In this fixed currency system, if price deflation was 5% per year during a period of growth, then people would have more money in hand, more money to lend. Borrowers would also have more money, so there would be less need to borrow. I can see how this would lower the interest rate but I don’t understand how it could go negative. Would not the pure rate of interest be dependent upon the amount of money available to lend and the desire of borrowers to borrow? Would not a negative interest rate mean that everyone has enough money to invest in all future projects and therefore no desire to borrow?
(Just finished your first boom and bust lecture, I am finding all of this very informative)