ZIRP Survey

[don]

When the recent posting on the 'tulip exposed ZIRP's devastation of pension compound interest projections, with all of its state and local budgetary impacts, yet another light went off.

We all know, and have felt, the bite in our savings.

The largess to the TBTFs is a given here on the 'Tulip.

ZIRP is a key component of QE, which has international repercussions.

Just how beneficial is ZIRP to the Financials?

Just how powerful is the ZIRP Gambit?

Can we measure its magnitude?

[Starving Steve]

Re: ZIRP Survey

The first accomplishment of Bernanke's ZIRP was to allow government (at all levels) to continue to spend, compound deficits, and play the game of pretend-and-extend for a while longer. The second accomplishment of the ZIRP was to give a reprieve to America's debtors and deadbeats, especially in real estate. The third accomplishment of the ZIRP was to allow debtor nations like the PIGS nations in Europe ( also known as the nations of Club Med ) to continue to run wild with speculations in real estate and green energy.

[charliebrown]

Re: ZIRP Survey

speaking as a little guy, and I am sure this is playing out at larger levels, the combination of ZIRP and rising prices of life's essentials and stagnant wages are causing me to speculate in financial markets to seek preservation of wealth. If real interest rates were positive, I would be keeping wealth in stable safe investments. But now we have countries with 100% debt to GDP ratios paying < 3% on 10 yr debt with an inflationary backdrop.

We have had several articles about pension funds lately. I'm sure their managers are scrambling to do the same. Find real return, for the waves of retirees looking to start drawing out of the plan.

[don]

Re: ZIRP Survey

speaking as a little guy, and I am sure this is playing out at larger levels, the combination of ZIRP and rising prices of life's essentials and stagnant wages are causing me to speculate in financial markets to seek preservation of wealth. If real interest rates were positive, I would be keeping wealth in stable safe investments. But now we have countries with 100% debt to GDP ratios paying < 3% on 10 yr debt with an inflationary backdrop.

We have had several articles about pension funds lately. I'm sure their managers are scrambling to do the same. Find real return, for the waves of retirees looking to start drawing out of the plan.

One of the Big Perks of ZIRP. Good add

[c1ue]

Re: ZIRP Survey

When the recent posting on the 'tulip exposed ZIRP's devastation of pension compound interest projections, with all of its state and local budgetary impacts, yet another light went off.

Don, I am surprised at your surprise. It has been repeated many times that the present policies of dollar devaluation with accompanying price inflation is simply a back door way of stealing from those with money - pensions are only one example.

Just how beneficial is ZIRP to the Financials?

Well, some anecdotes:

First I'll use Social Security payments as a baseline. At present this is roughly $700 billion a year. Each 1% COLA costs $7 billion a year, and extrapolated to the average present SS payout lifespan (15.3 for males and 19.6 for females as of 1990) yields the $128 billion.

Underwater mortgages presently total around $751 billion. Average monthly payments on said mortgages should be in the $6 billion range, and each 1% interest differential is roughly $500 million. So ZIRP being at least 5% under historical average, with resulting mortgage interest at least 3% under historical average, is benefiting banks in the order of $1.5 to $2.5 billion per month = $18 billion to $30 billion per year plus reducing likelihood of default.

Pension effects:

State pension obligations are in the $7.5 trillion dollar range. Each 1% less market yield in fixed rate securities should have an impact of at least $500 billion - with fees from sales and management opportunities certainly increasing as pension funds scramble to meet their payout obligations due to performance falling under charter assumptions.

I'm sure there is more data, but you can see just from these few examples what scale of impacts ZIRP has.

Just how powerful is the ZIRP Gambit?

Define powerful

Can we measure its magnitude?

See above

[Starving Steve]

Re: ZIRP Survey

Yes, the fourth accomplishment of the ZIRP was to liquidate the savings and the pensions of the elderly--- and to force them back to work.

The fifth accomplishment of the ZIRP was to de-value the dollar, not just in terms of gold, but also in foreign exchange, and also in purchasing power for the necessities of life.

[Starving Steve]

Re: ZIRP Survey

Imagine that there were idiots here at itulip and also in the universities who believed that if money had a rent assigned to it, that would be inflationary. I can remember posts here, not just by Hudson but by others, who would argue and "prove mathematically" that money could not be assigned a rent without causing inflation.... This was the olde compound-interest rates cause inflation saw that dates back to Karl Marx and others in the 19th C.

