From WIRP to ZIRP to NIRP and Finally BIRP by Joseph J. Ori, CPA, CFA
As many of you know, the interest rate policies of all of the central banks around the world have entered the “Twilight Zone”.
Here in the U.S., we have gone from WIRP or Wall Street Interest Rate Policy which was driven by former Fed Chairman, Alan Greenspan in the 1980’s and 1990’s. Mr. Greenspan, you may remember, never met a low interest rate he didn’t like and in every stock market downturn or mismanagement of a high flying hedge or private equity fund (Long Term Capital Management comes to mind), he gleefully lowered interest rates to save the Wall Street deal machine. The Wall Street deal machine is the nexus of and funds much of the New York/Washington D.C. political establishment and who’s business model is and has always been based on borrowing short and investing long. This serpentine investment strategy promulgated by WIRP leads to excessive financial engineering, recurring stock crashes, over levered companies and bankruptcies. WIRP was the lead cheerleader into the dot.com crash of 2000 and laid the foundation for the housing crash seven years later.
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After WIRP came Fed Chairmen, Ben “Helicopter” Bernanke and Janet “Never had a real job” Yellen with ZIRP or Zero Interest Rate Policy. Ben and Janet, both die hard academics, have been proud proponents of quantitative easing and zero interest rates to get the $17 trillion U.S. economy growing faster than an Arizona cactus which grows about an inch every ten years. During the seven years of the Obama administration, the GDP has grown less than 2% annually, which is some of the lowest growth in our vaulted history. The only thing the two Fed chairs were able to grow during their tenure, was the balance sheet of the Federal Reserve, which has increased from $800 billion in 2008 to more than $4.5 trillion today.
From WIRP, we are now entering the outer limits of interest rate policy with, NIRP, or Negative Interest Rate Policy. Currently, about 25% of government bond markets around the world have negative interest rates and yields. Negative interest rates are a final distortion of money and capital markets, by allowing a money lender to not receive an interest return on a loan, but instead pay interest to the borrower and savers to pay the bank for the privilege of parking money in the banks vault. NIRP is in effect a sneaky wealth transfer from savers to borrowers. This warping of the investment and return process turns corporate finance on its head. Interest rates are determined by adding the real rate of interest to an inflation premium to arrive at the nominal or Treasury rate of interest. A risk premium is then added to the Treasury rate to produce the market rate of interest. All corporate, real estate and investment analysis is based on using Treasury rates as the “risk free rate” to calculate discount rates or various rates of return on financial assets and discount those cash flows at this rate to determine asset value. However, with NIRP, this whole financial process is turned on its head. If NIRP takes hold here in the U.S., how will financial assets be valued, if Treasury rates become negative? How will pension liabilities be valued under NIRP? Will seniors on fixed incomes and savers pull their money out of banks and store it under their bed to escape the interest charge?
The “Piece De Resistance” of wacko monetary policy and the final solution will be what I call BIRP or Bubble Interest Rate Policy. BIRP will be the crash of all crashes of the financial markets with $20+ trillion in debt in the U.S. and tens of trillions more around the world at the government, individual and corporate level. None of these “IRP” policies have worked to create real growth around the world as all economies have been in stagnation for the last seven years. The only thing these policies have done is to artificially raise the value of financial assets, i.e., stocks, bonds, gold, real estate, artworks, etc. to bubble levels with a corresponding mammoth increase in debt world wide. Once the BIRP explodes, it will make the Great Depression seem like a day at the beach. All asset values will fall, jobs will become scarce, there will be huge debt defaults, fiscal and monetary policy will be worthless and it will take a decade of suffering by hard working Americans before the great U.S. economy comes back from the dead.