 If you've read the financial news lately, you've undoubtedly been introduced to the bizarre concept of negative interest rates, which have already been adopted in Japan and increasingly are under serious consideration by central bankers in Europe and now in the U.S. Now, negative interest rates conceptually run counter to everything we know about building an economy based on savings and production. And they also conflict with everything Mises and Rothbard understood and taught about the function of interest rates in a society. So here to make sense of it all and to explain it for us is Paul Martin Foss, who is head of the Karl Manger Center, who is a long time monetary policy aide to Congressman Ron Paul and also a frequent contributor to Mises.org. So stay tuned for an interesting interview with Paul Martin Foss. Paul Martin Foss, welcome back to the show. It's good to talk to you and I've enjoyed all the things you've been writing lately on both on your own website and for Mises.org. I appreciate it. Nice to talk to you, Jeff. Well, so negative interest rates, it's all over the financial press. It was in today's Wall Street Journal on the cover. This article in particular was talking about the Bank of Japan and what we're talking about folks is not just negative interest rates in terms of inflation adjusted rates. We're talking about actual real nominal rates being below zero as potentially set by central banks. So first and foremost, Paul Martin, let's talk about the fundamentals of interest rates with the Austrian perspective on them, how Mises and Rothbard understood the function of interest rates. Mises, for example, talked about the original interest rate, which was basically a discount applied against future goods for present goods. Right. And Rothbard was pretty much the same too. I mean, they both understood that the natural rate of interest always has to be positive because people always will prefer to consume in the present as opposed to the future or prefer to consume near at a near point in the future rather than a far point in the future. I mean, the concept of a negative natural rate of interest is just is absolutely absurd. I mean, that would mean that you're hungry and you say, well, I'll I'll eat two weeks from now. Well, by that point, you're dead. It just it doesn't compute with reality. OK, so all of the things being equal, there's no scenario under which I would rationally give you low new $1,000 today in exchange for $900 in return a year from now. Right. So talk about time preferences. I mean, explain to us what time preference means and how it applies to borrowers and lenders who would meet in the middle and develop an interest rate or a price. Well, I mean, time preference, again, people have different different time preferences. Some people prefer to consume a lot more in the in the present than in the future. The interest rate, you know, then it's a function of what exactly what exactly is a particular individual's time preference. I mean, if you if you decide to set an interest rate of five percent, somebody may say, OK, I will, you know, go ahead and defer my present consumption. I will let you borrow this money because I don't need it that badly in the present and in exchange, I'll get more in the future. I mean, and that's where, you know, it's one of the fundamental things that allows economic growth to occur. I mean, savings and investment is how is how economic growth occurs. You have to have a positive rate of interest. I mean, you just pointed this out, if you if you have government attempts to set a negative rate of interest or or eliminate interest altogether, what you essentially have is capital consumption. There is no incentive to save and invest and you consume your capital. And when it's gone, that's it. You have no more. You have nothing left to save, invest and grow. I mean, it's a it's a essentially self-defeating concept. Why do you think so many economists, not to mention the public, don't understand interest rates as prices? In other words, I'm telling you, I'm going to give you some money now. You're going to pay me that money back plus some interest. How much that interest is seems to me like a price for the loan. Yeah, I mean, and that's one of the things when I was working with Dr. Paul, we always he always used to hit on that. Was this this is price fixing what the Federal Reserve is trying to do by setting certain benchmark interest rates is essentially price fixing. In a sense, you can kind of understand. I mean, when you when you talk about, for instance, monopolies, too, I mean, people, a lot of economists will say, oh, yeah, monopolies are bad. We need to break them up. And you say, well, what about the government's monopoly on roads, the monopoly on the justice system, the monopoly on defense? And immediately their minds go blank because they just it doesn't compute with their worldview. They're not willing to think outside the box. I think because, you know, interest rates are quoted in percentages or basis points and because they're not quoted in necessarily in dollars or euros, people just don't bother thinking of them as a price, which is what they really are. Well, if we understand that conceptually, at least interest rates would be positive apps in any sort of government or central bank intervention. Fast forward to today, Mies and Rothbard no longer with us. Do you think negative interest rates as being discussed and even implemented by