On Perpetual ZIRP

Bruce Krasting's picture
I had this to say last week:

The Fed could easily attempt to buy some market peace by issuing a statement that the policy of zero interest rates would be extended for a minimum period of one year. I consider this to be a “high probability" to happen in the next 30 days.

I got it right, but I got it completely wrong. I feared that the Fed could extend the ZIRP language for as long as a year. Not in my wildest dream did I think they could take the extremely risky move of guaranteeing that interest rates will remain at zero for another 24 months. Having been shocked, my thoughts.

*This action is indefensible on economic merits. This move is not motivated by sound monetary policy. It’s motivated by politics. This is a payback to Obama. Shame on the Fed for mixing politics with money.

*We will not go two years with this monetary policy without inflation (measured by core) exceeding the previously stated commitment by Bernanke that policy would not be allowed to rise above 2%. Bernanke and the dove members that signed onto this policy have lied to the American people. Bernanke has done it on 60 Minutes. He has done it to Congress. Shame on all of them.

*The Fed has taken away its ability to react to a situation that would require them to tighten. We are now on a one-way street. There is no way to turn around anymore. I believe the Fed has abdicated its responsibilities under the dual mandate. The have no ability to react if inflation should pop up in a year from now. Even worse, they have no policy options should there be a run on the dollar. The possibility of a run on the buck has gone up exponentially as a result. Should that happen, the Fed will have left us economically defenseless. Shame on the Fed for making us more vulnerable to a speculative attack.

*The stock market run up this afternoon is the Bernanke Put at work. Lets be clear on the consequences of Perpetual ZIRP. From this day onward every buy and hold investor who acquires Treasury debt with maturities of less than five-years is GUARANTEED TO LOSE MONEY. So if you accept that, then stocks have to look better. Shame on the Fed for debasing money and punishing savers.

*We have only one monetary policy. Juice stock multiples. This is the farthest thing from “Progressive” economics as you can get. We have a policy in place that is designed to make wealthy people wealthier. At some point there will be a social cost to this. The fires and riots in London were triggered by a shooting. Underneath is a rage between haves and have nots. Shame on the Fed for rigging the outcome for fat cats. Double shame on them for when our streets are filled with rage.

*Zero interest rates also means Zero risk. I think the change in Fed language will exacerbate recent short-term funding liquidity. I think we will see this appear (again) sooner versus later. I think Zero interest rates discourages leveraged investing. This policy will dry up liquidity in the asset backed market (Shadow banking system). I'm looking for evidence of this in the Euro Dollar funding markets. I am also looking for it to occur in the Term Commercial Paper market. Shame on the Fed for setting us up for this systemic risk.

*Brazil, Argentina, Korea, Indonesia are going to scream bloody murder over perpetual ZIRP. Russia is likely to get downright ugly with their rhetoric. I wouldn’t be surprised if they took this opportunity to vote with their feet and just abandon the dollar as a reserve holding. China will also make noise. They will make more calls for a new international currency to replace the dollar. The Central bankers in Japan and Switzerland are puking in the trashcan over this. Bernanke is exporting US deflation to them. Shame on the Fed for pursuing Beggar my neighbor policies. They deserve all the global criticism they are about to get.

*Bernanke bills himself as a student of the Depression. He has said over and over that he would not make the mistakes that the Fed made in 1937 when a tightening of monetary policy triggered another wave of deflation. I think the history books will look at the Fed and August of 2011 and draw a similar conclusion. At a critical time in history the Fed has taken action. The mistake of 72 years ago DID cause a recession that lasted a few years. The mistakes of 2011 will mark a point in history where America turned a corner downward. One that will take a few decades to recover from. The history books will shame Ben.

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Patrick Donnelly's picture

USA has merely adopted the Japan solution! 

Patrick Donnelly's picture

OK until the end. The demolition of the Depression statutes and reckless lending are to blame. Ben is just a liar. It belongs to his predecessor.... if anyone. Uncontrolled credit destroyed America and led to destruction in Europe too. 9/11 allowed this to happen. Who was behind 9/11?

