What is a NIRP?
Like most people, you likely have not heard of Negative Interest Rate Policies (NIRP) before. Imagine putting $100 into the bank just so you can take out less than $100 in the future. How about buying a house using a mortgage where you pay back less than you borrowed. Crazy! But real. Negative interest rates are becoming common in Europe after having been used by Japan (with little success) for many years.
Here’s why I hate NIRPs:
- Historically, interest rates have always been positive. In the Bible, we read of a master rebuking a wicked and lazy servant who buried his master’s money rather than, as a minimum, putting it into a bank so that it would at least earn (positive!) interest. I think the word interest came into use since the lender has an interest in getting compensated for having his own money unavailable. “Pay me now or pay me later.” Better said, “Pay me now or pay me later with interest.”
- Negative interest rates are “the ultimate indicator that something is fundamentally wrong with the world economy,” said Adam Posen, president of the Peterson Institute for International Economics in Washington DC. He was describing the situation in Denmark where home buyers can get a 10-year mortgage rate of -0.5%. And we thought rates were low in Canada. NIRPs are a sign of desperation.
- NIRPs hurt savers and intoxicates borrowers. People who chose to under-consume and delay gratification lose out with negative interest rates. Those who saved in the past will see their savings shrink. Current savers will think: Why put money in a bank for guaranteed reduction? Normally, high interest rates discourage borrowers. Negative interest rates are an unbelievable stimulus to the borrower: Borrow now and pay back less in the future. NIRP buys time—not growth.
- They buy time with a slow death. Today, the 10-year government Treasury yields a miserly 1.5%, while CPI inflation remains broadly in the 2% range, resulting in a negative interest rate of -0.5%! In other words, a risk-averse investor investing in a so-called “safe” or risk-free asset would only expect to lose 0.5% each and every year if holding the “safe” bond to term! This is not the definition of risk-free that most investors have in mind. NIRPs mask inflation. Even though the official interest rates are low (about 2%), the effective rate is high—especially in the area of essential goods, such as healthy groceries. When I paid back my dad in 1982 for his loan of $5,000 for me to buy my first house, I used a 20% Canada Savings Bond. Since then rates have plummeted. And whatever happened to Canada Savings Bonds? On March 22, 2017 Canada stopped issuing CSBs. Why? Interest rates were so very low, and the private sector was better at delivering investment options. The Government of Canada decided to discontinue selling CSBs. Sadly, many Canadians have discontinued the practice of saving money.
- NIRPs encourage overspending. This means even governments can engage in deficit spending with fewer painful consequences. For the Economy, there is no pressure to pay down debt. Today’s deficits forces tomorrow’s tax INCREASED. Goodbye financial freedom. Hello slavery.
- My parents saw the Wiemar Republic in Germany go through a major currency crisis pre-WW2. My dad warned me of currency replacement. You are most vulnerable if all your assets are in the form of money on paper. NIRPs and the prospects of more money printing are creating conditions for a perfect financial storm.
What to do???
- Don’t panic or despair. But don’t be sleepy and follow the crowd over the cliff!
- Lifestyle. Simple steps, but not easy…
- Minimize debt. Aim to become debt free. Own your home clear title. Downsize if necessary.
- Buy tools—rent toys.
- Give more to the poor. This is counter-intuitive. It helps both the giver and the receiver. (See Generous Genevieve.)
- Do not give to the wealthy or to frivolous/elite charities. (Proverbs 22:16b)
- See the family and children as a blessing not a curse.
- Be part of a mutually-supportive community.
- Buy used vehicles. It’s usually the better option.
- Use Your Money Kitchen or some other cash management tool to track spending.
- Trust God, not gold or government.
- Investments: Diversify your assets.
- Include gold and silver in your holdings. Both are quasi currencies.
- Purchase some international debt such as the Sun Life High Income Fund.
- Invest in Alternative Assets, not just the traditional stocks, bonds, and cash.
- Use currency hedging to mitigate risk of negative interest rates.
- Use high interest accounts such as the one from CI Investments.
- Personal Education and Development
- Study the website wisdomwithwealth.org.
- Pay special attention to the three latest Study Guides & Resources
- True for You, but Not for Me (Video Prager University)
- The Triangle of Truth—Where is Truth?
- The Registered Resurrection Account
A lack of discipline with financial truths gets us into trouble. Negative interest rates are, in my opinion, an attempt to avoid the consequences of many foolish financial decisions. How we can be of service to you? Here are some suggestions:
- Retirement Planning
- Tax Planning
- Risk Management
- Succession/transition planning
- Financial Coaching
- Cash Management
- Debt Reduction
- Estate Planning
- Ad hoc Requests
Hoping you had a wonderful Christmas season, and wishing you and your family a blessed New Year!
- Tom Lipp
Image by Maddi Bazzocco via Unsplash.