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Welcome To The World Of ZIRP Zombies
Submitted by Alasdair Macleod via GoldMoney.com,
Interest rates in the US, Europe and the UK were reduced to close to zero in the wake of the Lehman crisis nearly seven years ago.
Initially zero interest rate policy (ZIRP) was a temporary measure to counter the price deflation that immediately followed the crisis, but since then interest rates have been kept suppressed at the zero bound. It had been hoped that the stimulus of close-to-zero interest rates would also guarantee economic recovery. It has failed in this respect and the low bond yields that result have only encouraged the rapid expansion of government debt.
It is clear that monetary policies of central banks are the problem. Instead of boosting recovery they have simply destroyed the mechanism which recycles savings into capital for production. They have brought about Keynes's wish, expressed in his General Theory that he "looked forward to the euthanasia of the rentier", whose function in providing finance for entrepreneurs is to be replaced by the state: entrepreneurs "who are so fond of their craft that their labour could be obtained much cheaper than at present."[1]
Instead of storing the fruits of his labour in the form of bank deposits to be made available to the investing entrepreneur, the saver is discouraged from saving, instead being forced to speculate for capital gain. In that sense, ZIRP is the logical end-point of Keynes's ideal.
The mistake is to subscribe to the ancient view that interest is usury and that it only benefits the idle rich, a stance that appeared to be taken by Keynes. What Keynes missed is that interest rates are an expression of time preference, or the compensation for making money available today in return for a reward tomorrow. If you try to ban interest rates by imposing ZIRP, then the vital function of distributing savings in the interests of progress simply ceases. An economy with ZIRP joins the ranks of the living dead.
Von Mises recognised this in 1909 when he wrote that "...a falling value of money goes hand in hand with a rising rate of interest and a rising value of money with a falling rate of interest. This lasts as long as the movement of the objective exchange-value continues. When this ceases, then the rate of interest is re-established at the level dictated by the general economic situation."[2]
Besides noting that Von Mises's analysis was independently confirmed by Gibson's paradox, it may be helpful to restate it in easier to understand terms. History has shown that a borrower of good standing in a sound-money economy that is stable would pay about 3% interest. If prices are rising, his margins will improve, and he will be prepared to pay more to seize the opportunity to profit. If on the other hand prices are falling, he can only afford to pay less and he will most likely restrict his future activities to those he can finance from his own resources. It is this free market demand that sets interest rates, not the usurious lenders reviled by Keynes.
On the face of it a suppressed interest rate should make it profitable to borrow, but that is not the way a producer looks at it. The marginal benefits of extra borrowing have to exceed the costs of investing in production in order to be profitable. A business with a good balance sheet will normally improve its existing products by reinvesting its own reserves without recourse to external funds under almost all conditions. Recourse to external funds implies a materially different product being planned or that a significant expansion of productive capacity is being considered, a more risky step requiring greater capital expenditure, only to be undertaken when economic prospects are set fair.
It is this capital commitment that is missing, despite prolonged monetary stimulus. Central bankers are becoming acutely aware of the failure, which has only lured their governments into a deepening debt trap. That is why the Bank for International Settlements has publicly expressed concerns for some time and why both the Fed and the Bank of England have expressed the wish to get back to some sort of interest rate normality. It will be extremely difficult, but let us assume for a moment that interest rates are raised: what happens then?
An increase in interest rates to more than one or two per cent will be accompanied by rising commodity prices: this much is evident from Gibson's paradox. It would likely come about as speculative money flees financial assets, closes short positions in commodities, and then seeks protection from a fall in the purchasing power of currencies.
Businesses will see two things. Obviously, with bonds, stocks and residential property prices falling as interest rates rise, the business outlook would be deteriorating. However, with commodities and wholesale prices rising, reflecting a fall in money's purchasing power, businesses would be prepared to pay more interest to Keynes's rentiers. This is the basis behind Gibson's paradox.
Not that this is properly understood: macroeconomists have found that their theories have failed, and they don't know why. They want to back-track to safer ground, but are frightened of the consequences. Normalising interest rates could generate a stock market collapse, risk setting off an avalanche of bankruptcies from overleveraged businesses and make government finances wholly untenable. Higher interest rates risk triggering a second financial crisis that could also undermine currencies, pushing up price inflation. While macroeconomic theories can be faulted on the basis of outcomes, there is little doubt the systemic threat from a trend of rising interest rates is very real.
On balance, it is a situation that calls for inaction justified by hope. After all, with the Fed funds rate at 0.25% and $2.6 trillion of commercial bank funds already on deposit at the Fed, could it be that even a small increase in the rate will just suck more deposit money out of the US banking system, leading to a contraction of bank lending?
Central bankers are beginning to see what it has been like for their colleagues in Japan, where for twenty-five years with zero interest rates nothing tried seems to work. Welcome to Keynes's world of euthanized savers and state-sponsored funding. Welcome to the world of ZIRP zombies.
