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Friday, November 7, 2008

Zero Rate World, the Age of Free Money: We're Doomed

Global ZIRP. This is going to be a disaster.

In a zero rate world there is NO incentive to save. NONE.
In a zero rate world the incentive is to borrow, leverage and spend.

Kind of like what we have been doing.
That didn't work out so well.

So how can more of the same be a fix? If cheap and easy credit got us into this mess how can the absolute extreme version of cheap and easy credit get us out? How can ZIRP save the day?

This neo-Keynesian claptrap has got to stop. Quantitative easing doesn't work. It's probably time for heterdox monetary policy.

Otherwise we're all doomed.

Zero Rate World May Lie Ahead as King, Trichet Cut (Update3):The age of free money may be at hand.

As major central banks slash interest rates with unexpected speed, benchmark borrowing costs are now below core inflation for the first time since the early 1980s, and policy makers are signaling they will go deeper.

Yesterday's cuts by the Bank of England and European Central Bank, which came with the Federal Reserve and Bank of Japan on the cusp of zero rates, are a bid to shock life back into their recessionary economies and strained money markets. It may be an uphill battle as consumers and businesses show greater interest in saving than spending, and banks hoard capital rather than lend it.

“It's the race to zero,” said Stewart Robertson, an economist at Aviva Investors Ltd. in London, which manages about $230 billion. “There's no obstacle to more rate cuts.”


Anonymous said...

Just wait until they continue to bring Bills, Notes and Bonds to the auction market in the trillions of dollars. Who will buy the paper? Everyone needs their own capital to weather the storm. Money is about to become very dear.

Anonymous said...

Hmmm. No incentive to save, large increase in the money supply, sounds like velocity could increase leading to ... more inflation!

Anonymous said...

So, what policies will work?

Anonymous said...

those that dont save will die. simple as that. pundits on cnbc feel the poor in chine who save 40% of their income should spend like americans....right ...they know there isnt anyone to babysit their ass and would die in the street without savings. we have lived with unlimited credit for so long we have generations that think they wont be out in the street.

all this free money will last 10 minutes and then we are toast...

peterthepainter said...

zirp in japan...did it work?

Charles Butler said...

On the one hand, you tout deflation as the probable outcome and then say that ZIRP discourages saving. Can't have it both ways. Zero is positive in a deflationary world - and cash is king.

Anonymous said...

its a race to devalue currencies to prop exports in every economy.

US and japan dont have far to go, IE their currencies will strengthen the most.

Anonymous said...

The underlying problem is people dont want more debt. If no one wants to borrow in a deflationary environment, its game over.

Were turning japanese
I think were turning japanese
I really think so..

da da da da da da da da...

Remoran said...

Kill the Fed and build a new financial system. There is no other way out of this disaster as money as debt is the way the world is currently working. This cannot continue.

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