GoldBricker's picture

I'm just a citizen, but I don't understand how it could be otherwise. Once you put in ZIRP, everyone (including the ones who matter, the big banks) places their leveraged bets accordingly. If you raise rates by even a percent, those bets at the margin will fail. ZIRP, for those who can access the 0-rate money, is an invitation to leveraged betting.

If Keynes talked about the 'liquidity trap' of hard money, then soft money, on the opposite end of the spectrum, has its own trap, that of ZIRP. Once you put on ZIRP, how do you back out gracefully? My guess is that you don't.

Wolf in the Wilds's picture

More importantly, who is buying 2yr Treasuries at 16bps?  With the target fed fund rate at 25bps, and average rates of 12bps, who in the right mind would own 2yr treasuries here?  And with official inflation running at 2.6%!




I am completely stumped bu the insanity.

jomama's picture

it's fallacious to assume the fed has the health of the US economy in their best interest.  

but you probably already knew that, and you're playing devil's advocate?

slaughterer's picture

Look closer: the Fed left itself an "out" from ZIRP: precisely what you delpore: increasing inflation.  And they also said they will tighten if the economy grows at a faster than expected rate. 

Ponzi Unit's picture

On the inflation question: If rates are zero and (see Shadowstats) inflation is running 80-10%, then there is a disincentive to save and invest in credit instruments (bonds). When inflation is higher than the Fed's discount rate, real returns are negative. Negative real return encourages consumption as well as speculation, both of which put upward pressure on the price of goods and services.

As to previous question about exporting deflation, when inflation drives down our exchange rate, our goods are cheaper, making foreign countries' goods relatively more expensive in their local terms.

Pike Bishop's picture

I have so enjoyed the past few years here, as the Fed has machinated, and ZH has collectively diagnosed and prognosticated all that is the Fed and The Benanke.

With Bruce's "OMG!" on telegraphing the rate to yet another horizon, i have to admit that Ben Bernanke already told us he would do it in a manner of sorts. In his mind, he will not hesitate to ZIRP, hammermanage, or peg any interest rate for a decade or more.

The below link is to a speech Ben Bernanke presented in 2002 on the subject of Deflation. For me, it would be the cognitive map to the story which the Fed would unfold since 2007. It helped garner me considerable humor over the past 4 yrs, as the Working Paper I wrote (for yucks only) to symbolically requite a 25 yr unfinished MBA at a nearby metro University School of Business.

First met with polite bemusement due to my standing in the city business community, it has precipitated painfully conceded acknowledgements, as recent history has endorsed it. This coming as no suprise to me, from Professsors who matriculated at the same time as myself. They would go on to to instruct a couple of decades of Businessmen with intentions and skills necessary to always fall into The New Coke, while I departed early to build a company based on studied visible principles and somewhat common to the Coca-Cola.

Although the Limburger waffs of his eventual problem would be more pungent than his topic of speech, Bernanke's speech is ripe with self-prescience and deja vu, and sumptuous in a whole host of ironies and predications to insanities. 

Something for everyone.


lynnybee's picture

.....meanwhile our elderly will suffer / some will be wiped out & hopefully they have family support.

jomama's picture

yep pretty sure i'll be supporting my mother & father when their employment time is up, besides the fact that they go out all the time to 'enjoy life', and no doubt also my siblings who had children they could never afford to support.  i'm a single guy who invested wisely and didn't have offspring i couldn't pay for - just so i could support my family who continues to make bad decisions.  

then again life isn't fair, now is it?

ThirdCoastSurfer's picture

On the one hand is the call for inevitable real inflation because of this continued debasement, and on the other hand, the adept assessment that anything with a maturity of 5 years or less cannot possibly pay more than a negative real rate of return.

I'm struck by this confluence but cannot work out the implications of the various scenarios & where the two will inevitably clash. Ideas anyone?

The biggest thing though is that the Fed can just can just reverse course once this hell storm becomes obvious or reality and all the threats of "ruined credibility" will instantly be excused. 

barliman's picture



    I agree with your assessment of Mr. Bernanke as a person. Help me understand what is different now from this morning:

1) ZIRP has been in place for 2+ years. No one expected ZIRP to be discontinued anytime soon. Given the instability in the E.U. and the debt inaction in the U.S., who would have estimated that ZIRP was going away anytime soon?

