Common sense once held that negative interest rates were absurd and impossible. But the European Central Bank has just made its once unprecedented negative deposit rate even more negative and numerous countries now feature negative interest rates, so obviously they are not impossible.

Are they still absurd?

Consider three questions:

  1. Could negative interest rates ever exist in a private, free market?
  2. Are negative interest rates only possible with central-bank manipulations and government monetary price-fixing?
  3. Is common sense right to view as absurd forcing savers to pay borrowers for borrowing –including the biggest borrowers of all, governments?

Addressing these questions requires making judgments about counterfactual states, but I believe the correct answers are almost certainly:

  1. No.
  2. Yes.
  3. Yes.


In other words, I believe negative interest rates can only be an artificial imposition by central banks, never a natural outcome of voluntary exchange.

Central banks, including the Federal Reserve, have been expropriating people’s savings, even with positive nominal interest rates, by engineering negative real interest rates— interest rates below the inflation rate. This strategy is not especially subtle, but is at least less obvious than the subsequent moves to negative nominal interest rates. When central banks arrive there, the expropriation of savers is explicit and blatant.

If having central banks, with the power to impose on the public whatever theories they choose, results in negative interest rates, we can conclude that such central banks are themselves a bad idea. Negative interest rates are the reductio ad absurdum of discretionary, fiat-currency central banking.

Featured Publications