ZIRP Embodied

ZIRP or “Zero Interest Rate Policy” has been in effect in the USA since late 2008. From that point forward, the effective interest received on money from CD’s, banks, and non-risk bearing debt is very low, especially when taxation is taken into consideration.

Recently I was standing at an ATM when I saw this receipt casually left on the ground. It showed over $300,000 left in a low or non interest bearing account. To me, this embodies how ZIRP has turned the world on its head.

When I was growing up, inflation was high and interest rates were high, too. I distinctly remember my grandfather having an argument with someone else when he said that interest rates would never go below 10% again (they were nearly 20% at the time). If you had any money, you had to put it to work to get the benefit of “compounding interest” which is basically interest earned on interest, which would make your assets grow quickly. In parallel, of course, inflation was making everything cost more, so you were probably treading water, but that is a different issue entirely.

In the age of ZIRP, there is no point instructing anyone about the advantages of compounding interest, because the effects are too small to be believed. In the portfolios I run for my nieces and nephews, they receive ZERO CENTS most months on the cash held in their account, and the cumulative year end totals are too small to receive an interest 1099 from the IRS. The SEC fee, which amounts to a few pennies per trade, actually is a larger cost, so I am just likely to ignore both elements.

Today you can tell people that with this interest rate policy, it really doesn’t matter where you keep your spare cash, in terms of lost opportunities to earn interest. This is the money that you need to have on hand in case markets seize up or you have an emergency, not money that you are investing and can wait a bit for the market to thaw out. You may as well leave it in a checking account, like this person does, because he is giving up such a nominal amount of money every year (less than half a percent, which is probably about $1500 before taxes) which probably is noise to him or her.

The banks barely even want your deposits. Theoretically they should be able to turn these deposits around into loans where they would make a solid return of several percentage points and thus they should be happy to receive your money by paying you just a little more than the next guy. But apparently banks don’t care about making loans or they think the risks are much higher than the interest rates businesses are willing to pay them.

Over $300,000 sitting in your checking account and you don’t even care, and the banks don’t care to compete to get those deposits, that’s ZIRP embodied in a simple graphic.

Cross posted at LITGM

16 thoughts on “ZIRP Embodied”

  1. Charging interest on loans is Usury. There was a time when Christians refused to make interest free loans except to close friends and family (assuming they trusted them). Moslems also taught that interest was usury and they too hated to loan money. Only one religion permitted charging interest and from time to time Jews were killed en masse in pogroms because liberals and governments hate to repay debts with interest.

  2. It’s worse than that. It’s a tax on middle-class savers and a wealth transfer to politically connected big financial institutions. It’s easier and less risky for these institutions to get free cash from savers and the Fed, and then to use the cash to buy govt bonds, than it is to compete for deposits and write business loans. The ZIRP is fundamentally corrupt.

  3. I asked my bank last year why I didn’t get an interest statement for my taxes. They said if it is under $10 they don’t sent it.

    All of this is sure screwing up our financial system. What’s the incentive to save?

    It is what is fueling the stock market.

    I don’t really understand the reasoning behind it except that it is the policies of the Federal Reserve all to rein in the results of a foolish government and their spending.

  4. We need to buy a new car – new in the sense of second-hand but young. You’ve made me wonder whether I can find a virtually free loan to do it with. I’ve borrowed to buy a car only once before, in 1974 when my loan charged less than the inflation rate that was clearly imminent, so that the bank was really gifting me money. At the moment we make a little more than 2%p.a. after tax on our emergency savings. Hmmmmm.

  5. 1. @Grey Eagle ref interest. No contest re historical accuracy. But, nB, that understanding which some held in the past errs. Easy exercise to prove the error. Take a Bible concordance. Use it to locate every instance of “interest”. Then scan those references. Any and every reference forbidding interest refers to charging interest from someone who, thru no fault of their own, finds themselves in need of charitable assistance = no interest emergency loan. Not one reference forbids interest on commercial, capital loans. In fact, many places (eg, Proverbs, or Jesus’ parable of the talents) commend interest bearing loans.

