Ending a Taking Economy and Creating a Giving Economy: Confronting the Zero Interest Rate Policy (ZIRP) and Taking Effective Action by Zeus Yiamouyiannis (guest essay)
The world can no longer afford a taking economy, where “make a killing” is the motto. Together we need to create a giving and sharing economy that helps us all “make a living.” This essay will unveil the present unjust and unworkable economic system that punishes responsibility and rewards fraud. It then outlines the implications for the average person, and ends with new, powerful, and practical principles and visions driven by the emergence of connected communities. This 2-part essay brings together many of the ideas I will be discussing in a new series on Transforming Economy on Gaia TV.
First, we need to become factually aware of “where we are now.” This allows us to take active responsibility as aware citizens without simply blaming ourselves for our personal and collective situation. In doing this we have to be courageous enough to learn about the unfair realities that surround us without capitulating to helplessness.
Knowledge is power, and the next three sections will bring you into the dynamics of the present economy so that you can be empowered to avoid self-blame for problems that are not created by you, and so that you can wisely avoid contributing to the mess. In Part 2 we will talk about proactive alternatives.
Why is it that 61% of “regular people” in the U.S. think they have not recovered from the Great Recession while the talking heads on 24-hour news shows seem to think everything is fine? The answer is simple: We now have a global two-tiered financial, ethical, and regulatory system. The rich and politically connected do not get prosecuted for outrageous fraud, while little guys get penalized for a tax return error.
Billionaires can pay zero taxes, and you pay 25-30% of your modest salary. Rather than being marched into jail, corporate executives who preside over corrupt practices walk away with hundreds of millions of dollars in compensation. There is no active accountability in the system as it stands presently.
Economic fundamentals have ceased to apply. Consequences for disastrous or corrupt upper- level financial decisions roll downward and profits are drawn upward. Wealth is concentrating into fewer and fewer hands. Private companies hog revenue and dump financial liabilities on public taxpayers. When big banks screw up in a way that should bankrupt them, taxpayers bail them out, and then these same corrupt companies reward themselves with near record bonuses. Gold and silver prices are manipulated downward to keep the U.S. dollar and stock markets inflated.
Even house prices, food, and other commodities cannot escape this mess. One middle class salary could buy a house and a car in the early 1970’s. Now couples with two middle class salaries cannot afford a house. An uproarious and sobering interview on the Daily Show exposed the Mortgage Bankers Associations “strategic default” on their own 79 million dollar mortgage for a headquarters building in Washington, D.C.
They could pay the mortgage but wanted to save money and rent a cheaper building five blocks away. This did not prevent the CEO of the Association from insisting that it was a moral responsibility for the little people who can pay their mortgages to stick with the initial agreement.
How did things get this bad? There are many factors, but one fateful feature stands at the center, the Zero Interest Rate Policy (or ZIRP), a decision at the highest levels of governments and central banks, particularly the U.S., to give trillions of dollars of (interest-)free money to private banks and offload the burdens and consequences of that decision to public citizens.
When money is free, especially to the worst abusers, decadence for the well-connected (and suffering for the “regular person”) are sure to follow. That is where we stand now, but this iniquity does not have to be the last word. We must empower ourselves by treating this uncomfortable truth as a doorway to inspiration, genuine choice, and effective change.
What We Know
“Virtually zero percent interest rates are to long-term economic policy what junk food is to nutrition—it tastes great going down, but later come horrible results… [that] pose dangers to all of us… ZIRP [is]…how the Fed (Federal Reserve) gave the U.S. Financial Diabetes.” — Gregory Bresiger, in Craig Smith and Lowell Ponte’s article,The Biggest Bank Heist in History.
How much money has ZIRP looted from responsible savers to subsidize crooked banks? Since the financial, crash of 2008 (2009-2015), the total amount of U.S. dollars in personal savings accounts over the last seven years is about 5.1 trillion dollars.
At the typical near-zero interest bank savings rates of 0.02% to 0.03% applied to that 5.1 trillion dollars in savings account you get only 1 to 1.5 billion total interest for all personal savings for all Americans for 7 years.
Compare this paltry 1.5 billion dollars to the 85 billion dollars Americans lost in purchasing power for money left in personal savings accounts even against the low average inflation rate of 1.7% during those years.
To put the zero interest rate policy (ZIRP) in perspective, it would take a saver leaving $10,000.00 in a savings account (at .03%) over ten years just to recover one $35.00 overdraft charge. If you put one million dollars in a savings account averaging .025% compounded daily over the last seven years, your total interest would be a mere $1,752.00 total or $250 a year! This is hardly enough to fund a retirement for two months much less seven years.
Compare this to a 5% return compounded daily over seven years yielding $419,000.00 or $60,000.00 a year! Now you are seeing the personal true cost of the rigged economy.