central banks around the world are these some? Is this represents sort of a Hail Mary past? In other words, we've had this extraordinary monetary policy period basically since the crash of 08 in Japan. We've had it far longer than that. So they've tried zero interest rates. They've twat. They've tried endless rounds of quantitative easing. Is this sort of the next the next gambit? Is this a Hail Mary? I think so. I mean, you have what, you know, Hyatt called the fatal conceit. You have these central planners, these central bankers who think that they're geniuses. They think they can manipulate the economy just so, you know, set this variable to this and this one to that and everything's going to be just fine. And they I think they realize now that their their models have failed. They don't know what to do. And they were literally grasping straws and they figured, well, this is pretty much the only thing they can they can do at this point. They've exhausted, I mean, QE, they've pumped trillions of dollars into the system. The ECBs done the same thing with their monetary easing. The Bank of Japan is, you know, pumped a few trillion yen into the system. They just really don't know what to do. They're the grasping straws basically thrown something at a wall trying to see if it's going to stick. And it really it's going to end up being a failure. I mean, if you look at the ECB, if you look at the, you know, why they went to negative interest rates and figure what was it a year, year and a half ago, they said, well, we don't want these banks parking the reserves at the central bank. So we're going to do negative interest rates that money is going to get forced out in the economy and they're going to loan it out to people and everything's going to get better. Well, when you look at the actual numbers of reserves that are parked at the ECB, you'll see a small dip when that first negative interest rate kicks in. But then it increases again, it comes right back up to where it was. It was a complete failure from a from a practical perspective because the banks, a lot of the banks figure that, well, we'd rather take a guaranteed loss parking our money at the central bank rather than loan it out and risk losing all of it. And so it just it just doesn't work. I mean, it's both theoretically and practically a bad idea. But this term has been bandied about for the limits of monetary policy. In other words, pushing on a string. It seems like you can't force banks to make uneconomic loans to insolvent borrowers, right? I mean, in other words, both business and household debt worldwide, but certainly in the US have increased since the crash of 08. Right. And, you know, we have such a such an uncertain regulatory regime, monetary regime, business climate. Nobody knows when the other shoe is going to drop. Everybody has this kind of sense of foreboding that something bad is going to happen. They want to park their money in the bank. They want to hold cash. They want to keep things safe and just wait and see. And, you know, you but then you've got these central banks and the other hand are saying, no, no, no, don't park it. Don't be conservative. Push the stuff out there. Lend money, you know, more debt, you know, more consumption. That's the way to stimulate things. And people just aren't going to respond to that. I mean, there was a Wall Street Journal article, I think last week, that said that some study had said that in the Euro area of a negative interest rate could possibly go as low as negative four and a half percent. That's mind blowing. I mean, when was the last time you even saw a positive four and a half percent on, say, a bank savings account? Wouldn't happen. So to think that it could go to negative four and a half percent is just and that's, of course, that would be the rate that the banks are being charged. Of course, if they pass those on to the consumers and the depositors, you can guarantee it's going to be even even lower than that. So it's just mind blowing, you know, what kind of policies they're trying to push right now. Well, you mentioned it hasn't worked in Europe. The ECB has not been able to force member banks into increasing loans, at least not much. Now, let's say hypothetically in the U.S., let's say the Fed was able to achieve this and so commercial banks no longer parked their reserves with the Fed or at least not in the numbers they do now. And they sort of pushed this out in the public and commercial banks responded by charging consumers negative interest rates on their deposit holdings. Would that not create an immediate sort of flood in the banks to withdraw cash? I mean, that seems like the rational response to me. Right. I mean, that is the biggest fear, obviously, is that people are just going to start pulling the money out of banks. You collapse the deposit base, which means all the loans have to get called in, of course, because of a fraction reserve banking system. If too many deposits are withdrawn and the bank can't cover it and it goes under. If you're talking a Bank of America or a Wells Fargo or, you know, these large commercial banks that maybe had some large institutional deposit holders to start to say, well, you know, why store our billions at the bank? You know, maybe it's cheaper. And you see this, I think, I want to say it's Switzerland, some places in Europe where some of these businesses are now starting to say, well, it's actually cheaper for us to just buy a safe and park