Today I offer a reasoned rant about the high costs of our federal government's Zero Interest Rate Policy (ZIRP). If you wonder what that policy is, just think about the amount of interest you now receive on your money in the bank and have for more than a decade. Isn't it almost zero?
Following the so-called Great Recession of 2008-09, the Ph.D.'s in economics in vogue decided that having extremely low interest rates for all borrowed money would provide a shot in the nation's economic arm and lift us back up to greater demand for goods and services, full employment, and prosperity.
First, I must mention a great quote of President Truman. Since economics is such a fuzzy science, he said, give me a one-handed economist. All my economists say on the one hand ... then, but on the other ...! (By the way, you can read pages of material debating whether Truman actually said this, but it certainly sounds like he would have said it.)
The policy has been a dismal failure. I believe it is the primary reason why the recovery since 2008 has been by far the slowest and weakest in economic history. Under the guise of resuscitating demand and preventing deflation (wouldn't some price rollbacks be a terrible thing?!), ZIRP has benefited the billionaires (who did not need the loans to become even richer) and the federal government, the spending and borrowing of which is making drunken sailors look like choir boys in comparison. My apologies to drunken sailors.
Supposedly, the policy was aimed at sustaining and reviving small to medium-sized businesses hurt by the recession. However, they often could not borrow (or did not wish to borrow) because of the Dodd-Frank bank regulations that seemed designed to send bankers to jail if they ever made an unsuccessful loan.
My observation is that even in the past several years of recovery, wise businessmen have been more conservative in general and reluctant to risk their financial health by taking major loans. They know, unlike the federal government, that they have to repay loans eventually.
So, what is the effect today? In the past two weeks, I have had several couples in their upper 80s seeking higher returns in the financial markets despite the inherent, albeit modest, risk of fluctuating returns and potential loss of principal. ZIRP is a Robin Hood-like policy, except it steals from the savers and gives to the spendthrifts.
Although we are still in the minority, some economists and financial professionals maintain that if interest rates had been allowed to return to some reasonable rate, perhaps 4 percent, demand would have naturally and more quickly risen as retirees could have earned $4,000 per $100,000 in their CD's. The recession would have been shorter as well.
This phenomenon with its anemic growth, not racism, caused the divide between rich and lower-income Americans to grow steadily during the Obama administration. During the period from 2017 until March 2020, the trend reversed and poorer folks gained income at a much faster rate. However, in 2020 we discovered the wonders of Modern Monetary Policy. This policy holds a government can print all the money it wants, right up until the point at which the house of cards falls down around us. But don't worry, the genius economists will know the limit.
In the paraphrased words of James Grant, the wise publisher of Grant's Interest Rate Observer, this kind of economic policy has not worked in the past 5,000 years of recorded history. But who knows? Perhaps it will.
Please don't hold your breath!
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at [email protected].