Central bankers worldwide seem to consider themselves omnipotent beings with the power and wisdom to dictate economies, socially engineer consumers to do their bidding, and make or break governments. The latest tool at their disposal is a negative interest rate policy (NIRP), an unconventional monetary strategy that has become an international phenomenon, like SARS in 2003 or swine flu in 2009. Despite NIRP being a new development springing from the minds of central bankers, it is already breeding unintended consequences in markets embracing subzero rates.
NIRP or Nothin’
Five central banks have adopted a NIRP: Switzerland, Denmark, Sweden, Japan, and Europe. The purpose behind implementing negative rates is to spur lending, boost spending, prevent deflation, and stimulate the overall economy. It turns out that most jurisdictions that have adopted NIRP are witnessing opposite effects, says a new study.
According to research from the University of Bath in the UK, subzero interest rates are canceling out the stimulus effects from other unusual monetary policy tools, including quantitative easing (QE), that were imposed in the aftermath of the financial crisis. It seems the left hand does not know what the right hand is doing if this is what happens.
Moreover, commercial banks have curtailed their lending capacity after being charged by central banks to hold excess cash reserves. The primary reason, study authors say, is that the added costs cut into profit margins, causing a decline in new loan growth. In fact, researchers discovered that bank margins and profitability performed worse in nations with a NIRP than countries that did not install this policy.
Dr. Ru Xie of the university’s School of Management said in a statement:
“This is a good example of unintended consequences. Our study shows negative interest rate policy has backfired, particularly in an environment where banks are already struggling with profitability, slow economic recovery, historically high levels of non-performing loans, and a post banking-crisis deleveraging phase.
“If bank margins are compressed due to low long term yields, and if there is limited loan growth, then bank profits will fall accordingly. The decline in profits can erode bank capital bases and hitherto further limit credit growth, thus stifling any positive impact on domestic demand from negative interest rate policy monetary transmission effects.”
The results of this study came after incoming European Central Bank (ECB) head Christine Lagarde claimed in written answers to the European Parliament that NIRPs have helped the eurozone more than they have hurt. President Mario Draghi’s successor says that depositors may have lower returns on their savings, but since they are also borrowers, consumers, and workers, then “they benefit from stronger economic momentum, lower unemployment, and lower borrowing costs.”
Was Lagarde talking about Europe? Perhaps she was – if she completely avoided looking at the data.
But we digress.
Embrace a Shadow and Love a Dream
When the Riksbank thought it was pulling off the greatest monetary stunt in Sweden’s history, the people had another idea. Instead of spending all their capital, Swedes saved even more. Since 2015, the quarterly gross household savings rate has dipped below 10% only three times. But it turns out that not all these savings are being deposited at the neighborhood bank run by George Bailey (Gertorn Bergkvist). Plunged into frigid rates and forced to live in a cashless society, citizens are hiding their krona in microwaves and Hjalmar Söderberg novels for fear of losing the fruits of their labor.
Examine the economic data in places with these policies, and you see disappointment.
Europe is a lost cause. Japan is trying everything to fend off a recession. Denmark is grappling with a series of economic challenges. Sweden is in a crisis – both financial and cultural. And those states flirting with the idea of substituting ZIRP (zero-interest-rate policy) with NIRP have their own problems.
Is it an inevitability that the Federal Reserve will slash rates to zero and beyond? Former Fed Chair Alan Greenspan recently warned the American people: Get ready! He thinks that not only will the United States mirror Tokyo and Stockholm on NIRP but also that negative-yielding Treasuries are on their way, citing an aging population’s demand for bonds, which sends yields lower.
It should be noted that the Fed started to prepare the banking industry and the public for subzero rates. Former Fed Chair Janet Yellen told Congress in her semiannual testimony that negative rates are on the table should a financial crisis transpire. She also initiated a completely different annual stress test, requiring banks to handle three-month bill rates tumbling to -0.5% from the second quarter of 2016 to the first quarter of 2019.
The Vision of the Anointed Unrealized
The vision of the anointed is never fully realized because – believe it or not – the public cannot and will not be controlled by a small number of men and women in power concentrated in a room in Frankfurt, Tokyo, or Washington. People everywhere, especially in countries with a rebellious past, have a natural inclination to contradict the Leviathan. Will this encourage leaders to leave everyone alone in the free market? Hardly. They need to be proven right, and they must control the people at all (negative) costs. That is the globalist way!
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