ZIRP (Zero Interest Rate Policy) has been replaced by the new central bank rage, NIRP (Negative Interest Rate Policy).
The only tangible result of these central bank actions has been asset bubbles that are guaranteed to pop.
Today, the Bank of International Settlements (BIS), finally issued a warning to the central banks of unknown and unwelcome consequences of NIRP.
Please consider Bank for International Settlements Warns of Negative Rates Risk.
Negative interest rates risk backfiring the longer and more deeply central banks in Europe and Japan venture into this unconventional monetary policy, economists from the Bank for International Settlements have warned.
Dubbed the central bankers’ central bank, the BIS published research on Sunday which cautioned that it was difficult to predict how individuals or financial institutions would behave if rates were to fall further below zero or stay negative for a long period.
Pointing to some unexpected effects, the BIS research finds that retail deposits have been insulated from the policy and that some mortgage rates in Switzerland have “perversely increased”.
“If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale,” said BIS economists, Morten Bech and Aytek Malkhozov.
“On the other hand, if negative policy rates are transmitted to lending rates for firms and households, then there will be knock-on effects on bank profitability unless negative rates are also imposed on deposits, raising questions as to the stability of the retail deposit base.”
Report Lacking
Those who wish to read research paper by BIS economists Morten Linnemann Bech and Aytek Malkhozov can do so here: How have central banks implemented negative policy rates?
I found the 14 page report quite lacking. The warnings were buried in the report and not once did the report mention the word “bubble”, a clear risk of ZIRP and NIRP actions.
Nonetheless, BIS warnings do not come lightly. That said, the odds Central Banks heed the warnings are essentially zero.
Mike “Mish” Shedlock
Given the composition of the BIS board I’m surprised this even saw the light of day.
Bis is a clearance mechanism first and foremost, when Neg Rates are forced through the system clearance becomes an issue since if your earning some sort of rate you will not jeopardize it for clearing someone else and performing your function.
What I see happening is that liquidity is being drained while market clearance is being impaired, it is a prelude to a very rapid implosion of asset prices. If bail ins are imposed there will be no capital to buy those assets in those places. A wholesale robbery of the insolvent by those “perceived” solvent. Any buyer in such a situation will be deemed fit for nationalization in a few years after.
I agree that this is (or can be) a liquidity draining action. I wonder if this is an attempt at raising interest rates to remove liquidity without actually raising interest rates. But how will this affect currency exchanges? For instance, will a high liquidity, higher rate currency flow into a negative rate currency in order to drain liquidity from that higher liquidity currency, sort of like some form of central bank arbitrage?
This is difficult to understand, to say the least.
What I sense is an attempt at a normalisation where the financial establishment is pulled into the dark and real open market financing rates are pulled towards 0. This will ease the burden on established debt and remove sovereign anxiety in the case of Eurozone, but will not encourage new lending to the private sector given that macro economic expectations are very poor. This normalization will be above all a legislative one over financial industry where the existing frameworks are pulled in and rearranged to a new management and discipline, from which will emerge an as yet unknown dictate directing investment and activity. I have the premonition that it will be a decidedly statist arrangement that aims to tackle and overide the old order and establishment, and to my view is unsound in its basis and approach, as well as being disconected from traditional and stable economic evolution. It might work in a sense, but I do not think it will be fully accepted and may easily lose the adherence of society in the case of Eurozone as the interface of national political realities are challenged by those subjected to the new approach. No banking authority has been granted that much say by the public, they are likely to reject any national authority that is obvious to its say, or else simply go into a deep deep depression out of the sheer loss of reference. Quite possibly we will end up with some form of socialist dictatorship as I do not think a few would be pontificators are going to be able to pander several hundred million people into accepting an alien system that offers more illusion than hard result, but you never know – people are taught to follow certain lines and they are not hard to persuade when they think they are making the choices themselves.
I watched a video with David Stockman in which he said that there is tremendous opposition to the NIRP that many are expecting and that market will be disappointed by what comes out. We shall see.
The biggest problem with BIS is it is toothless. No one listens to it.
My biggest problem is not with the consequences of NIRP, but the simple fact that NIRP by itself destroys capital. How can you expect growth and demand without capital? Understanding this is not rocket science but common sense, the lack of which among the Central Bankers is what makes them come up with such hare-brained schemes in their efforts to save the world. I am looking for a Trump among the Central Bankers, who upends the system and shows them up for they are. The world needs to get rid of these idiots before they destroy the world.
The world is awash in “capital”. Nobody wants to borrow the capital. What for? We have too many cars, too many ships, too many factories, too much oil, too much coal………..
Those who need the “help” are those paying interest today, now. They want to boost demand? Have all these member banks lower all credit card % (automatically) to 2% and all home mortgages (automatically) to 3%. Do this will all consumer loans and that will take the pressure off the people.
They will never do that since the Central banks serve the banks that own them, and not the countries nor people.
They keep doing this, lowering rates, but you cannot write off risk of failed payment without upsetting the natural economic balance – debt is based on profit, not loss, if you lend knowing you will make a loss you will go out of existence for those who make the profit from that.
What is actually going on though is redistribution in one form or another, and that is a different, and not necessarily friendly creature, especially when it is carried out without transparency, nor the clear acceptance of those involved.
In short, it seeks the title of benevolent dictatorship, but is unlikely to find it, and settles at a dictatorship which likes to show some benevolence, but at its own discretion, and most possibly profit.
* ZIRP
* NIRP
* Helicopter money
* Hyperinflation
* Dictatorship/War
Give or take 3-4 years between each, and by 2024 it’s gonna be all over.
That’s a horrendous prognosis, but it’s a potential outcome too consequential to ignore. ‘Now’ is the grand opportunity move your families to safer locales.
Everyone assumes helicopter money is a given. I do not.
Helicopter money would require a massive amount of political will. The powers that be would have to admit that they failed. They will not do that. They are all ostriches with their heads in the sand.
Why would they have to ‘admit’ anything? They’re politicians, after all. And they don’t have to call it “helicopter money”. It’ll just be another “instrument in their toolbox”. An extra-large tax return from the IRS. “Taxpayer Relief Act” A “new car-buyers’ credit”. Buy-one-get-one-free. Tuition assistance. “Enhanced child credit”. Whatever.
SD3, all of your examples would have to be approved by Congress. With a 50/50 split Congress, the repubs would need to vote in favor.
Not happening, unless we have such a deep depression that nothing else works (even ZIRP/NIRP).
This is why I say that helicopter money is highly unlikely, unless given an extreme circumstance.
My point is, given our political process and system as it is, I do not see how we could possibly hyper inflate without first experiencing a deep depression.
Negative % should help inform the “average” person that “money” today has NO intrinsic value at all.
Why should a bank pay you for your “paper notes” when they can get them for free from the Central Banks? Just hit a keyboard key for any amount and then type “credit to Bank “X”‘.
We don’t use money. We use “credits”.
If we used gold, all of this would be absolutely impossible. But, then, the owners of the Central Banks could not pull of this 200 year swindle.
“Today, the Bank of International Settlements (BIS), finally issued a warning to the central banks of unknown and unwelcome consequences of NIRP.”
To the central banks, are they unknown or unwelcome? Bankers are the FED’s constituents. Jamie Dimon is a billionaire.
Bernanke wrote back in 1988, that QE doesn’t work. Yet he did QE anyway. Who benefited from QE? Jamie Dimon is a billionaire.