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September 22, 2015

Viva ZIRP Now, ZIRP Forever!

GUALFIN, Argentina – Well, it’s ZIRP now. ZIRP forever.
Viva ZIRP! Viva! Viva!
As we suspected, Janet Yellen did not want to risk raising the federal funds rate. Bloomberg reports:
Federal Reserve officials left interest rates unchanged, opting to delay an increase amid stubbornly low inflation, an uncertain outlook for global growth and recent financial-market turmoil.In holding their benchmark federal funds rate at zero to 0.25%, policy makers showed they are still not convinced inflation will move gradually back to their 2% target, despite continued gains in the labor market.

Punish the Savers!

The whole show is so preposterous that our head swims and our knees buckle.
The Fed is determined not to allow savers any compensation for their discipline and forbearance.
Either inflation erodes the buying power of their savings at a rate of at least 2% a year. Or the Fed deprives them of a decent return.
You just can’t make this stuff up. Presumably, the U.S. economy cannot function with stable prices. And the Fed seems to have a preternatural dislike for savers. They must be punished.
If inflation won’t do the job, we’ll do it ourselves, says the FOMC.
These policy decisions – and the folderol that comes with them – are so breathtakingly absurd there must be a deeper logic behind them.
And there is…
Ultra-low interest rates are a form of white-collar crime. They steal money from savers and transfer it to debtors and speculators.
EZ money jacks up asset prices. C-suite bonuses rise along with them. Asset owners become richer… and can exchange their dollar profits for other people’s goods and services.
The house on Long Island that might have been owned by a plumber, who worked hard and saved his money, instead goes to a banker, who parlayed small interest rates into a big fortune.
The fix was in: The house was taken from the man who earned it and given to a man who connived with the fixers.

White-Collar Criminals

Last month, we predicted that the Fed would NEVER seriously tighten.
It can dabble with tiny rate increases. But our hypothesis is that it can no longer tolerate a real correction. Instead, as soon as the stock market breaks… and/or the economy goes into recession… the Fed will ease credit again.
We will not get rate hikes. We’ll get rate cuts. And since the federal funds rate is already on the floor, the Fed will have to cut a hole through the floorboards to let the rate sink further.
We laid out the reasons for this in our last book: Hormegeddon: How Too Much of a Good Thing Leads to Disaster.
The neologism in the title (which never caught on in the popular press) describes a phenomenon, often observed, but never before properly explained, of how public policy turns into a disaster.
As more resources – such as houses on Long Island – become products of the policy, rather than the output of the Main Street economy, more people have an interest in seeing the policy continue.
Wall Street… Big Business… Big Government… the Poor… the Rich… the Cronies… and the Zombies – all want to see this show go on.
It is only small businesses (who don’t have access to the ultra-cheap money)… honest members of the middle class (who have to work in the Main Street economy)… retirees… and savers who might like to see it stop.
And even they are often caught up in it – with student debt, car loans, and oversize mortgages.
Like viewers hooked on Game of Thrones, they have to see what happens to the dwarf!
The longer the distorting policy remains in place, the more people have adapted their lives to it… and the less they are able to bear the pain of giving it up.
At some point, the policy becomes impossible to change. You just have to stick with it… even as it leads you to a disaster.
That’s what hormegeddon looks like.
And that’s the show we are watching now.
Courtesy Bill Bonner, Bonner & Partners



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