2) Our fiscal/economic policies have been deivering diminishing and now negative returns. How do you see the phrase "are likely to warrant ..." as an unconditional guarantee to middle of 2013 that is a gamechanger bringing the markets back into a Bull run? Or have I missed the point and is it the sheer cowardice that has you enraged?

3) The FOMC shat out a stink bomb of both policy and wording today. This suggests to me that the official vote may have been 7-3 but it started out as 3-7 against Mr. Bernake and it took giving up on QE3 action at this time and drafting a consensus agreement to get to a more face saving 7-3 vote. ANy thoughts on this topic?

If I were Mr. Bernanke, I would be traveling under an assumed name to hide in a small cabin in Tibet so Obama can't find me. The wording and effect of this document leaves all parties to fight their own fights. From a political perspective, Barack O'Lead-From-Behind has been tossed under the bus for a change.


onlooker's picture

GOOD MAN Bruce. We appreciate you

Fred Hayek's picture

Thank you, Bruce.
Thanks to you and others I think I've got a better handle on this.

Reese Bobby's picture

The U.S. better lock-down capital controls or this idiocy guarantees massive money will flee to greener pastures.  Sticking around to watch a life savings debased towards zero seems just crazy.

rumblefish's picture

we had 2 company wide meetings today to discuss the state of the economy.

the talking points  were:

  • the US will never default
  • The S&P Downgrade was about politics and not our creditworthneess
  • The stock marke will go back up.
  • ZIRP is good for consumers.
  • Cutting gov't spending would be bad for the economy


I have never seen such a concerted effort to brainwash folks. This spin has me conceerned things are worse than we imaginzed.

BigSkyBear's picture

"I have never seen such a concerted effort to brainwash folks. This spin has me conceerned things are worse than we imaginzed."


"Winner!!!....Winner!!!!...Chicken Dinner!!!!"



AdahPrice's picture

Need... brains... eat... brains....                                                        :^)

JB's picture

"it only costs $5 to dig it from the ground!"



Reese Bobby's picture

ALL the major banks are acting like that, and I agree it disturbing.  They are all scared to death their stocks will head to zero.  The desperation is obvious.


The financial stress is probably beyond what we can imagine.  I don't know what the CB's are really doing behind the scenes but I'd bet it is massive.  Strange days.

snowball777's picture

I hope they asphyxiate on fistfuls of little blue triangle pills.

TruthInSunshine's picture

ZIRP is going to render the economy even more impotent, if anything.


Bruce, good article with a focus on a very timely, relevant issue, but to be honest, I need to read it again (several times) to think of what it is that I believe is amiss here (there's something amiss in your analysis, I do think).

I will read this again tomorrow morning, but in the interim, I've maintained from day 1 that ZIRP has been far more the threat to proper functioning of capital markets (and other markets), rather than 'QE.'




Wed, 05/18/2011 - 14:00 | TruthInSunshine

QEx is already here. It's ZIRP for as long as The Bernank doesn't get mutinized (and not by other Fed Board Members, either, who will never mount an insurrection - it will be by Congressional Incumbents, prodded to throw their hands up by senior citizens, the most fearsome voting block in history).

So, ZIRP is all Ben's got left.

Austerity? Austerity can't happen, you say?

We'll all see it.

The reality is that QE3 or QEx, involving anything remotely close to past iterations, will only exacerbate the problems confronting The Bernank, and further, it will actually hurt Wall Street (and I do think the reality is that retailers are already screaming at the Fed and Congress behind closed doors, and that no one can deny that the U.S. and Europe are just too damn big on the consumption scale to be able to sacrifice on the altar of continued levels of inflation without Wall Street getting what someone else referred to as "boomeranged") - Whew...run on sentence.

Bernank can't merely kick the can, again. There's a giant and sturdy wall at the end of the road he's come to.

When you get to the fork in the road, take it, Bernankincide.



Race Car Driver's picture

I have never seen such a concerted effort to brainwash folks.

They're already brainwashed if they watch TeeVee. All your company meeting did was to reinforce the message.

