If there is less money, its value increases.
There is less liquidity when there is less money.
Does a negative interest decrease the money supply?

Especially when people don't need money: they saved it up but nobody needs it -- nobody needs to borrow it from them so they saved up for their pensions and now they want to buy a pension but nobody really needs their money. So a negative interest rate is established to entice them to spend it: a little late because they are buying pensions but OK. They are too old to spend it well. They think the washer will outlive them. So they leave the money in the incinerator of negative interest bank accounts. Then there is less and less money. Now somebody wants to sell something (liquidate it) but there isn't that much money there at the moment. It was burnt. The money becomes a kind of commodity that people are willing to pay more assets for. The asset price in currency is lower. People think, hey cool: Let as much people as possible have their money burnt so that my cash becomes more valuable. Run on the bank. But then it turns out that the CB really can print money...

Here's a story. I guess it can be what happened in the repo market recently.


Definition of Money Supply: The money supply is the entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time. Because of it's definition, the money supply can only be affected if a central bank prints or burns currency. Thus, technically, rates don't affect it per-se.

Velocity of money and money in circulation: What you may be thinking of is related more with how much money is in circulation and how fast it changes hands.

Effect of negative rates: In theory, when rates go up, money flows into bonds and "leaves" circulation. By the same logic when rates go down, money flows out of bonds and "enters" circulation.

  • $\begingroup$ I'm asking, can a negative rate be, "burning money"? (decreasing the money supply). And, for the effect, can practice be that money stays in the bank (savings) for burning so that the money supply decreases and its value goes up? $\endgroup$ Nov 2 '19 at 9:31
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    $\begingroup$ @JuliusBaer Maybe you should clarify what has the negative rate. If I loan you \$100 for -2% interest you'll be happy, and also, no money will be destroyed. If people loan the central bank \$100 for -2% interest, money will be destroyed. $\endgroup$
    – user253751
    Dec 2 '19 at 13:01
  • $\begingroup$ when soneone talks about negative interest rates and the money supply together, i'd assume the central bank 'has' the negative rate $\endgroup$
    – develarist
    Aug 1 '20 at 5:49
  • $\begingroup$ Does a negative interest rate at the central bank not amount to burning money? $\endgroup$
    – user253751
    Mar 26 at 11:14
  • $\begingroup$ "money supply can only be affected if a central bank prints or burns currency" - false. See bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/… $\endgroup$
    – Mick
    Mar 28 at 12:35

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