From ZIRP to NIRP: the last throw of the dice

The recent announcement of the Bank of Japan (BoJ) that it would introduce a negative interest rate (NIRP) for commercial banks holding cash reserves is the final admission that monetary policy supported by mainstream economics and implemented by central banks globally has failed.

The main economic policy weapon used since the global financial crash and the ensuing Great Recession to avoid another Great Depression of the 1930s has been zero interest rates (ZIRP), then ‘unconventional’ monetary measures or ‘quantitative easing (QE)’ (increasing the quantity of money supply to banks), all fixed to inflation targets of 2% a year or so.  ZIRP and a virtually unlimited supply of cash (QE) were supposed to kick-start the global economy into action, so that eventually capitalism and market forces would take over and achieve ‘normal’ and sustained economic growth and fuller employment.

But QE and ZIRP have failed to achieve their inflation (and growth) targets.  On the contrary, the major economies are close to deflation, as commodity and energy prices plunge and prices of goods in the shops and on the internet slide.  Deflation has its good and bad side.  Sure, it lowers the cost of many things but it also raises the real burden of debt repayments for those who borrow.  And if prices are falling continually, it breeds an unwillingness to spend or invest in the expectation that it will be cheaper to wait.  Deflation is a symptom of a weak economy, but also a cause of making it weaker.  Deflation can become a debt deflationary spiral.

So now we have NIRP.  It started with the Swiss, then the Swedes and more recently the European Central Bank and now the Bank of Japan.  Now about one-quarter of all interest rates are below zero!  And we have only just begun with this latest monetary tool.  BoJ governor Haruhiko Kuroda announced there is “no limit” to monetary easing and that he would invent new tools rather than give up his goal of 2 per cent inflation. “Going forward, if judged necessary, it is possible to cut the interest rate further from the current level of minus 0.1 per cent,” said Kuroda.  “The constraint of the ‘zero lower bound’ on a nominal interest rate, which was believed to be impossible to conquer, has been almost overcome by the wisdom and practice of central banks, including those of the Bank of Japan,……It is no exaggeration that [ours] is the most powerful monetary policy framework in the history of modern central banking,” he said.

The ‘wisdom’ of central banks – really?  ‘Most powerful’?  NIRP will fail in the same way that ZIRP and QE has.  Take Sweden.  There, the Riksbank, the central bank, has applied NIRP with zeal for some time.  What has been the result?  Inflation in the prices of goods and services has not returned.  Instead, cheap credit and penalties for holding cash (negative rates) have pushed banks into lending for property and stock market speculation, not productive investment. Swedish non-financial credit now stands are 281% of GDP, a rise of 25% on the pre-crisis peak and up from 212% a decade ago.  House prices have risen by a quarter nationally and 40% in Stockholm over the past three years, stretching earnings ratios to extremes (house prices are 11.7x earnings in the capital).

Far from curing deflation and restoring growth, NIRP will only exacerbate the sizeable debt burden that the major economies have built up in a desperate attempt to avoid a ‘Great Depression’ since 2009.  To bail out the banks and avoid a severe collapse in incomes and employment, governments borrowed hugely.  Sovereign debt, as it is called, rose to record post-1945 levels.  But the private sector, particularly the corporate sector, also expanded its debt.  Cheap central bank money flowed into the so-called emerging market miracle economies of Asia and Latin America.  But now they are in recession, leaving a debt burden to be serviced, mainly in appreciating dollars.

And as China and emerging economies slow or drop into a slump, the demand for exports from Europe, Japan and North America has slid away.  Take the European powerhouse, Germany. While Chinese exports only account for 6% of total German overseas sales, adding in Asia this rises to 10%.  That might still seem small, but is a potentially large drag on GDP where net trade has been contributing an average of 0.6% pts to the 1.5% pts of growth recorded over the last six years.

german exports

It’s a similar story in Japan.  The BoJ’s policy of ZIRP, QE and now NIRP has succeeded in weakening the yen against the dollar.  But it has failed to boost exports because most other Asian currencies have fallen too and now the Chinese yuan is under pressure.  Despite a 55% fall in the yen against the dollar in just three years of BoJ policy, there has been zero increase in export volumes.

