Tuesday, March 03, 2015

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 saved 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.


AIM said...


We really took a wrong turn starting about 40 years ago.
Been misusing credit and debt for all these years.

Congress and the US Treasury turned The Fed into their "enabler".

The Fed is in a pickle: they are blowing bubbles and if they try to raise rates they will stop all growth, plunge us deeper into recession/depression, and make the interest on the national debt unpayable (causing higher taxes and the eradication of many federal and state public services) and then social security, medicare and welfare's slow death gets sped up and amplified and then... civil unrest.

Would be nice to have had grown ups as our leaders and legislators instead of children.

When the debt/credit bubble pops it ain't gonna be pretty.

dearieme said...

Did you see that the third biggest bank in Austria went pop the other day? It had been "rescued" by a government bailout once already; the government refused to do it a second time, so now it's a "bail-in": in other words, its creditors are going to lose money.

Just one problem: one of the Austrian provinces is a major creditor, so now it will be in the soup.

And so it goes.

Joseph Oppenheim said...

Hint: Levittown, NY was where the US middle class/American Dream was born around, 1948 - 1952. Houses were about 1100 sqft, 2br/1ba, no garage and 20 year mortgages were typical.

Whiners today expect McMansions and call houses like the above, crap shacks, yet cry they can't have the American Dream.

Also, banks paid low interest rates back then, such that people used to build wealth by things called saving and paying off the mortgage.

AIM said...

My understanding is that it is called "the American Dream" because you have to be asleep to exist in it.

Yet, I think it will soon be "the American Nightmare".

It should be that politicians and government bureaucrats and workers can be held accountable for any major damage or disruption that they cause to our nation or economy. Fines, community service and jail time, depending on the degree of violation and damage.

Also, I prefer term limits. Two years and you are done. No high salaries, no perqs, no special pensions, no special social security (should be the same as we all have), no special medical (should be Obamacare like we are all FORCED to have).

95% of our Congresspeople need to be either jailed or put out to pasture. Don't get me started on Obama's administration, the Supreme Court, the Electoral College, the US Treasury, the Federal Reserve, DOD, DHS, CIA, NSA, FBI.

Jim in San Marcos said...

Hi Joseph

I need to define "Crap House" Usually its pretty close your example 800 square feet and built around 1950. The trouble is out here they want about 400k for that home. At 200k it cash flows as a rental. Most of them are in bad neighborhoods to boot.

And remember one thing, in the past it was always cheaper to own a home than rent one, you paid extra for the freedom to pick up and move. Somehow that isn't true anymore in California, but you may luck out back East.

AIM said...

We'll probably have ZIRP (and NIRP) for many years to come. The Fed will maybe try to raise rates sometime this year (in a weak attempt to prepare themselves for future deflationary trends). They'll probably try to raise rates by 25 basis points once or twice a year for the next period of years (unless leading economic indicators continue to worsen). But then, as always, the raising of rates even at small intervals will plunge the economy downwards again and then we'll be ready for the next QE and back to ZIRP/NIRP. Congress, Treasury Dept and Fed Reserve will never get out of the hole they have dug. It will have to be a crash crisis wherein everyone recognizes that the old system is too corrupted and beyond repair and it is time for a reset. I hope the new system will be better than this one (and that it is realized that government is no place for academics and attorneys). Hope we will have learned from history.

AIM said...

By the way... "crap shacks" make great rental properties for retirees that don't want to live in a big house, apartment or condo, and want a backyard. They must be well located (walking distance to shopping, public transportation, etc.). Just slap siding on the exterior, install good flooring and washerless faucets in the kitchen and bathroom and that minimizes your maintenance. Retiree tenants on pensions and social security don't leave until they are ready to leave feet first. I'd like to have a portfolio of about 20 of "crap shacks".

Jim in San Marcos said...


I am in agreement with your first post.

your second post kind of cracked me up with the American dream reference. We need to bring back Tar and feathering for politicians, I don't think that violates any laws.

I'd relax a wee bit if I were you, it could get worse. Hillary wants to be president and so does a Bush. Kind of reminds me of the fall of Rome--everyone became Roman citizens and you had to be a relative of someone already elected to get into office.-- Of course, we are smarter today than those people--aren't we????

Jim in San Marcos said...

Hi dearieme

The Credit Anstalt back in 1931 way before my time, strikes a bell. That brought the whole world down.

Looks like Switzerland pushed the first domino over not sure how many more fall before it is all over.

Thank you for the heads up.

Jim in San Marcos said...


I'd like to have about 20 crap shacks for retirees also, only one problem. A few more years and I'll probably find myself in one of them.

Joseph Oppenheim said...

"California is overtaking Brazil as the world’s seventh-largest economy, bolstered by rising employment, home values and personal and corporate income, a year after the most-populous state surpassed Russia and Italy.'

AIM said...

Just think how much better Calif would be doing if it was actually business friendly and hadn't driven so many businesses out of the state (and it is still driving businesses out of the state). The state income tax rates are some of the highest/worst in the country. The government and legislators of Calif are the most corrupt and stupid as you can find. Horrid democrats = corrupt, marxist, parasites with no understanding of our country's Constitution. California is a welfare/warfare state. It is a darn shame because it is such a beautiful state geographically.

Down with the California Marxist government regime!!

Joseph Oppenheim said...

Just a note about crap shacks....where I lived when born was an about 450 sqft apartment in a cheap neighborhood in Manhattan, now the neighborhood is the most desired in NYC and similar apartments in the same building sell for as much as $5M.

There is a worldwide desire to live in SoCal, especially close or even a short drive to the beach.

Before the crash, stupid people craved large homes. And, banks feasted off these people.

Now, banks have better lending standards and the smart people/investors are loaded with cash and snapping up all properties in SoCal with great current or potentially great locations.

People renting now, most should rent.