BTW - you forgot 'The Tea Party did it'. I don't have a TeeVee, but that's what I hear from the folks that do.

steve from virginia's picture


A friend of mine went to China not that long ago and he spent some time talking with an economist over there ... the dude did nothing but complain; "QE this" and, "QE that". I told him the China prob was the ZIRP, not the QE BS b/c the ZIRP enabled the dollar carry, basically neutering Chinese monetary policy.

Be that as it may, the markets were begging for more QE and they didn't get any. The plunge protection team/Bernanke put was in so the Fed gets a 'victory', instead. The markets aren't going to get any QE because it doesn't work (neither does ZIRP, but who's talkin'?).

Monetary policy is a joke because all the cheap tricks have failed. Balance sheets balloon and liabilities flow and nothing changes. We don't have a 'money cost' problem, we have a 'something else' prob.

Something else: productivity (no, we become more automated every day) demand (no everyone has two or more cars/salad shooters/jet ski/vacation homes) politics (nobody has working governments, not anyone, not even Iceland) religion (yes, the gods are angry but who cares?) ... Nobody wants to hear about the real problem because it means people would have to give up something.

That's the problem. ZIRP has nothing to offer.

Bananamerican's picture

"ZIRP has nothing to offer."

Then ZIRP it is...

Vampyroteuthis infernalis's picture

The Bernank has power of the biggest and most powerful economy at his call. He can abuse the power as much as he wants to until collapse.

snowball777's picture

China disagrees vehemently, but it remains to be seen what they will do in response beyond shopping for a new symbiot.

lookma's picture

The dollar is the world's reserve currency. As the $ is world's primary reserve currency, it is the reference point against which other currencies' values are calculated.

The FED prints to debase the dollar and fight debt deflationary forces. 

By debasing the dollar, Bernake exports deflation to other countries, whose currencies appreciate vis-a-vie the dollar as a result of the FED's debasing (the reference point against which the other countries measures their currencies value is worth less as a result of the printing, making their currency more valuable in comparison to the reserve currency, ceteris paribus).

The other countries then face the dilemma of 1) not printing and seeing their currency appreciate (not good for exports, and in our current $ system, the rest of the world exports more than they consume and the US over-consumes) or 2) printing to match the FED and keep their currency from appreciating against the dollar (this stokes inflation in these other countries).



Reese Bobby's picture

I bet I would find your definition of "deflationary forces" funny.  Please share it.

johngaltier's picture

Second that Reese. Not seeing many of those.

walküre's picture

Ja, you know what? That whole "reserve currency" thingy? That is about to come to an end. Why don't we just give the Zim $ reserve currency status? Might as well! This worked as long as there were credible threats and rumors of war in the world. Today the US has pissed off everyone else in the world to the extent that nobody will believe they're forced to drink the US koolaid anylonger. Fuck at this time, I'd welcome the Chinese to take over and declare themselves as Super Super Power just to spite the cabal in NY and DC.


newbee's picture

@ Lookma - most excellent explanation, got it - and thanks for the reply my friend!

newbee's picture

BK, easy question for you: at the beginning of your article you mention inflation being further ignited by ZIRP as we've already seen.  Later you mention ZIRP causing deflation "Bernanke is exporting US deflation to them. Shame on the Fed for pursuing Beggar my neighbor policies. ".  May I request a bit more friendly explanation?

James's picture

Bruce, you chose to use the word "shame" numerous times in your post.

Is'nt it obvious by now that these people have, in fact, NO SHAME?

snowball777's picture

Exactly; shame requires senses, memory, and an ethical code all of which they sorely lack.


Transformer's picture

It's called empathy.  It is the one ability that sociopaths and psychopaths lack.  Very simply, they cannot experience any feelings by watching what is happening to others.  The sociopath can experience feelings about himself, the psychopath, not so much.  The differences between the two are kinda up for debate amongst the shrinks.

This is the flaw of the human race.  S-path and P-path are the source of human suffering.  It varies from culture to culture, but usually between 1-3 percent of the population are these types.  It appears to be at least partly hereditary.  It is possible that the big banking families have more prevalence of the gene.  It is still being studied.  Tribal cultures have the lowest incidence.  They tend to kill or ostrasize them by the time they get to their 20's.  Corporate CEO's have the highest incidence in their job category.  We can't reliably test for it yet, and if we could, corporations would probably test all CEO candidates, not so they could bar them, but as a requirement for the job.