japanese exports

Nevertheless, the dominant economic tool of the mainstream and major governments is still monetary policy, with its last stand in NIRP.  The US economy is still plodding along at about a 2% real growth rate, better than most and official unemployment has come down.  US Fed chief Janet Yellen claims to be confident that sustainable improvement in real GDP is here.  Yet all the recent economic data lend serious doubt to that forecast and the aim of the Fed to hike interest rates in 2016.  So there is even talk that the US Federal Reserve may adopt NIRP if everything goes pear-shaped in the US.

In its annual stress test of the US banks for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period. “The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities”, the central bank said in announcing the stress tests last week.  New York Fed President William Dudley said last month that policy makers were “not thinking at all seriously of moving to negative interest rates. But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action.” 

Fed Vice Chairman Stanley Fischer said that foreign central banks that had resorted to negative interest rates to stimulate their economies had been more successful than he anticipated.It’s working more than I can say I expected in 2012,” he told the Council on Foreign Relations in New York. “Everybody is looking at how this works,” he added. Working well?  Really?  Sweden?

Radical Keynesian, Richard Koo summed up the NIRP option as “an act of desperation born out of despair over the inability of quantitative easing and inflation targeting to produce the desired results… the failure of monetary easing symbolizes crisis in macroeconomics”. RichardKoo_2Feb2016-1

As I have shown before in a previous post, during the Great Depression of the 1930s, John Maynard Keynes also gave up on monetary policy.  Having advocated lowering interest rates and ‘unconventional’ monetary easing, he eventually concluded that it was not working and moved onto to fiscal policy – in essence more government spending. This is also the answer for Koo.

Keynes in the 1930s was disappointed that governments, particularly the US and the UK, did not adopt his policy of deficit financing and government spending, let alone his more radical suggestion of the ‘socialisation’ of investment to replace the failure of capitalists to invest.  And modern Keynesians like Paul Krugman, Larry Summers, Simon Wren-Lewis or Brad Delong, while promoting monetary easing big time since 2008, have increasingly become disillusioned and joined Richard Koo in advocating fiscal spending to avoid ‘secular stagnation’ and deflation.  What puzzles the Keynesians is why governments, as in the 1930s, will not go down this road.

For the Keynesians, running up debt (public sector debt) is not a problem: one man’s debt and is one woman’s credit is the argument.  But debt does matter, as I have argued in previous posts.  Debt must be serviced and repaid by real production: money does not come out of nothing forever.  The corporate sectors of China, Asia, Brazil, Russia and Europe are finding that out now.  Deficit financing and rising public debt will not kick-start an economy that has low profitability and high corporate debt.  And in near deflationary economies, there is a real burden in servicing that debt.

Monetary policy has failed; NIRP will not work.  But neither will a more radical Keynesian deficit financing plan.  Both fail to recognise that it is profits versus the cost of capital and debt that sets the pace of economic expansion or contraction in a capitalist economy.

Globally, corporate profits have been falling and in the major economies even the largest companies are seeing falling earnings and sales.  In the US, 43% of the top 500 companies have reported their financial results for the last quarter of 2015.  On average, sales were down 2.5% over the end of 2014 and profits were down 3.7%.  In Europe, 17% of the top 600 companies have reported and sales were down 6.5% and earnings 11.7%.  In Japan, 45% of the top 225 companies reported a fall in sales of 2.5% and profits down 9.3%.


16 Responses to “From ZIRP to NIRP: the last throw of the dice”

  1. cominsitu Says:

    Hi there. Very interesting article. One question: where did you get the data for your graphs (especially the one on German exports?).

    Thanks in advance.

