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March 2016 Perspective: The Land of NIRP

March 01, 2016

Negative Interest Rate Policy (NIRP): a bizarre, upside-down experiment where the lender pays the borrower interest, instead of the other way around.  The theory is that this will incentivize borrowing and spending, which in turn may work to stimulate the economy. Negative interest rates do not exist in a free market economy. 

“No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays zero nominal interest.”

– Ben Bernanke, 2009

“I think negative rates are something the Fed will and probably should consider if the situation arises.”

– Ben Bernanke, December 2015

“In theory there is no difference between theory and practice. In practice there is.”

– Yogi Berra

The title of this month’s Perspective is a play on a biblical reference to the “land of Nod.” Nod was a land of exile and it also happens to be the Hebrew root of the verb, “to wander.” If it feels like our policy-makers are wandering in search of the right mix of pro-growth solutions, perhaps they are, as the conflicting quotes from former Federal Reserve Chairman Ben Bernanke suggest. In the U.S. we’ve seen QE1, QE2, Operation Twist, QE3 and ZIRP fail to produce sustainable economic growth. That is to say, growth strong enough to continue without extremely accommodative policies supporting it. Central banks around the world tried similar policies with similar results. Now the world is entering the land of NIRP.

We touched on the concept of Negative Interest Rate Policy in a prior Perspective and are coming back to it this month because the world is witnessing the transmission of this policy from the realm of Theory to real-world Practice.  Will we see a difference between theoretical outcomes and practical outcomes as Yogi Berra suggests? There is no way to know for sure. The world is in unchartered territory and the results of the current policy are simply unknown. In theory, negative interest rates are supposed to do what seven years of money-printing and zero interest rates could not: spur the higher levels of borrowing and spending that policy-makers think is needed to generate sustainable economic growth.

What we do know for sure is that NIRP is happening in various countries around the world, but it has not yet been implemented in the U.S. We also know it will create problems in some areas and opportunity in others, as new policies always do. As your advisors, our approach is the same as it always has been: we tailor the structure of your portfolio to fit your personal needs, diversify your management strategies to take advantage as opportunity arises and diversify your assets so risk from a particular asset is not detrimental to your financial security. 

It is important to remember the global economy is a robust system that constantly assimilates new information and continues to grow over time, sometimes in spite of government policies and corporate failures.  At the end of the day the common goal across participants is growth.

We hope you enjoy this month’s Perspective from Clark Capital: