[danieltillett]

It is not so much that it stops people from spending - it is that it makes the real interest rate high relative to the nominal and so discourages borrowing.

Actually with negative interest rates proving possible (almost nobody thought they were a few years ago) if you had a deflationary currency you could always use negative interest rates to control demand. I am sure some smart economist has looked into this.

[narrator]

When the real interest rate is high, business retained earnings are more valuable. Thus, economic power is transferred from lending institutions to profitable corporations. Who do you think does a better job investing?

[danieltillett]

Well the theory of a bank is to act as an efficient mechanism to transfer capital from businesses and consumers with excess capital to those with a need for more capital. Of course in practice banks have got pretty good at capturing almost all the value out of this process.

Business should not really be in the business of retaining earnings. If it was not for tax reasons it would be best to return any excess funds to the shareholders and raise new capital when needed.

[narrator]

This would be fine and good, except banks create money when they lend through the money multiplier effect.

[danieltillett]

Yes but returning capital to shareholders would have the same effect too.