    (also, we reblogged your article on our blog, hope that’s ok)

  2. Allen Richards Says:

    Hi Michael. I have been following your posts for quite awhile. It is refreshing that you “tell it like it is” and I think that you are spot on.
    I agree that the current “old school” methods are past their prime and will not work in todays maxed-out, debt-burdened economies.
    It seems to me that the people in charge really have no idea what to do obviously as they keep trying to do things the Keynesian Way which as you say needs a highly consuming middle class to have any chance of working.
    In the US we no longer have a highly consuming middle class. Most people are one paycheck away from being on the streets and cannot afford what they have. That is the real picture. The jobs being “created” are low wage jobs. There is no real wage growth taking place so the numbers can distort the real picture. “Figures don’t lie but liars can figure”.
    Two questions if I may,
    1. What would you recommend for the US economy? Modern Monetary Theory? and
    2. How does a person with assets protect their value from devaluing currencies? Real property? Gold and Silver?
    I certainly am not asking for investment advice just your opinion. Thanks for your insight and your informative assesment of the real status of the economy.

  3. Henry Says:

    “How does a person with assets protect their value from devaluing currencies? Real property? Gold and Silver?”

    I don’t even get the question!

    Though I am starting to think that converting everything to cash and keeping it under the bed is my best option!

  4. SimonH Says:

    I think the only people who can sure of their investments in the years to come will be those in the Arms Industry.

  5. Charles A. Says:

    “Keynes in the 1930s was disappointed that governments, particularly the US and the UK, did not adopt his policy of deficit financing and government spending.” *** Not enough to get out of the Depression, — but significant to workers tided over in the Civilian Conservation Corps, Works Progress Administration, etc. Today, capital cannot even tolerate that much.

  6. billjefferies Says:

    I read that 80% of US firms reporting surpassed profit estimates. The downturn inasmuch as there is one at all was limited to the oil sector. That also explains the dip in German exports shown on your graph. Volumes have risen but as the unit price has fallen, so has the overall value.
    All this depression talk is over blown, and doesn’t become any more convincing by endless repetition.

    • sartesian Says:

      Where did you read that? The “dip” is not confined to oil. Railroads in the US are reporting reduced earnings (NS, UP, KCS), following a 2.5% decline in overall traffic..

      Caterpillar reported reduced earnings in 2015 and predicts a 10% decline in revenues for 2016

      S&P 500 reported quarterly earnings for the 4 Q down 5% on a y-o-y basis, following the 3Q’s 1% decline.

      The “downturn” is not limited to the oil sector, but includes coal mining and natural gas (the energy sector), metals, ores, and “bulk” shippers (see the WSJ of 1/21).

      Of course this is also reflected in the earnings of companies that service the energy sector– Halliburton, Schlumberger.

      The US BEA in its Table 6.16D (Corporate profits) reports US non-financial corporations for the first 3 quarters of 2014, declaring $3,755.6 billion in profits, with profits in the 4Q reaching their highest level at $1,327.5 billion

      The earnings in each first 3 quarters for 2015 was below that 4Q 2014 peak. The total for the quarters 1-3 2015 was $3,812,3 billion. So unless the 4Q comes in above $1,270.8 (unlikely as the S&P estimates for the 4Q shows a decline from the 3Q) TOTAL earnings for US nonfinancial companies will decline in 2015.

      Airlines and auto have reported improved earnings, but Cummins reports a collapse in truck demand, with sales falling to “2009 levels.” (WSJ 12/16).

      Other than that, Bill, as usual, I agree with everything you say.

  7. jim drysdale Says:

    jim drysdale

    The drive of capital towards ever increasing production. The need, also, for constant expansion of value and capital accumulation. The ongoing change in the organic composition of capital, i.e. the tendency for the rate of profit to fall. The requirement for increasing the exploitation of labour so that even more commodities are overproduced more cheaply that must be sold in the drive for a higher rate of profit, i.e. the need to create, sustain and expand the global market, the global consumer society..…all of these bring deepening periodic crises to the process of capital accumulation, deepening periodic crises in the realisation of an acceptable rate of profit.
    The barrier that capital presents to its own activity, means, for example, that, globally, society sees more frequent and deeper recessions, and depressions in the growth of the bosses’ profits.
    As capital’s own self-measure is profit, it is noted that, from the bosses’ point of view an economy is measured by how well or not profit is growing.
    Empirical data and statistics can be beneficial. However, scientific analysis (dialectics /contradiction) moves thought beyond wish-lists and moral argument, beyond the ‘appearance only’ (vested interests) analysis of mainstream-media, most politicians, economists and most academics. The thought of Marx continues to terrify the ruling capitalist class. Precisely why the bourgeoisie continue to demonise Marx. Capital & Labour, use value & exchange value, FOP & ROP. In short, contradiction.
    (Preface to ‘A Contribution to the Critique of Political Economy’. Karl Marx)