Look it up, it's fascinating stuff.

the grateful unemployed's picture

the market sold off on the ineffectiveness of monetary policy, trumped to some degree by Tea Party politics. If you suppose Bernanke is trying to put a bid under the Obama Presidency, what do you suppose the Tea Party is doing? If they want the White House they need to stop the Fed. I forsee a lot of back and forth in this regard, with the Fed's monetary solutions running the Congress and fiscal constraints.

Reese Bobby's picture

The Tea Party doesn't seem to care about getting re-elected.  Does that strike you as different than the rest of the One-Party Congress?


I have given up on politics but I am glad there is a Tea Party even if they don't have a chance.  The recent debt deal neutered them.

ddtuttle's picture

@BK: The problem is that the Fed's mandates are not real.  They have only have one real mandate: liquify the banking system as needed.  The banks will tell you when they need $$$, print accordingly.  Mandates are for when there's nothing else to do, and to misdirect poiticians and citizens alike from the fact the Fed does EVERYTHING for the banks, and NOTHING for the American people.

Having said that, this was a little scary. They are essentially doing nothing.   James Rickards suggests they won't do aything at least until Jackson Hole because QE2 didn't work so they don't have a lot of credibility.  Also things aren't really that bad ... yet.  And their goal right now is to debase the dollar so that the banking system can become solvent again ... someday.    The stock market isn't important right now, debasing the dollar is their goal.

But the world is clearly a mess, and as the owner of the world's reserve currency the US has an obligation and a desire to keep the existing system in place as long as possible.  Europe MUST pour trillions upon trillions on their shattered economies to keep the EU from imploding.  The Fed will help with that, to prop up the status quo.  QE3 will be coordinated with the ECB, with significnant dollars flowing to European banks.  Japan is a mess, and China is perpetually on the verge of over heating and imploding.  If the EU goes, China goes with it, and we follow taking the rest of the world with us.  Not a pleasant prospect for The Bernank's legacy.

granolageek's picture

I might have had a teensy bit too much alcohol, but I am pretty sure that you are whining that the really big boys are giving you folks with a million or two, that you expect to make a living off,  the same screw job that they have been giving doctors, lawyers and engineers, who actually do work for their living, for about 30 years.

Sympathy level zero.

Crucified on Cross of Gold. Banksters on lampposts. Take your side.

AccreditedEYE's picture

I would say that the "whining" is more directed at how this is going to absolutely destroy the Middle Class as we know it in this country. Commodities are going to continue flying higher as global investment fiat seeks the shelter of wealth preservation. Oil highs of 2008 and beyond, here we come. But far worse than this, Benny is robbing TIME from folks to actually work through and out of this mess. That's the real tradgey here... the barrier to growth coming from higher input costs, higher taxes needed to pay down higher and higher debts. Serfs indeed.

Vampyroteuthis infernalis's picture

Lawyers don't work for a living. They LIE for a living.

Escapeclaws's picture

You misunderstand truth. There are different kinds of truth. For lawyers the truth is with the party that has the deepest pockets and can prolong the suit long enough for his opponent to exhaust his resources. That's lawyer truth.

Boston's picture

Sure this will put upward pressure on stocks, but let's not forget that the impending meltdown in Euroland could---and most likely would--- overwhelm these upward forces.

zorba THE GREEK's picture

Who is going to buy the short bonds (5yrs or less) once the fear trade is gone?

ViewfromUndertheBridge's picture

why would the fear trade ever go away? You mean, when things are fixed? Come on.

inkarri9's picture

I'm a little ignorant but can someone please give me a brief explanation as to why ZIRP will lead to a lower dollar?  Thank you very much.

mcguire's picture

here is a try.. assume there are two countries, the US and X.  US has zero interest rate, X has 3%.  you have $100 to invest for one year.  excluding all other investment choices, you would exchange your US$ for X$, enjoy 3% for one year, then exchange back.  hence, the rational investor sell US$ and buy and hold X$ to earn the 3%... this drives US$ down and X$ up until a new equilibrium in the exchange rate is reached..