    2. That ZIRP exists HAS to mean that somebody is paying the difference between no interest and what someone (without using force to steal) would have to pay to obtain a loan. That a bank does not have to pay to entice saving CANNOT mean money is free. It DOES mean that someone is supplying the bank with that money without demanding payment for the loan of the money. Guess who that somebody is who makes the loan. Then guess who, at gunpoint, supplies that somebody with the money to make the loan.

  6. It might be a good idea to have that money in farmland or gold or platinum when the balloon goes up. I don’t know what is going to happen when this ends but I would as soon not be here. What were good investments in Weimar Germany ?

  7. I am not an expert on the historical uses of interest but in my lifetime it was commonly acknowledged that you should be paid a reasonable return on your funds and that there were institutions that could put this money to work. Not clear on what has broken down with this, likely it is as Jonathan says, the banks just take zero interest loans from the Fed and buy government bonds. It is no work whatsoever for them. Also unclear on why we need banks at all if that is what they view their function to be, we might as well just set up checking accounts with the US government.

    On the other hand there are a ton of small businesses out there needing capital, and no one is lending to them, at least according to the popular wisdom. I don’t understand this, unless there are just regulatory barriers to additional sorts of lending. We need to unleash the economy and small business but in fact are going the other way with crushing regulations, taxation, and compliance costs to hiring, building, and basically doing anything. The banks clearly don’t care.

    As far as Weimar and not wanting to be here, I have news for you – the first that happens when the sh*t goes down and you are an alien in another country, they take your wealth and likely kill you to boot. If things are bad here they are worse elsewhere, and the biggest targets are foreigners living abroad. Plus in those countries for the most part you can’t defend yourself like you can in the USA and / or the government themselves are part of the corruption and the illegitimate use of force. I’m sure a few places might be OK like Switzerland but you’d be living out of a bag there.

  8. Thank you Carl for pointing out better than I could that there’s no place to run…

    Q: “What were good investments in Weimar Germany ?”

    A: The very young and quick minded made a lot of money fast by minutely following the stock market and currency exchange rates.

    This function today is fulfilled by Quants and HFT [High Frequency Trading].

    Here you are. Might be a bit pricey, and then there’s getting that milliseconds advantage of renting space on the exchange premises, also a bit pricey.


    Or you can invest in lead, gold, silver, food, backup power. And hold on.

  9. Obama has run a trillion dollar deficit every year for 5 years. GDP is only $15 trillion. So the 5 trillion in Obama deficits equal 5/15 or 33% of 2013 GDP.

    Now some people say deficits are evil because our children will have to pay them. Because deficits this size are inflationary, in ten years when our children start paying Obama’s 1.5 trillion dollar 2013 debt – in 2023 – the price of a cup of coffe at Starbucks will be $1 trillion. So $1.5 trillion in 2023 will be pocket change (if people are still using US$).

    Interest rates are at 1% because the US treasury issues bonds paying 1% to raise dollars to pay the bills caused by Obama and the Dems and the Rinos spending $1.5 trillion more than the US collects in taxes and fees. However the Federal Reserve under Bernanke buys these bonds at $100 instead of the $50 price they would get at auction. Then he sells the bonds to the banks as special non-negotiable bonds that can be used only to meet reserve requirements. This freezes the bonds so that the do not get counted as part of the money supply. The banks get to loan out all their assets, not just 90%.

    Inflation is occuring, it just is not counted because Obama has changed the rules used to decide if prices have gone up.

    In 2023 when coffee costs $1 trillion, inflation will be reported as 1%.

    Saving money is a really bad idea. Borrow all you can on long term balloon loans and in 2023 all your debts will be less than the price of 1 cup of coffee. Keep your passport up to date in case I’m wrong.

  10. MikeK Says:
    December 15th, 2013 at 4:23 pm

    In the unthinkable situation where I had disposable income to do major preparations for hard times, it would be invested in tangibles that could be held and/or protected/hidden. Nothing in a financial or government institution is going to be safe from seizure or theft. Nothing in the form of electrons in the system is going to be redeemable. The recent flurry of laws worldwide concerning “bail-ins” making depositors responsible for making “investors” and speculators whole if there is a financial failure should have been a major warning.


    1) arable land with water sources in a temperate area for growing.
    2) stored food, seed, etc. for a year at least.
    3) water purification
    4) energy from multiple sources.
    5) medical preparations
    6) if you need a means of capital storage, first small denomination silver coins, and second small denomination gold coins.

    If you have all the above; it will require means of protection from two-legged predators, in or out of uniform. That requires not only means of doing so, and proficiency; but also cooperation with a group of like minded people. Someone has to be on watch while work is being done and overnight. Cooperation with other groups is good, and communications will be required. All this implies the acquisition of certain skillsets, and there are others that would be desirable.

    If I was really capable of preparations, I would not ignore the chance to obtain a foreign passport. As Carl said, things may well be worse elsewhere; however there is no guarantee that things will not get bad enough to where a temporary evacuation will be necessary. There are those in our political establishment who have expressed admiration for the methodology of the Khmer Rouge. This is not a cardinal priority or even a possibility for most people. But a foreign passport may be a necessary back door.

    Others may have other priority lists.

    Subotai Bahadur

  11. “I have news for you – the first that happens when the sh*t goes down and you are an alien in another country, they take your wealth and likely kill you to boot.”

    Oh I wouldn’t think about emigrating. The people I know buying farmland are doing so here but away from big cities. Some in Oregon, for example. If I were doing that, I would think about self sufficiency; power, water, and climate. When I was a kid, my great aunt was the Mother Superior of the order than owned St Mary of the Woods in Indiana. At the time, it was totally self sufficient. It had its own farm and even its own coal mine.

    The only men on campus ran the farm and the coal mine and power plant. I’m sure the coal mine is long gone but that is the idea.

    I know some people are doing this; some of them with serious money. I’m not in that class but I do live in Orange County, the safest place in California. I don’t have my boat anymore. In the 70s, the last time we had the same Armageddon feeling, my boat was my possible refuge but I had little kids than. I wonder how many have ever read Neville Shute’s novel “Ordeal” which describes a family using their boat to escape bombing in Britain. It was written in 1938.

  12. “1) arable land with water sources in a temperate area for growing.
    2) stored food, seed, etc. for a year at least.
    3) water purification
    4) energy from multiple sources.
    5) medical preparations
    6) if you need a means of capital storage, first small denomination silver coins, and second small denomination gold coins.”

    This is exactly what friends of mine did in the 1970s. The Mormons are well ahead there. The guys who bought silver, got it when silver was at par. Now it is $20/ ounce. I hope they still have it although some have died since then.

    I wouldn’t give a nickle for safety in Chicago or New York.

  13. For those who believe inflation is a daily report card on the effectiveness of an economy’s policymakers the true purpose of ZIRP is plainly obvious.

  14. ‘The guys who bought silver, got it when silver was at par. Now it is $20/ ounce’

    Silver prices spiked to about $45oz circa 1980, collapsed circa 1983, relatively level until about 2006, spiked again 2010 and drifting lower ever since.

  15. “Silver prices spiked to about $45oz circa 1980”

    The Hunt brothers tried to corner the market then and lost their shirts. Gold and Silver trends go with Democrats. I bought gold stocks when Clinton was elected and made some money. I wish I had bought gold in 2001 when the price was at an all time low. I sold what I had in 2011.

  16. Have a good friend who decided to leave CA and move to northern ID. The best thinkg to have if this Armageddon is coming is …. guns.

    And the public seems to agree.

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