Well, welcome to the inflationary legacy of the ZIRP. Five fountains of inflation sown by the ZIRP: 1.) pretend-and-extend forever at zero interest rates; 2.) deadbeat relief in the housing bubble; 3.) more free money for Club Med to enjoy ( via a burgeoning carry-trade from America, engineered by the Fed ); 4.) de-valuing the savings and the pensions of the elderly; 5.) covert dollar de-valuation.

As we all face starvation together, kids here might tag these five results of the ZIRP on the front door of their university economics departments.

[lektrode]

Re: ZIRP Survey

....As we all face starvation together, kids here might tag these five results of the ZIRP on the front door of their university economics departments.

and put a mugshot of slugman on it as the primary mouthpiece for the banksters in support of it all, and then give him another nobel prize for journalistic hypocrisy for his prev stance in screaming about the outrageous deficits during geedubya's daze, all while the current occupants make the prev look like dimestore piker/cheapskates!

pul-leeeeze! the trillion dollar war(s) in the middle east at least CREATED SOME GD JOBS!!!

tell me what the dipsh_ts 'created' since 2008? DESTROYED would be a better descriptor...

[c1ue]

Re: ZIRP Survey

Imagine that there were idiots here at itulip and also in the universities who believed that if money had a rent assigned to it, that would be inflationary. I can remember posts here, not just by Hudson but by others, who would argue and "prove mathematically" that money could not be assigned a rent without causing inflation.... This was the olde compound-interest rates cause inflation saw that dates back to Karl Marx and others in the 19th C.

If only you were trying to be funny, this would be amusing.

As it is, it is only sad.

[don]

Re: ZIRP Survey

Which is a better transfer of wealth instrument, ZIRP or bubbles?

[aaron]

Re: ZIRP Survey

Bubbles are "fairer" since speculators "deserve" to be crushed. You are left with infrastructure at the end... Internet and houses.

ZIRP is preventing the fruits of the bubble from being realized. We SHOULD have a huge amount of cheap housing to buy, for example. Instead, we must speculate on wall street, with the money they take from us via inflation of the money supply.

[santafe2]

Re: ZIRP Survey

When the recent posting on the 'tulip exposed ZIRP's devastation of pension compound interest projections, with all of its state and local budgetary impacts, yet another light went off.

We all know, and have felt, the bite in our savings.

I've no serious political or social view on this issue but ZIRP works well for those of us running a growing business during difficult economic times. We're in our 4th year and as we've been able to grow faster than our competition, low rates have been very helpful when we've required cash during more difficult cash flow periods. ZIRP is designed to punish the risk adverse and reward the risk taker.

As EJ pointed out several years ago, the best time to start a new business is during an economic downturn. During these times one will be given no forgiveness for ineptitude. A business will perform or die off. Four years ago, these were words of advice, today they are the stone on which we hone our sword. ZIRP rewards us when we overstep our growth expectations and need cash. It allows us to take chances we could not otherwise take.

[don]

Re: ZIRP Survey

Great news a tulip entrepreneur is flourishing in this economy. Your comment on making it in hard times has much merit. (I started a successful construction business in the Volcker years - not exactly low-hanging fruit)

ZIRP, of course, is a plague of locusts for most of us. There are other ways to address capital start-up needs in a less distorted interest environment, taking nothing away from the cojones you're demonstrating in making the most of what's out there. Hear, hear!

[mmr]

Re: ZIRP Survey

Another impact of ZIRP is helping to hold off any day of reckoning for the largest issuer of dollar-denominated debt (the US Treasury).

The last time I looked, something like 30% of the US federal debt outstanding was scheduled to mature within the next year, and half within 3 years. There's $14 trillion of debt outstanding, give or take.

If rates were to rise 1% today, the interest expense on the $4 trillion that would have to be refinanced in the next year would rise by $40 billion, adding to the deficit by that amount, with a $70 billion increase by the third year. You can do the math on what a multiple percentage increase in rates would do to the deficit over time.

Treasury has been trying to extend its debt maturity profile (i.e., issue longer-term debt that won't have to be refinanced at market rates for many years) to mitigate this problem.

That being said, how will short-term rates be allowed to rise significantly as long as the Fed / Treasury has any control over the situation?

[don]

Re: ZIRP Survey

Another impact of ZIRP is helping to hold off any day of reckoning for the largest issuer of dollar-denominated debt (the US Treasury).

Which deficit funds further military actions, which in turn prop up the reserve currency by physically holding global energy sources, which helps, albeit weakening, or is it? - foreign treasury buys. There is a functioning system in place . . . . for a few.