From ZIRP to NIRP (Jerusalem Post, February 13)

The Swedish Riksbank unleashed unprecedented stimulus with a negative interest rate and quantitative easing in a race to stem a deflationary spiral blamed by some economists on premature policy tightening.

That was the opening of a news item on Bloomberg yesterday (Thursday), announcing a move whereby Sweden joined a growing number of countries which have adopted a NIRP monetary policy.

NIRP (negative interest rate policy) is the next, some might say logical, step after ZIRP (zero interest rate policy), which several leading central banks around the world adopted during or after the crisis of 2008. The idea then was that if you brought the cost of money down to zero, or very close to it, that would provide a strong incentive to consumers to borrow and spend more, and to firms to borrow and invest more — and the result would be a powerful stimulant to the entire economy. This medicine would, in the first case, stem the collapse that was underway in 2008-2009, and would then facilitate a general and more lasting recovery.

The official version is that these goals were in fact achieved. The slump was reversed in 2009, following the adoption of ‘unorthodox monetary policies’ (UMP) — namely, reducing nominal interest rates almost to zero and implementing programs whereby central banks bought large qunatities of government bonds and sometimes other financial assets as well. The latter has come to be known as quantitative easing, or ‘QE’ for short.

Repeated rounds of QE in the US have resulted — again, according to mainstream economic analysts — in a slow but gradual recovery which eventually encompassed the labor market as well. In the UK, the recovery has also been slow but clear-cut, at least in terms of growth and jobs.

However, even the supporters of UMP, implemented via a combination of ZIRP and QE, admit that this carries costs. Notably, the ZIRP regime has severely punished savers, including pension saving in all its forms. The return on savings — interest on  deposits, yields on bonds — have largely evaporated, forcing investors into riskier assets such as equities or corporate bonds, in an effort to obtain what used to be considered a ‘reasonable’ rate of return.

These costs, it is argued, are unavoidable — indeed, the whole point is to encourage spending and discourage saving. When your economy is based on consumer spending, as is that of the US, stimulating spending is the only way to quickly spur growth.

However, the pro-UMP camp never expected to have to use this extreme form of intervention in the economy for so long. Had anyone told policy-makers in 2008/09 that UMP would still be in operation in 2015, they would have been shocked.

But the facts are plain enough. The impact of repeated rounds of QE in America brought diminishing returns — as should have been expected. In japan, where ZIRP was in use long before anyone else dreamt of it, it failed to eliminate deflation but, noting daunted, the current Japanese government has implemented a much larger QE program — which is also failing to decisively break Japan’s deflationary malaise.

Continental Europe went its own way. The European Central Bank (ECB) held interest rates high, until it was obliged to accept the reality that most of the Eurozone countries were in such bad shape that they desperately needed lower interest rates, even if the German bloc did not.

Over the last two years, the situation has only worsened and the ECB finally moved to ZIRP. But that didn’t help and, for various reasons, QE was not readily available, so

the ECB moved on to NIRP — taking interest rates negative, in order to virtually force banks to lend and people to spend. Now, at last, the ECB is also implementing a program of QE.

But it seems that it’s all too late. The pro-UMP school would say “too little and too late”, while the anti-UMP camp would retort that if all the trillions of dollars of UMP/ QE expended around the world over the last six years (at least 10 trillion, depends how and what you count) have failed to prevent the onset of deflation, then the policy is fundamentally flawed.

It is deflation that is the critical issue. First it was airily dismissed by central bankers as not a genuine threat. Then they said that if it actually developed, they had the tools to deal with it. But now it’s here, in Europe, Japan, China and taking hold in the US too — and it is increasingly apparent that the policy of printing money, of making money virtually free, of giving it away in ultra-cheap loans, simply isn’t working.

The collapse in commodity prices and now energy prices, the unbelievably low yields on medium-and long-term government bonds in developed countries, and the unwillingness of banks to lend to businesses or of businesses to borrow from banks — all these are symptoms of the victory of deflation in the global economy.

Yesterday, it was Sweden moving to a NIRP of minus 0.1%. Last week it was Denmark moving much deeper into NIRP, at minus 0.75%. That brought the Danes in line with the Swiss, and below the ECB. There are economists in Israel demanding the Bank of Israel should also move to from near- to full ZIRP and, if necessary, NIRP. But so far it hasn’t helped and, at some point, there will have to be a rethink.

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