Central Banks Want to Eliminate Cash So They Can Implement Negative Real Interest Rates and Defeat Deflationary Trends

The second reason for eliminating cash is to impose negative interest rates. Central banks are in a losing battle against deflationary trends. One way to defeat deflation is to promote inflation with negative real interest rates.

A negative real rate occurs when the inflation rate is higher than the nominal interest rate on borrowings. If inflation is 4 percent, and the cost of money is 3 percent, the real interest rate is negative 1 percent ( 3 - 4 = -1). Inflation erodes the dollar’s value faster than interest accrues on the loan. The borrower gets to pay back the bank in cheaper dollars. Negative real rates are better than free money because the bank pays the borrower to borrow. Negative real rates are a powerful inducement to borrow, invest, and spend, which feeds inflationary tendencies and offsets deflation. 

How do you create negative real interest rates when inflation is near zero? Even a low nominal interest rate of 2 percent produces a positive real interest rate of 1 percent when inflation is only 1 percent (2 - 1 =1). 

The solution is to institute negative interest rates. With negative nominal rates, a negative real rate is always possible, even if inflation is low or negative. For example, if inflation is zero and nominal interest rates are negative 1 percent, then the real interest rate is also negative 1 percent (-1 - 0 = -1).

Negative interest rates are easy to implement inside a digital banking system. The banks program their computers to charge money on your balances instead of paying. If you put $100,000 on deposit and the interest rate is negative 1 percent, then at the end of one year you have $99,000 on deposit. Part of your money disappears. 

Savers can fight negative real rates by going to cash. Assume one saver pulls $100,000 out of the bank and stores the cash safely in a non-bank vault. Another saver leaves her money in the bank and “earns” an interest rate of negative 1 percent. At the end of one year, the first saver still has $100,000, the second saver has $99,000. This example shows why negative interest rates work only in a world without cash. Savers must be forced into an all-digital system before negative interest rates are imposed.

—James Rickards, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis (New York: Portfolio / Penguin, 2016), 28-29.