If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise

The fundamental premise of global central bank policy is simple: whatever’s broken in the economy can be fixed with zero interest rates (ZIRP). And the linear extension of this premise is equally simple: if ZIRP hasn’t fixed what’s broken, then negative interest rates (NIRP) will.

Unfortunately, this simplistic policy has run aground on the shoals of reality: if zero or negative interest rates actually fixed what’s broken in the economy, we’d all be living in Paradise after seven years of zero interest rates.

The truth that cannot be spoken is that zero interest rates (ZIRP) and negative interest rates (NIRP) cannot fix what’s broken–rather, they have added monumental quantities of risk that have dragged the global financial system down to crush depth:

Crush depth, officially called collapse depth, is the submerged depth at which a submarine’s hull will collapse due to pressure. This is normally calculated; however, it is not always accurate.

Indeed, the risk that has been generated by ZIRP and NIRP cannot be calculated with any accuracy. The sources of risk arising from NIRP are well-known:

1. Zero interest rates force investors and money managers to chase yield, i.e. seek a positive return on their capital. In a world dominated by central bank ZIRP/NIRP, this requires taking on higher risk, as higher yields are a direct consequence of higher risk.

The problem is that the risk and the higher yield are asymmetric: to earn a 4% return, investors could be taking on risks an order of magnitude higher than the yield.

2. To generate fees in a ZIRP/NIRP world, lenders must loan vast sums to marginal borrowers–borrowers who would not qualify for loans in more prudent times.

This forces lenders to either forego income from lending or take on enormous risks in lending to marginal borrowers.

3. The income once earned by conventional savers has been completely destroyed by ZIRP/NIRP, depriving the economy of a key income stream.

Please consider this chart of the Fed Funds Rate and tell me precisely what’s been fixed by seven years of zero interest rates:

Bank credit soared. If our only problem was a dearth of new bank lending, we’d be in Paradise now. Alas, we’re not:

The reality is that zero interest rates have only brought debt-based consumption forward, expanded lending to marginal/high-risk borrowers and forced capital into dark caverns of risk from which there is no orderly escape.

What’s the crush depth of all this impaired debt and risky credit? Nobody knows. Rather than fix what’s broken with the real economy, ZIRP/NIRP has added problems that only collapse can solve.

If zero or negative interest rates actually fixed what’s broken in the economy, we’d all be in Paradise now. Instead, we’re in a sinking submarine awaiting the implosion of predatory excesses. In other words, a financial Hell.

Facebooktwittergoogle_plusredditpinterestlinkedinmail
This entry was posted in Uncategorized. Bookmark the permalink.
  • Feb 18, 2016 Charles Payne – Negative Interest Rates

    Fox Business analyst Charles Payne and Gary Kaltbaum (Kaltbaum Capital Management) join Neil Cavuto to discuss FED chairman Janet Yellen’s recent mention of negative interest rates.

    https://youtu.be/LCfuyxxCDkA

  • Feb 16, 2016 Central Bankers Are Now Pushing The Public To Accept A Cashless Society

    Brazil is in a credit crisis as 5,525 business go out of business. Canadians are losing confidence as the economy spirals out of control. Consumer confidence in Norway declines. More layoffs in factories and companies. Home builder confidence tumbles as sales decline. Empire fed contracts for the 7th month in a row. Oil production is now frozen, Iran will continue to pump more oil. Central bankers pushing the idea to get rid of cash by dumping the $100 dollar bill. The Central Bankers want to initiate NIRP and they need to have a cashless society to accomplish this. US Government getting ready to go after private pensions to fund the government.

    https://youtu.be/6ear6UYKDK8

  • Jan 16, 2016 Food Prices Soar as the Canadian Dollar Collapses

    And NO, it’s not just Nunavut: it from coast to coast. Think your grocery bill is high? Canadians paying $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes. We are watching a Real Time Currency Collapse In Canada – Is This Is What It’s Going To Look Like In the USA?

    https://youtu.be/X-bMN1K-ITU

    • ArtBell

      Moose, Elk and deer are free though! Cauliflower is $2.49, Cheerios are $3.99, Life Brand cereal 2 boxes for $6.00. That is in a small local store in a rural town in Alberta. The prices you are quoting are in towns where food has to be flown into. That was a bit of a propaganda job. Remember also that the Canadian dollar is $0.72 cents US.

      • Simply prove your point AB! I did not create this video but it does come from a source I have had for years. Got a news link from the MSM?

        • ArtBell

          Google up a Candian Wall Mart or Canadian Safeway store online flyer and see for yourself. I live in Canada.