ZIRP Gains More Attention

We have been talking about how there had been no bubble in US stocks and how the economy is doing just fine.  We have also been talking about how the bubble is in policy and that the economy and stock bull market have been created – yes, like Frankenstein’s monster once again – out of this policy bubble.

Enter economist Joseph LaVorgna of Deutche Bank…  Fed needs to start raising rates, top forecaster says.

Will wonders never cease?  As you may know, I read the financial MSM to get a feel for what the casual market participant is reading, what the majority is being told is the truth.  Usually it is some combo of self-promoters and agenda (sometimes political) driven bulls and bears.

“The economy is improving much faster than the Fed is willing to acknowledge, LaVorgna said in an interview. At the current rate of hiring, more jobs will be created this year than in any year since 1999.”

Exactly, and still they inflate.  He correctly puts the focus on the financial (and national) disgrace called ZIRP as opposed to the theater surrounding QE’s long term bond purchases.

“In six months, the unemployment rate will be below 6% and the core inflation rate will be at 2%,” he said. “We are way ahead of schedule. We’re going to get to 5.2% or 5.4% a year ahead of schedule.”

“The Fed is behind the proverbial curve,” he said. “The Fed should be raising rates.”

It’s all that this corner of the interwebs has been hammering on for over a year now.  If the economy is at all real, get rid of QE and end ZIRP.

“I would have raised rates years ago,” just enough to get the federal funds rate off zero after the emergency passed, he added. He argued that ultra-low rates may not be doing anything positive for the economy, anyway. “It’s not about the cost of money; it’s about the provision of credit,” he said.

It is about that provision (or better yet, attempted force feeding) and to this credit, which goes right into the pockets of asset owners there is also a debit, right out of the pockets of the dying breed that used to be a majority, savers.  You know who savers used to be, right?  They would be the ones who used to deploy capital at appropriate times, investing in opportunities provided by the economy’s natural up and down cycles.

Today there is one cycle; the BOOM/BUST cycle.  Right now we are on a BOOM.  But the funny thing about cycles is… they cycle!

He’s not worried that quicker-than-expected rate hikes will choke off the recovery. The level of interest rates is more important than the change in interest rates, he said. “If the Fed raises rates because the economy is better, that is a good thing.”

Yes yes yes.  This refusal to even entertain a rate hike until some shady day out there in 2015 begs us to ask the question ‘what are they afraid of?’.  Well,what are they afraid of?  The economy is fine on the surface of things.

He’s encouraged that Fed officials are at least talking about the risks of financial instability, but he’s worried that the Fed is too focused on its main goals of maximum employment and price stability to pay attention to financial markets.

The Fed can continue to put the pedal to the metal because gold is in a bear market and the outward signs of inflation are muted.  This is the same Fed that did not see the credit bubble, the housing bubble, the tech stock bubble, the commodity bubble in anything resembling foresight.

As for this ‘price stability’ thing, since it is a system of Inflation onDemand, what they are saying is that declining prices is a bad thing because it would errr, undo the system.  If the system is undone, they are undone (cue Sgt. Barnes… “if the machine breaks down, WE break down”).  So inflation it is.

LaVorgna hesitates to identify potential trouble spots in the financial markets. “We don’t know for sure where the bubbles are,” but he’s confident that the stresses will reveal themselves once rates start to rise. Now is the time to prick those emerging bubbles before they get any bigger.

The answer is right in front of you.  The bubble, as we have been writing for too long now, is in policy.  Why, just look at this…


Yes, it’s this chart again with its stark reminder of why the Fed keeps the pedal to the metal.  Now, as certain financial assets (read: stocks) start to threaten bubble-like behavior, the 5.5 year long ZIRP (green line above scuttling along the floor) is put into context, very disturbing context, against the backdrop of robust employment and economic acceleration.  Here we reference the increasing ‘Cost’ component in the monthly ISM manufacturing reports.

Unfortunately, I don’t think there is a manageable way for them to back away from ZIRP.  Sure, if it were to go as it usually does the market could continue to rise for a short time in the face of ZIRP’s withdrawal, but an end to ZIRP would mark the beginning of the end for the bubble economy.  The policy bubble is going to need to pop either sooner or later and I don’t know about you but I find the one-way aspect of this situation pretty scary.