    jim drysdale

  8. Tom Says:

    What do you think about this Marx criticism: http://socialdemocracy21stcentury.blogspot.com/
    Can anyone help?

  9. vallebaeza Says:

    Reblogged this on Econo Marx 21.

  10. Henry Says:

    To respond to Tom,

    Capitalists want to pay workers as little as they can get away with. Who would deny this?

    Capitalists see benefit from reducing necessary labour time and increasing surplus labour time. Who would deny this?

    If surplus labour time is the source of capitalist profit then there is one law that cannot be broken, a capitalist will never employ workers for only the time it takes to reproduce the workers. Who would deny this?

    The article misses an important observation Marx made in capital volume 1, namely that though the level of necessary labour is a standard it differs in time and space due to culture, history etc etc.

    A worker who lives in a nice house, with a car, an Ipad and home computer, and plentiful food is still paid at near their value, and still exploited by the capitalist. It is a mistake to think otherwise.

    Historical real wage graphs are problematical because the bundle of goods and the way the thing is measured changes so much that you never get an appropriate comparison. This is used by capitalist apologists to always claim you have never had it so good, which is sometimes true!

    This article does not take into account the abstract nature of Marx’s theory, and therefore does not understand how to use the tools Marx gave us. And worse, thinks Marx’s scientific work is tells us exactly how history will proceed!

    This article takes some polemical statements and runs with them but misses the actual scientific argument.

    This article makes no reference to imperialism, monopoly and oligopoly, workers struggles. So it attacks Marx with history but doesn’t bring actual history into the argument, just so called empiricism.

    This article pays too little attention to the fact that much of Marx’s arguments were against the arguments by apologists of capitalism that workers needed to work long hours otherwise the nation would go to ruin. Marx argued the opposite, that by reducing workers hours the nation would in fact benefit! Think of the argument against Senior’s last hour.

    One of my main arguments is that Marx and others did not take enough account of the fact that the change from the hand to the power loom (and some other changes during that period) was of a different magnitude to that of all subsequent changes, it was reckoned that the organic composition of capital went from something like 50:50 to 85:15 during that period, with the expected fall in both profits and it should be noted wages too! Marx and others did not take into account the drastic technological change during this period. The revolution in computer technology and all technological developments since have not had the drastic affect that the technological advances of the last and early 19th century had.

    On that note, this article should have said more about profit! You cannot talk about wages without talking about profit!

  11. Kevin Stenson Says:

    There is and always will be two classes of people, the EXPLOITED and the EXPLOITERS. Greed is the primary motivator as our Godless Society evolves

  12. vyankatesh Says:


  13. Lazy Rentier Says:

    EXCELLENT! It’s refreshing to read, that other people, including on the other edge of the ideological spectrum are reaching the same conclusion that ZIRP & NIRP will not end well. But i strongly disagree with your implied conclusion, that debt deflationary spiral is a real possibility. While not stated, i inferred this from your last sentence about “creative destruction” coming. Sorry, if I’m wrong. I find it increasingly likely that the central banks will do helicopter money (re: 0 coupon perpetuity already being discussed in Japan) in some form instead of giving up and admitting defeat. And it will bring about CPI inflation (as opposed to just asset price inflation). They’re eventually going to succeed. Lenders are going to get “murdered” in real terms in any case, but CPI inflation will help spare the borrowers and make it more “smooth”. Still going to be pretty bloody though.

    Wrote a bit about NIRP and ZIRP from the angle of all the malinvestment it has brought about:

Leave a Reply


WordPress.com Logo


Google photo


Twitter picture


Facebook photo


Connecting to %s


%d bloggers like this: