The Trouble with NIRP

ZIRP (Zero Interest Rate Policy) gives way to NIRP (Negative Interest Rate Policy)
[courtesy Google Images]

“I now believe negative interest rates for the entire world is inevitable; and with them, the imposition of increasingly draconian capital controls—from FATCA and FBAR-like reporting requirements; to limitations on withdrawals and capital exportation; and ultimately, “cashless societies” in which investors are forced to hold savings as digital deposits at insolvent banks—In which, arbitrary government decrees like negative interest rates—will be used to not only confiscate wealth, but destroy all remaining remnants of capitalism.”

A dire warning, indeed—but what, exactly, is “NIRP”?

•  Bill Bonner described NIRP in a recent article entitled “Trifecta of Absurdity”:

“In Japan two-thirds of government debt carries a negative yield; savers pay a bankrupt government for the privilege of lending it fictitious money.

“NIRP is an absurdity trifecta.

“First, the money is phony.

“Second, the borrower is insolvent.

“Third, the interest rate is less than nothing.

“Central banks are doing this to drive bank lending rates into negative territory. Not only will bondholders pay to lend their currency to governments but also anyone with a bank deposit will be charged to save money.

“Sweden, Denmark, Switzerland, the eurozone, and Japan have pushed their key lending rates into negative territory.  The Federal Reserve is considering following suit and pushing its key rate into negative territory.”

The Federal Reserve has implemented ZIRP (Zero Interest Rate Policy) but has not yet implemented NIRP (Negative Interest Rate Policy).

•  Reuters (“BOJ launches negative rates, already dubbed a failure by markets”) described NIRP:

“The Bank of Japan’s negative interest rates came into effect on January 29^th in a radical plan already deemed a failure by financial markets, highlighting Tokyo’s lack of options to spur growth as global markets sputter.”

To say that that the central bank of Japan or of any other country, has a “lack of options to spur growth” is a lie.  It’s only true to say that Japan has a “lack of options” within the limits and premises of Keynesian economics and of the debt-based monetary system.

Japan, the U.S., EU and China still have other “options” outside of Keynesian theory and outside of our debt-based monetary system—if they choose to use them.  For example, if Japan really wanted to stimulate its economy, it could abandon Keynesian theory and debt-based currency, and restore an asset-based monetary system founded on physical gold and silver.

But central bankers can’t abandon Keynesian economics or the debt-based monetary system without also abandoning their primary power and foundation for the New World Order: the power to “spin” fiat currency out of thin air.

In a debt-based monetary system, it’s easy to create fiat currency from nothing.  In an asset-based (gold/silver) monetary system, no such “currency creation” is possible—you either work, earn and possess the physical gold or you don’t.  Unlike paper or digital currency, physical gold can’t be “spun” into existence.

Without Keynesian economics and debt-based currency, the central banks would cease to exist or at least cease to wield any significant power.

The current “limits” in the central bankers’ powers to stimulate the world’s economies aren’t based on reality.  Instead, those “limits” are based on the central bankers’ choice to advocate and implement Keynesian economics and a debt-based monetary system.  If they would choose to implement classical economics and an asset-based monetary system, they’d almost certainly have a number of “new” options to stimulate the economy.

Almost everyone who follows the national or global economies knows that QE (Quantitative Easing) and ZIRP (Zero Interest Rate Policy) have failed to stimulate the world’s economies. Central Banks are therefore trying NIRP (Negative Interest Rate Policy) to see if that might work.

What’s NIRP?  It’s ZIRP on steroids.

If ZIRP (an interest rate of, or near, zero) won’t persuade the public to borrow, spend and stimulate the economy, then the central bankers will try a negative interest rate of, say, -2%.  And if a negative interest rate of -2% won’t move the public to borrow, spend and stimulate the economy, then maybe they’ll try a negative interest rate of -5%, or -10% of maybe even -50%.

It’s all insane, of course, but the central banks will go as far as they must not only to somehow stimulate the economy but also (and more importantly) to maintain the illusion that Keynesian theory and debt-based currency are valid, rational concepts.

So far, central banks won’t admit or even consider the possibility that the fundamental premises of Keynesian economics and of a debt-based monetary (which have empowered the central banks) are irrational.  Instead, they’re pursuing the madness of their economic principles to their logical extreme—which will be an economic calamity.

•  The central banks’ real problem is that the people in nation after nation will no longer allow themselves to be conned into going deeper into debt. Despite the central banks’ most enticing offers (“free currency” and “we’ll pay you to borrow from us”), the public won’t borrow enough and spend enough to stimulate the economy.  Rather than offering the public ever-bigger doses of negative interest rates and “free” currency, the central banks should be seeking to learn WHY the public no longer bites at the central banks’ “bait”.

Something has happened to the people of Japan, EU and U.S. that discourages them from borrowing to the same extent as they did in the 1990s.  More than likely, the Great Recession has taught the dangers of debt to enough people to prevent more of the “irrational exuberance” (easy credit, more debt) that Alan Greenspan warned of in A.D. 1996.

There is a solution to the economic problem of people refusing to borrow and then spend enough to stimulate the economy.  But, that solution will be found only by going back into the economic fundamentals of Keynesian economics and debt-based monetary systems and then finding, admitting and eliminating the false (and even fraudulent) premises on which those concepts are based.

•  When the BoJ first implemented NIRP, “senior BoJ officials expected only a minor impact on Japanese banks, but their stock prices plunged, contributing to a global market sell-off.”

Implication:  Results that are both significant (“global”) and unexpected imply that the BoJ doesn’t know what it’s doing.  They’re experimenting with NIRP.  The people of Japan (and of the world) are the experiment’s guinea pigs.  More, the fact that they’re now experimenting with NIRP in hope of finding a cure for their economy’s depression is evidence that they have no other reliable solution to the problem within the limits of Keynesian economics and debt-based currency.

Once you accept the premises of Keynesian economics and debt-based currency as rational and true, the logic of those premises will inevitably drive you to accept NIRP as reasonable.  But NIRP doesn’t work.

No matter.  NIRP is being tried anyway since QE and ZIRP don’t work either—and all for the very same reason:  the fundamental premises of Keynesian economics and debt-based currency are false and arguably fraudulent.  Even so, central bankers can’t admit that those premises are false without losing the foundation for the central bank’s power:  creating fiat currency from nothing.

Within the limits of Keynesian economics and debt-based currency, the BoJ (like other central banks) is out of Schlitz.  Within those limits, the central banks have no weapons or strategies able to alleviate Japan’s 20-plus years of economic recession and/or depression.  Within those limits, there’ll be no relief for the U.S. economic recession/depression.

Realistically, what’s left to do besides face the truth, let the Japanese economy implode and then, after the dust settles, rebuild their economy on a financially-solid foundation like classical economics and an asset-based monetary system?

But central banks won’t return to classical economics and/or asset-based currency since doing so would deprive them of their only great power (spinning currency out of nothing) and leave them impotent, irrelevant and dead.