The economy itself doesn’t exhibit any major imbalances right now, he said. Inventories and sales are well-balanced, banks have recapitalized, and consumers haven’t taken on excessive debts.

Which is exactly where the bears (both economic and stock market) have gotten it wrong.  Conventional analysts who were bearish on the economy were just not paying attention or did not look in the right areas (ref: our highlight of the Semiconductor sector in January of 2013, ratios like a rising palladium vs. gold as but one example).  The stock market as well has presented technical targets to the upside since the big breakout in 2013.

The article goes on to glad hand Mr. LaVorgna on his forecasting prowess among a host of other establishment gurus.  I won’t bore you with it.  But nothing, absolutely nothing has changed in our analysis that sees the last refugees of the ‘Great Recession’ (handy nickname isn’t it, with its implication of something that is well in the past?) being sucked back in by the seemingly endless run of ZIRP.  The process is completing.

Or as the poor pre-retirement couples in a disgusting John Hancock commercial put it…

“We felt better holding onto our money…”

Her:  “But waiting?”  Him:  “Hmmm, we shouldn’t wait anymore.”

Him:  “So here we are.”  Her:  “I mean, we need to invest again.”

“We just need to find the right thing to do.”  The look on the guy’s face is classic.

So here they are… finding the exact wrong thing to do as instigated by policy making.

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10 thoughts on “ZIRP Gains More Attention

  1. How did we get here? Is our economic system really this complicated? At the end of all these words,no one knows what's going to happen. Exercise in pointlessness. I want to go back to the lemon-aid stand of business. Or KISS.
    Buffet said he won't buy a business he doesn't understand. Nuff said.

  2. “We are way ahead of schedule. We’re going to get to 5.2% or 5.4% a year ahead of schedule.”

    Ahead of schedule for what? Apparently no-one clued him in on the fact that Neocons still rule the roost in Washington?

    We have lost our faith in government and the only two options left are to either regain that faith or become a country without a constructive government, like Indonesia or the Philippines.

    There is no inflation to fight and cannot be any inflation to fight until either the rich somehow develop the ability to drink a thousand gallons of milk a day each or we get money distributed a little bit more evenly in this country. It sure would be nice if people claiming to be "economists" understood basic supply and demand.

  3. *Expectations* -- setting them appropriately and sticking to them.

    With the FED there are none. In such an investment environment as the FED has manifestered (my own term), expectations are unknown and unknowable. ZIRP? QE? What, if anything, did these do for the main body of struggling people of this country? Their expectations of savings are zip. Their safe haven bond investments pay nothing. Their access to credit severely reduced. The FED did this to them. The FED's willy-nilly fiat juggling of rates only detracts from a stable economy. There are no expectations of return in such an environment. How can savings accounts pay nothing? That makes no sense. The FED has WAY too much control over such things.

    Rewriting history is a fool's errand and so we'll never know if the FED's actions helped or hindered the Nation and its recovery. It surely helped the top 20%. The bottom 80%? From recent analysis and hearsay of a return to a rentier society - the bottom 80% are worse off. Much worse.

    1. The ability of low interest rates to help people with bad credit is very limited. That's what people mean when they say "Trickle down doesn't work". I would counter that we actually are seeing some effective trickle down, but just not enough. Trickle down is actually quite effective at it's job, but it simply cannot work alone. The metaphor I use is it is like a chair that might be well-constructed and do the job its designed for, but it kind of falls apart when an Elephant comes along and sits on it.

      1. I like to hear people say trickle down doesn;t work because it proves they don't understand the environment at all. In normal situations, money flows from the poor/less poor/ to the rich. It's the stockholder / business owner that money flows to in the forms of dividends / earnings etc. - That's normal. Anyone who wants anything other than trickle down wants a reality that cannot be. Business owners cannot pay for you to take their wares, so there is no such thing as trickle up, flow down. There is of course only one other choice to trickle down, comrade.

        1. Frank - So your point is that the only economic option is for all the poker chips to eventually wind up in one hand? Or actually, let me rephrase that. What point *are* you trying to make. I don't remember anyone bringing up the "Businesses pay you to take their wares" hypothesis.

      2. Low interest rates help no one but the rich, agreed. The poor and middle class, bad credit or no, have never represented the financial risk takers the wealthy can afford to be. Savings and bond earnings have typically been their only tool to earn their limited return, a return that's been ZIRP for years.