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Raise the rates and kill the zombie's, except they should of died in the last recession. This will go on till everything falls apart and they'll try it again, but won't work with no economy left.......
It is amazing that most people dont realize the last time the FED actually raised rates.
June 2006
Debt pyramid ponzi zombies! Or is it mummies?
ZIRP ZOMBIES. Worth copywriting.
Point of no return. Zombies are dead, and the dead don't come back.
We're almost there, kids.
Japan will be declared a dead zone soon.
Get out before you grow an extra limb.
If any school of economics was any good it would have supplanted all the others due to its consistent accurate forecasts.
Many schools exist because they are right sometimes; nearly right sometimes and wrong the rest of the time.
Economics is still in the dark ages.
The Austrian nonsense thinks banks rely on savings when they create money out of nothing .... ho hum ....
Um, what? Banks have nothing to save because fiat currency precludes the storing up of actual capital — i.e., productive work — which is the basis of Austrian "nonsense."
Your post below is as good as the post above is bad. Nobody with any sense thinks that fiat is sound money. Does not that "Austrian nonsense" rely on sound money and not on-a-whim fiat?
Central Banksters are afraid, because they have nowhere to backtrack to.
Economics profession is also scared because they have been acting like a one religion Religious Studies department for over 50 years. They only now just realized that their livelihood has become tied to that one religion and that one religion is a religion based on having a Spaghetti strainer on your head.
That's because economics is bullshit.
Race,
Only if you don't believe in survival of the fittest.
There has been only one prevailing economic theory for the last while. There is no competition of economic thought, therefore no survival of the fittest.
Just a bunch of economics walking around in circles wearing spagetti strainers on their heads....
It will be in teresting to see if Austrian Economic thougth gets more headway? Probably not as it does not benefit the debt makers...
Bernanke looked at the 1930s to see the problems caused by banks failing.
He did not look at Japan after 1989 when it hid banks losses and bailed them out, the economy never recovered.
Better to deal with the cause than the effect.
The real problem, bankers don't understand their product, debt.
“What is wrong with lending more money into the Chinese stock market?” Chinese banker before last month
“What is wrong with lending more money into real estate?” Chinese banker last year
"What is wrong with lending more money to Greece?" European banker pre-2010
"What is wrong with a NINA (no income no asset) mortgage?" US banker pre-2008
“What is wrong with lending more money into real estate?” US banker pre-2008
"What is wrong with lending more money into real estate?" Irish banker pre-2008
"What is wrong with lending more money into real estate?" Spanish banker pre-2008
"What is wrong with lending more money into real estate?" Japanese banker pre-1989
"What is wrong with lending more money into real estate?" UK banker pre-1989
“What is wrong with lending more money into the US stock market?” US banker pre-1929
We need to teach bankers the lost art of prudent lending and the importance of fundamentals, eg. ratio of mortgage size to income.
The "Austrian nonsense" would teach them just that - by allowing the irresponsible ones to fail.
Is .22 LR or .22 Mag good for zombies and social work?
Come on. This is the fiat utopia that central bankers/planners dreamt of.
Why anyone would think the bankers had good intentions is beyond me. Set aside all thier talk and look at the results of thier actions. They are asset stripping the planet. If they cant own it they fully intend to destroy it.
The big ugly truth? This is how they want things to work.
It works until millions of hungry and desperate people decide to haul their sorry hides out into the street.
What good is having stolen billions if you're beaten to a pulp by the mobs?
Thats why they pay top dollar for a police state.
I upvoted you but you are wrong.
WE pay for their police state.
Two words. Asset forfiture. They are turning police work into a revenue generator.
Why keep paying cops if you can grant them the permission to be pirates? So long as tptb can get a pass on getting robbed at gun point its all good for them.
VW,
And do all they can do to promote it
Frankly, I think this whole narrative is ridiculous. Of course you would expect price rises to be correlated with interest rate rises. When goods become scare (i.e. in demand) prices rise and to compensate for the increased price of goods, interest on money has to rise as well to compensate for the rise in price. If that didn't happen then over time the economy would crash as less money was available for higher priced goods would impact demand.
It's perfectly clear to ne. What is not so clear is the following statment, which I think is backwards: "...a falling value of money goes hand in hand with a rising rate of interest and a rising value of money with a falling rate of interest."
It's perfectly clear to ne. What is not so clear is the following statment, which I think is backwards: "...a falling value of money goes hand in hand with a rising rate of interest and a rising value of money with a falling rate of interest."
The purpose of interest collections it to mitigate defaults experienced. They go up and down in perfect lockstep (defaults leading interest collections by an instant). Notice DEFAULT-INTEREST is the error term begin controlled to drive to zero at all times. It is a simple negative feedback system.
In a properly managed Medium of Exchange:
INFLATION = DEFAULT - INTEREST = zero
What Mises means by:
falling value of money = rising interest rate is that people prefer to buy goods versus saving money. They prefer goods over money. Higher interest rates is a regulatory price that prevents over consumption of loan-able funds.
