Negative Interest Rates and Other Conundrums of a Bitcoin World

by Stephan Kinsella on March 17, 2026

A friend asked whether “interest makes sense only so long as the economy is expanding due to a handful of economic expanders: technological advances, more efficient trade, a low cost of dispute resolution, and an increasing population, but whether a shrinking population will end…

— Stephan Kinsella (@NSKinsella) March 16, 2026

On a discussion list, a friend asked whether

interest makes sense only so long as the economy is expanding due to a handful of economic expanders: technological advances, more efficient trade, a low cost of dispute resolution, and an increasing population, but whether a shrinking population will end up causing so many defaults that lending just is no longer a profitable business, even with state money being nearly free.

My somewhat tangential reply:

I don’t think this is right. Something about it seems wrong

Some have a said that with a fixed money supply lending is also impossible, which I also think wrong.

That said, @Saifedean Ammous has an intriguing arguent I am not sure about yet. Hans Hoppe is skeptical of it; I got Saif to propose this to Hans when we met in Istanbul last year. But his view is something like this. I think he’s trying to find a way to justify the Muslim and I guess Christian opposition to usury. ¹

Now my view is that he is right that in a sound money world, habits would change and there would be far less consumer spending and debt. You would rent an apartment, buy a cheap car, and then save up and pay cash for a house or car, no mortgages or loans. I tend to agree. Whether the phenomenon of business credit would exist, i don’t know. I think there might still be a role for business credit, taking out loans instead of selling equity (instead of selling “bonds”). Not sure. I think clearly separating the deposit-saving function from credit intermediation ² would help end the Ponzi scheme of fractional-reserve banking (including FRFB of freebankers) but whether it would disappear totally, I am not sure.

But one thing most people do not seem to realize, is this. They do not fully appreciate the deeper problem with smart contracts ³—which is that most loans are unsecured and therefore could not be fully automated. And even though the TTTC means that contracts are not binding promises ⁴ you can also acquire a debt in various ways: 1. some “breach” of contract ⁵ happens that leads to liability not planned for (another reason you can never escrow enough in a “performance bond” to ever fully secure a future title transfer, even if you could escrow some ahead of time, which in most cases you can’t; the nature of loans is that the borrower usually needs money and that he has none to escrow, and often has insufficient collateral, and certainly not enough for unplanned “breaches”—another reason smart contracts cannot work: there almost always has to be contingencies for unexpected developments, which is why there is always explicit or implicit dispute resolution, ⁶ which again limits the ability to automate many contracts); or 2. you commit a tort and owe (again, often unsecured) future title payments to someone.

I.e. even if consumer lending disappears, and even business credit borrowing were to go away, you would always have the possibility of debts and that will have an interest aspect.

In any case Saifedean’s argument, IIRC, seems to be something like this: progress and civilization imply the reduction in time preference. This means a steady decline in interest rates charged for loans/debts. In a sound money world this process would continue. I think Ammous talks about this in The Bitcoin Standard, maybe Principles of Economics, and in his alternate history “novel” The Gold Standard. The idea is that, in a gold money world, it’s costly to store gold. If interest rates keep declining, the storage costs are greater than the interest you can charge.

For example it might cost 0.3% to store but you can only charge 0.2% interest. So if you hold gold you would lend it out for free, to save on storage costs, or even charge negative interest. For example instead of paying 0.3% storage costs you would pay someone 0.2% to borrow it. If they repay the loan later, you saved the 0.1% difference. Or something like this. I know I am mangling a few steps here… I can’t quite work it all out in my mind, similar to my mental block accepting [X’s] argument that in a bitcoin world you cannot on average beat the rate of deflation (based on overall global GDP growth) in your investments.

The thing is that this argument might work in a gold standard world but in a bitcoin world storage costs are essentially zero and I do not see interest going to zero but only asymptotically going to some low, but finite and non-zero, value. So in a BTC world you always have some positive interest you can charge for making a loan since it’s always greater than the storage costs.

Still working through this in my unfortunately limited brain.