        Trickle down may have worked, somewhat, when the playing field was much more level. But with the field tilted so far down to the left (the poor) from the upper right (the rich) the meager trickle runs out before it gets more than a few degrees into its descent. Two of the major problems with trickle down is that the trickle doesn't occur. Wealthy tend to save much more than the lower 90 percentile. They know that wealth builds wealth. Spending wealth (the trickle) does not. In addition, regardless of the commonly held concept that the rich buy rich things, they don't spend an equivalent percentage. A 1%'er making 1000 times as much as a 99%'er does spend 1000 times as much during their day to day or month to month existence. 1000 times more milk? Or gasoline, or iphones, or shoes, or haircuts, or you name it? One person is just one person and can consume only so much. If this were not the case -- trickle down might actually work.

        What I think works is 'bubble up' economics. Here's a thought experiment:

        Take 1000 of the bottom 90%'ers and give each $1000. $1 million dollars. How much of that do you think will enter the local economy? Buying food, and fuel, and clothing, and furniture, and what have you. Most if I would think. Suddenly that $1M is circulating and bubbling up through the economy, driving commerce and prosperity.

        Now take that same $1 million dollars, and give $100K to ten 10%'ers. What do you think will happen to that money? I'll wager it goes right into investment accounts where it it will sit benefiting no one but the recipient. No trickle down there.

        But of course the bubble up theory eventually benefits the very top. Those who own the clothing and furniture and other production companies. If those wealthy bubble toppers were to take this bubbled up cash and recycle it down to the bottom of the pile it would again bubble up in an every increasing economic boom. Does the FED understand this? Not on your life.

        1. "Trickle down may have worked, somewhat, when the playing field was much more level. But with the field tilted so far down to the left (the poor) from the upper right (the rich) the meager trickle runs out before it gets more than a few degrees into its descent."

          I mostly agree with statements like this, but I would point out that while policy might be for low interest rates in the "what's happening today" sense, the only possible outcome of money collecting in fewer and fewer hands is low interest rates as the long term trend. Return on investment ultimately comes from consumers whereas investment dollars ultimately come from savers, so when savers have all the money the ratio of investment return dollars to investment dollars by definition goes down. Interest rates are just one form of this ratio.

          Trickle down has an effect because people are able to spend out of their houses as house prices rise (and similar effects). However trickle down has become more and more necessary as the ratio of wages to corporate revenues is near a low point, creating a massive imbalance. Either we fix the wages to revenues imbalance or the debt that is mitigating the imbalance eventually fixes the problem by indiscriminately reducing revenues (causing a vicious deflation cycle). Of course fixing the problem requires that people understand the difference between what FDR did and what Calvin Coolidge did.

        2. "Now take that same $1 million dollars, and give $100K to ten 10%'ers. What do you think will happen to that money? I'll wager it goes right into investment accounts where it it will sit benefiting no one but the recipient. No trickle down there."

          We eventually ended up in very similar places through very different means... 🙂

      3. I'm just reminded of information I read in the book "Debt: the first 5000 years" -- Dave Graeber where there were early societies that had yearly debt forgiveness period. If I remember correctly the powers that be in those societies found that if they didn't unclog the monetary pipes with regards to deep debt owed by peasant farmers (mostly) who had suffered repetitive drought and were now beggars having had to surrender their lands to those they owed money, that the system came to a stand still. The one-time consumers were all now beggars and could no longer afford food or clothing. The merchants couldn't sell and the tax collectors couldn't collect.

        So the King would forgive all debts, the land would got back to the farmers and the whole system started running again.

        This seems strangely familiar...

        The passage from that excellent book:

        "The problem was that Nehemiah quickly found himself confronted with a social crisis. All around him, impoverished peasants were unable to pay their taxes; creditors were carrying off the children of the poor. His first response was to issue a classic Babylonian-style “clean slate” edict—having himself been born in Babylon, he was clearly familiar with the general principle. All non-commercial debts were to be forgiven. Maximum interest rates were set. At the same time, though, Nehemiah managed to locate,
        revise, and reissue much older Jewish laws, now preserved in Exodus, Deuteronomy, and Leviticus, which in certain ways went even further, by institutionalizing the principle. The most famous of these is the Law of Jubilee: a law that stipulated that all debts would be automatically cancelled “in the Sabbath year” (that is, after seven years had passed), and that all who languished in bondage owing to such debts would be released."

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