The negative and zero interest rate policy (NIRP and ZIRP) is becoming a new global standard. The endless printing of paper money would boost savings, while individuals see their savings lose value. These policies have traditionally been seen as a last resort, as temporary measures to save economies, but they are increasingly being praised for the smooth rhetoric from central banks and policymakers as a solution to global problems, paving the way for next global slowdown, or even a major crisis. economic collapse.
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Sticks and stones can break my bones but words make it less painful
In George Orwell's Classical Dystopian Novel, 1984, the political language Newspeak existed "not only to provide a means of expression for the worldview and mental habits of the faithful of Ingsoc (the dystopian political system of the novel"). ), but also impossible modes of thought. Politicians today use the same techniques.
The euphemism is designed to make unpleasant realities harmless, even enjoyable. Economic terms such as "quantitative easing" and "NIRP" do not seem particularly threatening or bad. The underlying realities, however, have been misleading and central banks are able to conduct economic activity with impunity that is extremely detrimental to the finances of the working people they govern.
NIRP and ZIRP
NIRP and ZIRP are acronyms for "negative interest rate policy" and "zero interest rate policy," respectively. The acronyms themselves remove a little punch with not so wonderful meanings, but the extended terminologies are also misleading. A negative interest rate is commonly referred to as "commission" in the real world. If the interest is a payment received for lending money to another person, company or financial institution, a negative interest would be charged to do so.
Global politicians and financial advisory groups say: "In Europe and Japan they have NEGATIVE RATES. They are paid to borrow money "(Donald Trump), or "Without money, depositors should pay the negative interest rate to keep their money with the bank, which would make consumption and investment more attractive" (the IMF), the reality of what is advocated is hidden.
How does NIRP work?
Negative interest rates are set by the country's central bank. They stimulate spending and discourage savings. Banks can not afford to let excess reserves deteriorate in the central bank at these rates and are therefore incentivized to provide more affordable loans. Some retail banks absorb this cost to prevent their depositors from converting their savings into cash; other banks charge their customers. Low rates and increased loans mean more people are borrowing and spending, and the now-stimulated economy is therefore considered "strong" (more newspeak), inspired by the fast-paced drug of the US. Easy loan increase. The printing of more money can then be justified under this pretext. At some point, however, the hens of these policies end up at home, as assets and healthy resources are limited, no matter how much paper money the government prints.
ZIRP is the only more conservative cousin of NIRP, a zero interest rate policy defined by a country's central bank. Unlike NIRP, zero is the limit as to how to set low nominal rates. This is why other measures such as quantitative easing are often implemented.
When zero interest rate policy fails to properly stimulate an economy, quantitative easing or quantitative easing can be used together. QE is the creation of more money by a central bank, which temporarily relieves stress on a given economy. Under EQ, central banks are creating more reserves to buy debts and securities from their governments and sometimes even from private entities. As thebalance.com financial website notes:
No fund changes hands, but the central bank gives credit to the banks' reserves when it buys the securities. QE has the same effect as the increase in money supply.
With the increase in the national money supply, economic activity should be stimulated. However, like the NIRP and ZIRP policies detailed above, this equates to taking an aspirin for a serious illness, or buying more credit cards to pay for the pile of old plastic already exhausted in one's wallet.
An increased money supply means higher inflation and the loss of purchasing power that results. If QE fails to provide a boost to a given economy, a phenomenon called stagflation can also occur when inflation continues in the absence of economic growth. It may seem surprising to think that many world leaders, central banks and financial planners are now praising and implementing policies designed to weaken money in the name of progress, but that is the reality.
"In Europe and Japan, they have negative rates. They are paid to borrow money. Should not we follow our competitors? " @Varneyco Yes. The Fed does not have a clue! We have unlimited potential, only retained by the Federal Reserve. But we win anyway!
– Donald J. Trump (@realDonaldTrump) October 29, 2019
The Zeitgeist of the NIRP
In its annual report on the 2019 global banking sector, McKinsey & Company, a management consulting firm, said that "60% of banks destroy value" because they are not economically viable. From 2009 to 2018, most of the banks surveyed had a return on equity (ROE) below their cost of equity (COE). In other words, they can not make ends meet and, in the case of another crisis such as the global slowdown in the late 2000s, may not survive.
The global trend towards negative rates and easing is nonetheless touted by policymakers. According to a study by the Federal Reserve Bank of San Francisco, "central banks that have not yet introduced negative rates could be reassured by this evidence because it seems that there is a margin underneath zero for additional economic stimulus ". The megaphone complicit media for these concepts of endless easing and low rates, with even respected financial publications extolling such moves. Of course, none of the pretty terms change the harsh reality that lies beneath.
Reorganization of the deck chairs on the Titanic
To see where this all goes, just look back at the long list of countries where inflation has already gone out of control, as well as the current rhetoric of global monetary policy and central bankers. While many countries had already suffered independently before, the calendar now suggests that a broader and more global financial crisis could loom on the horizon.
The leaders of the European Central Bank continue to praise and advocate for the extension of the NIRP and ZIRP policy. Japan, Sweden, Switzerland and Denmark do not have the impression of escaping their NIRP slump. Rates in the United States, Australia and New Zealand are fast approaching zero and the central bank in New Zealand is even considering imposing liquidity to force citizens to spend and discourage savings.
The International Monetary Fund (IMF) maintained in February 2019:
Severe recessions have always required a reduction of 3 to 6 percentage points in key rates. If another crisis occurs, few countries would have such room for monetary policy to react.
Since rates are already so low globally, another recession could spell disaster. One of the solutions proposed by the IMF was even to eliminate species, another emerging global theme.
At the end of the day, the central bankers seem to be playing a board game. When the gambling money strips run out, the banker writes some numbers on blank paper and the game continues. In Monopoly, all this is done for pleasure and leisure. In reality, it is a game that plays with people's livelihoods, with saccharine politicians and central bank governors who have nothing to lose by losing their money.
What do you think about NIRP and QE in the context of the global economy? Let us know in the comments section below.
Image credits: Shutterstock, fair use.
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