Rising value of money = falling interest rate, because people prefer to save more money versus spending their money on goods. Interest rates can be lower, because there is less demand for present goods, which means funds are cheaper for entrepreneur can engage in new types of production today to bring about consumption in the future.
I will repeat..
When people prefer goods over money, there is high demand for funds to buy it, thus like any supply and demand law, prices rise for those funds. When people prefer money over goods, it's inverse. Demand for funds is lower, means consumers are not spending as much, and this allows room for capital investment, because funds are not competing for consumption. Consumption levels have subsided, and the investment period can began today to bring about new goods for consumers tommorrow.
I don't know how you missed that.
I don't know how you missed that.
My concern is with anyone who thinks they got it!
When people prefer goods over money, there is high demand for funds to buy it, thus like any supply and demand law, prices rise for those funds.
A properly managed Medium of Exchange (MOE) does not respond to a supply/demand relationship for the MOE. It responds to the default/interest collection relationship. But with proper management, the process "guarantees" both these ratios are unity ... all the time and everywhere. And such proper management is trivial. How? Monitor defaults. When there is one, immediately collect an equal amount of interest.
Money is "a promise to complete a trade". It is an efficiency that allows simple barter trades to proceed over time and space. Money is created by traders making trading promises and getting them certified. The certificates are destroyed when the trader delivers. If the trader defaults, the orphaned certificates are recovered with interest collections. During the delivery process, the certificates circulate as the most desired object of simple barter. This is because, under a properly managed MOE process, they never lose their value. Thus they are universally accepted.
Supply and demand for these certificates (money) is in perpetual perfect balance ... it's the nature of trade.
Demand for funds is lower, means consumers are not spending as much, and this allows room for capital investment, because funds are not competing for consumption.
This is a "capitalists" notion and was imposed by capitalists. It gives capitalists control over traders and their desire and ability to trade where no such natural control exists.
It is ridiculous to require that someone first save before he, or someone else using money, can trade. In the beginning there was "no" capital. Yet trade got started and has continued ever since.
Consumption levels have subsided, and the investment period can began today to bring about new goods for consumers tommorrow.
Consumption and savings have nothing to do with proper management of an MOE process. Under a properly operating MOE process, reliable traders (those who don't default) enjoy zero interest load. Thus, in time value of money calculations (i.e. (1+i)^n) the zero "i" term makes all these "buy it now with future money or save present money for a future purchase" considerations go away. With inflation guaranteed to be zero, a consideration to trade is governed only by the traders desire to do so and ability to deliver.
Without some capitalist jacking the system with their farming operation (i.e. diddling interest rates and restricting traders ability to get their promises certified) traders are far less likely to default ... and there is no cascading effect if they do.
A properly managed MOE process "automatically" increases interest colledtions in the face of defaults. This is what the capitalists claim to be doing with all the nonsense described in this article.
So again... if you "get that", you are putty in the capitalists hands and you are a major part of the problem.
Interest rates effectively tamp demand, from both sides, user and producer.
Works like a rheostat .
Wall Street and the banks went into the Tokyo Stock exchange in 1983 and raised the price of the Nikkei four fold by 1989 where they shorted it and then pulled the plug. Interest rates went near zero.
Around Y2K, with the help of Wall Street and the banks, Greenspan pulled subprime mortgage backed securities out of one of his orifices which, in 2008 sent the American economy plummeting until the Fed started printing money and buying toxic assets from the banks. Interest rates went near zero.
Now thw Mossad and the Wall Street Yehudim put into play the idea of doing to China what Wall Street had done to Japan 25 years ago.
"What do you mean?" cried Lloyd Blankfein into his smart phone. "Shanghai suspended trading in thousands of stocks and we can't cover our shorts to get out? And Hank Paulson can't do any thing?" "And now they're devaluing the yuan we have exchange for the dollars we bring back home -- if they ever unsuspend trading in the stocks we have hundreds of billions in." Call the NYT, the WaPo, and google and sure not a word of this ""complication"" hits page one."We had the chance in 2007-2009 to re-set everything and come out with a stable growing economy and severe limitations on banks. It did not happen. We will get another chance, but the pain threshold will be much higher!
This whole article assumes the myth of capitalism. Thus, it is totally misguided.
Capitalists have convinced this writer that one must save before another may make a promise to complete a trade.
What abject and absolute nonsense.
YES THE FEDERAL RESERVE MESSED UP. I read zerohedge.com religiously and agree with most of the content but find it often overly negative.
Here is a summary of what the Fed did wrong.
1. Offered QE for way too long. It should have ended around 2011 to concentrate on the other goal ( remember - improve employment?) with more infrastructure funding (lender of last resort).
2. Kept the interest rate target too low. Didn't the Japanese do the same thing? Hello? See
http://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/
3. Should have applied the Kelley Monetary Policy in 2011. See
http://michaelekelley.com/2015/03/27/the-kelley-monetary-policy-rule/
Here is what to do to protect yourself.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Thanks and good luck.