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From ZIRP to NIRP

This post’s title might make you think I’m losing my sanity or living in a fantasy world. I assure you, I’m not. ZIRP and NIRP aren’t imaginary goblins, though they can be scary. They’re monetary policies, and they’re in effect around the world.

A ZIRP, or Zero Interest Rate Policy, is an aggressive policy aimed at stimulating economic activity whereby target interest rates are kept at or near 0 percent.

A NIRP, or Negative Interest Rate Policy, is similar to a ZIRP, except target rates are kept negative. That means banks want to encourage spending so much that they charge customers to hold their money! 

These policies are considered unconventional, to be used in extraordinary times. Well, half of the world right now is NIRP-ing, including in Japan and across much of Europe, which is strange. It basically means central banks are discouraging banks from parking their money and instead encouraging them to lend it, the idea being that it will increase consumption and job creation. In essence, borrowers get inexpensive financing so they can put it to work.

That’s the theory anyway.

In reality, negative consequences arise from these policies.

First, they penalize savers. Who would put money in a “safe” CD if it actually costs them? For those who don’t want their money in the market, like seniors and Boomers, these policies lead to storing cash under the mattress.

NIRPs also lead to higher fees. Central bank costs flow from banks to consumers in the form of higher checking account fees and even fees to see a teller.

Lastly, enormous debt is earning negative interest, more than $7 trillion according to Bloomberg because of NIRPs. Most on the NIRP bandwagon started with -0.01 percent, but some have gone to -0.05 percent!

Strange, extraordinary times indeed.

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