ZIRP money also allows corporations, especially financial corporations to buy up their own stocks. I call this practice “naked long buying.” It means that you buy up stocks to artificially boost stock demand and thus stock “value” with interest-free money. This creates false values and inflated prices unrelated to the productive fundamentals of the company itself.
Because there is no effective cost to the money, a CEO can theoretically do this forever–goose the stock price by buying up a company stock, and then use the boosted stock price as collateral to borrow even more money to boost stock prices yet again.
All the while, the company’s CEO gets rewarded personally with outrageous compensation through stock options pegged to the value of the stock. Talk about conflict of interest! This “looting upward” is the opposite of “naked short selling’s” attempt to “loot downward” which depresses the price of a stock by putting in false “sell” orders and then cancelling those orders, while betting separately on a “short” or price decline. This makes the naked short seller tons of money when other stockholders panic, thinking there is about to be an exodus from the stock, thus selling their actual stock and lowering the price of the stock for real.
The reality of lost purchasing power caused by ZIRP acts as an extorting pressure for John and Jane Q. Public to enter the stock market to keep personal financial asset values above inflation. This artificially inflates the stock market even more. This contrived demand keeps the stock market up, not fundamentals or the worth of companies. That is why we are seeing the Dow Index at 18,000 instead of 6,000.
ZIRP also helps to depress the price of gold, which usually operates as a hedge against a poor stock market and has been flat for the past four years. ZIRP depresses good-paying jobs and wages, by promoting debt-financed living, which serves as a substitute for better wages. Is it any surprise the federal minimum wage has not been increased in 7 years?
ZIRP depresses mortgage rates (which are now near record lows), which may seem like a good thing because it lowers monthly payments, until you realize that abnormally low mortgage rates along with tax-deductable interest hyper-inflates the sales price of homes far above the market-set rental rates of a comparable house.
How is a Millennial or a retired person expected to survive in these conditions?They cannot currently be expected to do so without incurring further debt, which will swallow what little money they have left in earnings or savings. Currently large numbers of seniors are cannibalizing their retirement principal to get by, and Millennials are being subsidized with help from their parents.
However, this strategy cannot go on forever. Principal runs out, and borrowing financial help without an opportunity for productive contribution and compensation simply drains the economy dry. As I say in my book, in the end with this system, there is no actual money. There are only IOUs.
All this is compounded and pressurized even more by the skyrocketing costs of college tuition and health care that far outstrip by many times both inflation and the consumer price index.
As I detail in my book Transforming Economy, all this larcenous nonsense is undergirded by a complete lack of serious investigation, much less prosecution, of the crooked financial institutions who caused the financial collapse of 2008 and have since profited from laundering money for terrorists and drug cartels.
Is it any wonder we have seeing growing criminal boldness like that evidenced in the recent scandal at Wells Fargo, where millions of accounts were created in the name of customers without their knowledge so employees could charge customers fees. Yet, it looks like the head of this division of Wells Fargo will walk away with 125 million dollars in compensation rather than being held accountable.
What This Means
“For any professional investor, this is the difficult period we’ve ever experienced… You have high multiples of cash flows, low yields. I’ve never seen it in my career. It’s the most treacherous moment”—Joe Baratta, Blackstone’s global head of private equity
This quote above was taken from a recent article on Bloomberg.com. In that article many investment firm executives are pinning the blame for the poor investment climate on ZIRP. Wise investment used to mean prudent saving and strategic, diversified allocation of money according to economic fundamentals. In a healthy economic system, money has to cost something (in terms of interest or some other equivalent like labor) or it basically has no value for investment purposes, because it cannot generate a true yield.
Furthermore, cost-free money promotes spending beyond means for consumers and company executives alike. Traditionally, this irresponsibility would lead to inflation, higher interest rates, and “paying the piper,” curtailing the irresponsibility. But now, interest rates are being actively suppressed (along with responsibility) to a near-zero mark as a matter of long-term policy to keep the U.S. dollar, housing market, and stock market artificially aloft, creating a stagnant condition in the movement, or “velocity,” of money.
Global central bank and government intervention in order to save economic elites from the consequences of their poor financial decision-making prevents the natural flows and counterbalancing that should normally obtain in the various parts of the world economy. Price discovery and correcting markets have vanished. We don’t really know the financial value of anything with a dollar sign attached to it, because that value is, in essence, based in funny money.
As a result, there will be no completely safe individual investments, since economic fundamentals no longer can be relied upon in a skewed economy. It is as if some overarching authority just decided to simply change the size of an inch or a centimeter. How could you then measure your height in such a situation? How could you accurately measure how wealthy you are financially in our current skewed economic system?
There no longer seems to be a rational alignment between economic cost and value. This means questioning so-called conventional wisdom and critically considering whether or not to own property or even to go to college.
In Part 2 (published tomorrow), we look at what individuals and households can do to protect their assets and change the system from the ground up.
The original essay can be found on citizenzeus.com. Zeus is the author of Transforming Economy: From Corrupted Capitalism to Connected Communities .
My new book is #8 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.