NIRP

Don't ask me what I want it for
If you don't want to pay some more
--The Beatles

First we had zero interest rate policy (ZIRP). Now we have negative interest rate policy (NIRP). In NIRP, depositors don't get paid interest rates on their funds. They pay banks for the privilege of keeping their funds on deposit.

In June the ECB announced the first major central bank NIRP. Last night the Swiss National Bank (SNB) followed suit.

What's the purpose of NIRP? Bureaucrats want people to spend and invest in risky assets instead of save. Thus, they place a penalty on keeping wealth in 'risk free' cash.

The stupidity behind NIRP cannot be overstated. Reasons as to why NIRP consitutes supremely misguided policy include:

Class discrimination. Old people and others with low risk appetite are hit with what is essentially a tax. People who rely on steady income streams not only get no income, but they must surrender principle to depository institutions.

Inviting structural instability. NIRP is a policy of financial repression. To the extent that policymakers are successful in chasing investors out of cash and into risk, then the finanical system becomes more vulnerable to exogenous shocks that could vaporize massive amounts of wealth.

Bank runs. Modern day banks are bankrupt from the get go. They typically keep less than one dollar in their vaults for every ten they take in. This means that demand for withdrawal exceeding 10% of deposits cannot be met. When they must pay rather than get paid for their deposits, depositors are more likely to withdraw funds. This will put pressure on already thinly capitalized banks to maintain enough equity to remain solvent. Banks may face a Cyprus Syndrome.

More leverage. With NIRP, borrowers essentially get paid to take out loans with a negative cost of carry. Leverage in the system climbs.

Reduced savings. Worst of all, negative interest rates discourage saving. Any interventionary policy that suppresses interest rates below market is bad in this regard. However, at a time when world savings are already low or negative, NIRP is a disaster for future prosperity--one that will enslave our children and coming generations for years.

Surely, history will look back on NIRP with disdain.