The Zero Interest Rate Policy (ZIRP) Sucks

I feel like kicking a big rock every time I remind myself that short term interest rates are so low and that the interest on your principle is absurd; you cannot afford to reasonably expect to live off of your retirement savings. Realistically many retirees have save a million dollars for retirement when interest rates were a lot higher. But at 2 percent interest, that nest egg returns about 20 thousand a year. At 8 percent, it would be about 80 thousand dollars.

Then I read a current CNBC article that stated that; “If you invested that $24,000 at 8 percent for 30 years, it becomes $91,000.” At the present ½ percent interest using the rule of 72, it would take 144 years to double your dollars and you are not even close to the $91,000 figure. So there are two trains of thought running here, before and after government intervention.

You have to ask one question, why are rates so low? The main reason, there is too much money in the banks and not enough people with good credit that want to borrow it. You can lower rates in the expectation that people will borrow. But the government cannot force people to take out loans. The net effect is like pushing on a string.

The housing market has not rebounded with the lower interest rates in California. People are still trying to sell crap shacks for 400K. One problem now, the banks don’t want to hold on to paper with low interest rates. Why? If rates go up they have to pay depositors on a monthly basis, whereas they are locked into a low loan rate that is fixed for 30 years. You can get an MBA in Stupidity if you are a politician, but not as a bank manager.

The government has to get out of the loan market. Of course you have to realize how they financed all of the real estate sales for the last 7 years. What happens is this; the Treasury issues four to eight trillion dollars of 30 year securities that are purchased by the Federal Reserve Board. So in 30 years, the securities mature and the Federal Reserve gets its dollars back. In the meantime, the Treasury has the funds to sell and finance property to everyone who has a pulse. Sell the defaulted property and support the artificially high real estate prices. What we can figure right now is that the Federal Reserve has between 4 and 8 trillion dollars’ worth of notes from the Treasury for real estate loans. Since the Fed turns over all interest on its transactions, a lack of interest generated means that there is nothing to transfer and at the end of 30 years. They don’t have to make money to stay in business. The notes will be redeemed and it will be a zero sum game.

What has happened in the meantime, retirees are screwed out of their real interest income. If the government was not in the mix, interest rates would not be at their current low rates. Housing prices on the West coast would have collapsed. And the market would have gone back to more normal interest rates. Bad loans would be bad loans and money would be lost, not guaranteed by the government. Risk would again be part of the market.

High risk loans at exorbitant rates are still around quite prominently. Just look at credit card debt. Credit cards offer cash loans at 25 percent. Your monthly interest rate is determined by your credit score. Bad credit, just how bad do you want the money? We are not talking 15 percent interest here, higher.

The banks are in the loan business and there are areas where they get a decent return. Government guaranteed student loans at 6 percent and credit card debt starting at 6 percent on up to 36 percent. The student loan borrower cannot default and the total amount is guaranteed by you guessed it, We the people.

But wait a minute, the super low rates allow Congress to borrow more without having to raise taxes. So let’s see now, the money that government is borrowing is for consumption. These are dollars that the private industry would use to invest in the future.

What we can deduce at the present time is that easy money at decent interest rates funded a real estate bubble. We still have bubble prices and very few buyers, real estate is no longer the road to fabulous wealth. We also know that buying T-bills or putting your savings in a bank is a losing proposition. We can pretty well tell where the dollars are not going. Bubbles are created when too much money is invested in the wrong place. It is called misallocation of resources.

Where are the next bubbles? Third world economies? The stock market? The health care market? Student loans? Credit cards? Cell phones? Solar panels?

Its only when a bubble bursts that it is realized for what it is. The last people in, are left holding the bag. The neat thing about bubbles, you can only see them in the rear view mirror.

The one thing not fully understood by those in charge, is that economic theory can only be used to explain the “Why” of what has already happened. It doesn’t work when applied to controlling future expectations. New economic policies force people to change their investment strategies in ways to maximize gain that aren’t necessarily prudent or productive. And that changes the expected results.

When Suze Orman tells seniors to avoid the bond market because it is a lousy investment that pretty much says it all. Interest rates are the key to a healthy economy. The reward for saving money has to be present for future investments. The more the risk the greater the return. You have a problem when all risk returns the same gain low gain; people vote with their feet and their pocketbooks.

It looks like the stock market is the last game in town. And there is only one difference with this game, it is out of the realm of political control and comprehension. The Government is not coming to your aid if the market collapses. But hey, the game is just starting, markets are on a new swing upward. Faites vos jeux! —This could be a year to remember, unlike any other in recent time. The trouble is, after it is over, you might just want to forget what happened.