Three Weird Consequences of NIRP

Negative interest rates are all the rage at central banks, a symptom of the deflation that is slowing spreading worldwide. The Bank of Japan, European Central Bank, and Swiss National Bank already peg rates below zero. Even if the Federal Reserve doesn’t formally join them, US rates are solidly negative in real terms.
Explicit or not, negative rates have odd and counterintuitive consequences. Imagine the entire banking system trying to stand on its head, and that’s kind of how a deflationary, NIRP-driven world will look. Here are three early signs.
Everything’s Price Will Fall
Today almost everyone, even economists, is used to living in an inflationary world. We assume most goods and services will get gradually more expensive. We don’t even notice because it is so normal. We notice the exceptions, like technology and energy-but their falling prices are notable precisely because they’re so unusual.
A deflationary world won’t look like this. Prices will fall instead of rise. Since everything you own will be constantly losing value, you will want to own as little stuff as possible, for as briefly as possible. We see some of this already in the ‘sharing’ economy. Companies like Uber and AirBnB help car and home owners shed some of their excess ownership.
Rising prices will move from being normal to unusual. This is already happening in Japan. This month an ice cream company called Akagi Nyugyo had to raise its prices for the first time in 25 years. The company so feared losing customers that it aired a TV commercialwith executives bowing in contrition.

This post was published at Mauldin Economics on MAY 20, 2016.