NIRP Has Created Financial Frankenstein

March 18th, 2016 by

Negative interest rate policy (NIRP) is one of the surest symptoms of the financial market’s ills right now. It resembles a free-wheeling science experiment gone awry. What kind of monster have these mad central bankers unleashed on the world?

Nobody Knows the Consequences of NIRP

negative interest rates (NIRP)It’s one thing that NIRP is essentially uncharted territory for any monetary regime. Even worse, however, are the implications for further experimentation with the financial health of the world’s interconnected web of economies. How far can they go? Is there no such thing as the “lower bound” anymore?

The first thing to consider is that our current untenable situation is many years in the making. The notion of slashing interest rates to the lowest threshold (and potentially into subzero territory) was floated more than a decade ago by none other than Ben Bernanke, the former Chair of the Federal Reserve, in a speech given in 2002. This support of the extreme policy tools such as greatly inflating the money supply, purposely devaluing the U.S. dollar, and cutting interest rates down to zero fittingly became known as the “Bernanke Doctrine” following the aforementioned speech.

Source: AgainstCronyCapitalism.com

Source: AgainstCronyCapitalism.com

The Fed (and to an even greater extent the other major central banks around the world, in Japan and Europe in particular) has embraced this view of economics crafted in the mad monetary laboratory by Bernanke and his cohort. What we are seeing now is truly the Frankenstein of their creation. Excluding U.S. Treasurys, 46% of sovereign bonds around the world now offer yields below zero.

Zombie Banks and Monetary Monsters

contagionBy propping up unproductive and insolvent institutions through these extreme monetary “magic tricks,” central banks unavoidably end up creating zombie banks. These are institutions that should otherwise be allowed to die and are saddled with toxic debt, but groups of central monetary planners have decided to keep their dead corpses animated by pumping them full of more money through fiat manipulation. By using the dangerous and distorted “bazooka” of quantitative easing (QE) and untested measures like zero interest rate policy (ZIRP) and now NIRP, our economic leaders and policymakers are merely keeping a broken system artificially on life support. Behold, the walking undead!

Like Dr. Frankenstein’s terrifying monster, the world’s central bankers seem to have created an unnatural creature which they can no longer control. Regardless of their intentions, the ill-fated experiment is overpowering its creators.

frankensteinPeople have from the outset taking note of this unfortunate mistake. Larry Fink, CEO of major financial firm BlackRock, put it this way: “Let’s be clear: Negative interest rates are terrible.” Meanwhile, Bloomberg columnist and debt market expert Lisa Abramowicz concludes that “For now, investors aren’t convinced that this unprecedented policy [of NIRP] is helping in any way, and it’s hard to blame them.”

To make matters worse, the only response we seem to get from the central banks as their policies prove ineffective is more of the same. In doing so, they only make the monster bigger and stronger. There’s no telling how or when this nightmare will end, but the smart money is running for safety before their wealth is consumed by the dysfunctional system.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.