the stuff, you know, in a safe and on business rather than hold a bank account. And if they start doing that, then you kind of get this domino effect, this spiral of, you know, deposit withdrawals and bank collapses that will eventually, you know, create this huge, huge spiral that it will take down the banking system. That's the real big fear if you try to push these negative interest rates. And the thing is, because this is uncharted territory, nobody knows exactly, you know, where that border is, where that limit is. And if you know the Fed obviously doesn't know that remember, you know, they're all their economic data is about three to six months out of date, so if they push negative interest rates past that border, by the time they realize, oh, crap, we did something bad, you know, the whole banking system may have been brought down and it's too late to save it. Well, the irony here is that all of this, of course, sounds deflationary, which is what central bankers live to fight, right, is deflation. I'm just curious though, if commercial banks did experience a run, you know, the cash just isn't there. The fiscal cash is not there. If you go to your bank and try to take out even five or $10,000, they oftentimes your local bank branch simply won't have it. Well, I remember when I was working for Dr. Paul, we took a trip up to the New York Fed and they showed us the underground vault where they store the gold. They showed us a couple other vaults where they had printed all this, I guess it was in the aftermath of 9-11. They printed billions and billions of dollars of cash because they were afraid that there were going to be bank runs and people were going to start pulling money out of the bank and go into ATMs and everything was going to run dry and there wouldn't be no physical cash. So they have pallets and pallets of physical cash down at the New York Fed. Now, I doubt there's still not enough to go around in the event of a really, really big crisis. But I mean, I know that they are sitting at least as of about three years ago, they're still sitting on some of those pallets of 50s and hundreds. But of course, one way to fight this is to declare war on cash, right? Take $100 bills out of the system, which has been floated in just recent days by the awful former Treasury Secretary, Larry Summers. And all of a sudden, it gets pretty hard to hold significant wealth in cash. Right. And if the end of banning cash and going to mandatory digital payments where everything is in the bank and through some sort of electronic payment system, they're going to be able to force negative interest rates on you because then what can you do? You know, your bank decides to push a negative 2% interest rate on you. Well, you can't pull your money out of the system unless you buy food or clothing and use that as kind of a barter method. But all you can do is transfer it to another bank that you hope has a slightly higher but still probably negative interest rate. It makes it very difficult for consumers to escape these monetary shenanigans if war on cash continues. You know, Paul Martin, we just have time for one last question. But if you step back and look at all this from a distance, you know, it really goes to the two basic perspectives that have dominated economics in, let's say, the last 150 years. One, you could loosely term the Austrian school based on Sey's law that says, you know, savings and production are what grow an economy. The second, the now dominant strain of economics we might call neocainsiness, which basically says aggregate demand is king and we need to stimulate it. And it seems like the triumph of the latter viewpoint is being sorely tested in what's happening today. Yeah. And I mean, I think for the last, you know, at least 50 years, what we what we've had is because, you know, we've had negative rates of return on, say, bank accounts. I think the Bundesbank did a study that showed that people would deposit money in the bank for the past 50 years. They've lost money every single year. We've had kind of a slow motion capital consumption as Mises said would occur. We've basically been testing, you know, kind of these. We've basically been a lab lab rats for cocaine for the past 50 years. But we're reaping the negative effects of a capital consumption, monitor huge amounts of monetary inflation, especially after the gold window was closed. I know a lot of people in the United States, I know we're starting to wake up thanks to good work that Mises Institute is doing and all the resources people can find there, they're starting to open their eyes and realize what exactly the Fed's doing wrong and what the ECB is doing wrong. The question is, when are the policymakers going to finally admit their fault? I mean, the two most difficult phrases, I think, to utter in the English language are I'm sorry and I don't know. And for people who have spent their entire careers in government and academia and risen to the level of the Federal Reserve or, you know, member of the Board of Governors, last thing they want to say is I don't know or I'm sorry or I can't help. We don't know what to do. I really think they're just going to keep stumbling and bumbling into a complete economic collapse. Well, one thing we know for sure is you cannot create prosperity simply by punishing people for saving money and accumulating capital. Paul Martin Foss, thank you so much for your time. Ladies and gentlemen, have a great weekend.