving Fisher. If not for Irving Fisher who believed in Gesell’s negative interest rate policies, Gesell would remain today completely unknown. To understand obscurity, Gesell was mentioned 19 times since 1969 in academic papers at the American Economics Association. Less than a handful of academic papers were actually written regarding Gesell’s negative interest rate theories because he was considered a radical outside of mainstream economic thought.

Gesell was most influenced by former economists Henry George, Pierre Joseph Proudhon and Karl Marx. Gesell was vehemently opposed to Marx as outlined in deep detail in the Natural Economic Order. Why Gesell was classified as a radical was not only because George and Proudhon were radicals but all Gesell’s writings contained portions of the Stockholm, Von Mises Austrians – Classical Liberals and Socialist thought. Communists roundly rejected Gesell but because of the questionable classifications in Gesell thought, neither economic schools or academia accepted Gesell so he fell into obscurity. The Ludwig Von Mises Institute today still considers Gesell and interest rate policies as irrelevant. Another reason is nobody ever considered negative interest rates. What developed after Gesell’s writings was the formation of the German Workers Party in 1919 to “break the back of interest slavery.” and it is here where Hitler began to rise. Today, Gesell shares a renaissance as the ECB since early 2014 studied then implemented Gesell’s negative interest rate policies. Denmark, Sweden, Norway, Japan and the Swiss adopted negative interest rate policies while more central banks could be on the way. The Israeli Shekel, Bulgarian Lev and Czech Koruna are next candidates.

The word Natural in the title in my estimation is an answer from famed Swedish economist from the Stockholm School of Economics Knut Wiksell. Knut Wiksell in 1898 wrote the most groundbreaking books on positive interest rates ever written in my opinion. Wiksell’s books remain widely read today by college students, academics and market traders. Wiksell gave the world the Natural Interest Rate to understand economies measured in 20 – 50 years and the 3 month interest rate. Interest rates viewed in 20 – 50 years determines if an economy is under performing, over performing or at equilibrium. If a financial market instrument trades today, thank Knut Wiksell.

Gesell viewed interest rates as unnatural, forces hoarding and concentrations of wealth, as collusion by moneylenders and the state and distorts the medium of exchange because only moneylenders possess the power of exchange to enter and exit markets at will based on an oversupply of money. Interest rates in Gesell terms was viewed as a monetary phenomenon and incorrectly prices money because interest was seen as a toll, a strict profit motive and tribute. Building on Proudhon, Gesell says money isn’t the key to open markets but the bolt that locks markets shut because money incorrectly priced based on interest enters and exits markets at the wrong time. Its a market distortion so money should be priced based on commodities or in Gesell terms, wares because its an all encompassing term to products in any economy. Money in Gesell’s negative interest rate world should not only be free and traded as any normal commodity but to charge interest hinders economic growth and prosperity.