Are central bankers nuts?

It’s kind of a zany question, and I hadn’t entertained it until recently. But the fact is, recent actions by the world’s central bankers – as well as some ideas that are still being contemplated – seem completely crazy.

It all stems from the fact that quantitative easing (QE) and zero interest rate policy (ZIRP) have largely failed. Economies around the globe, from emerging markets to developed nations, are stalling out. The risk of a global recession is now very real.

And that’s lead central bankers to think not just outside of the box, but out of this world entirely.

Going From ZIRP to NIRP

The first item coming from central bankers is negative interest rate policy, or NIRP. As pointed out by my colleague, Alan Gula, the Federal Reserve has recently hinted at the possibility of NIRP.

This wouldn’t really be surprising. Some countries in Europe, such as Sweden and Switzerland, already have negative interest rates.

The stated goal of NIRP is to encourage banks to put their money to use, rather than parking it at the Fed. Essentially, a negative interest rate would penalize banks for stashing too much cash.

NIRP could also mean the end of the dollar’s strong run. That, in turn, could lift emerging markets, which have been getting drubbed. In a roundabout way, that helps the Treasury market, as emerging markets that have been sellers of Uncle Sam’s debt will once again become buyers.

But the real effect will be on everyday people.

As if earning nothing on savings held at a bank or in Treasuries wasn’t bad enough – the latest three-month T-Bill was auctioned with a 0% yield – now, dear reader, central bankers want you to pay the banks for the privilege of holding your hard-earned savings.

Meanwhile, negative interest rates are bad news for pension funds and insurance companies in need of a conservative investment that earns interest.