Hanging by a ZIRP Thread

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The stock market and economy are hanging by a thread over an economic abyss. That thread is zero interest rate policy (ZIRP). Rampant inflation and foreign competition will snap the thread. Jerome Powell is gaslighting the public. The Fed cannot manipulate bond prices forever. Money printing will create inflation.

ZIRP is the only thing that is protecting the U.S. stock market and economy from a shocking falloff. The Fed’s bond price manipulation pokes the hegemony bear, testing the world’s trust and respect for our bonds. The Fed has signaled (warned) that it might increase interest rates as the pandemic fades, but it does not have an interest-rate control dial, especially not for long-term bonds.

Regardless of the reasons for increases in bond yields, the consequences are predictable and alarming:

  • Bond prices will fall.
  • Stock prices will fall because (1) earnings are discounted at a higher rate and (2) bonds become a reasonable investment with an actual rate of return.
  • Interest expense on the Federal debt will surge, triggering a debt spiral of ever-increasing money printing (a.k.a., monetizing the debt), causing rampant inflation.

The Fed cannot continue to suppress bond prices much longer because inflation is on the horizon and some foreign governments pay much higher yields on bonds that are comparable in quality to U.S. bonds.

Money printing brings serious inflation

The Fed has warned that it may have to increase interest rates to cool off rising inflation in a heated economy, gaslighting the public into ignoring the massive amount of money that has been printed since the onset of the pandemic. When the market recognizes serious inflation, it will require higher yields that the Fed cannot stop, although it’s setting the stage to take credit for the increase. At some point, even the Fed will not have resources to fight off market forces, although it might seem that its powers are unlimited.

Money printing is poking the inflation and hegemony bears, supported by modern monetary theory (MMT), which has been justified by Japan’s early adoption and apparent success.

The U.S. government has printed an unprecedented amount of money since 2009: more than $10 trillion with a probable $6 trillion more on the way. Yet inflation has remained subdued, even though the CPI recently increased 5%, which some think is shocking. The shocking reality is that inflation will not be transitory.

For perspective, new money printing now exceeds the total costs of our most expensive wars. The money supply has tripled but inflation has remained low. Economists explain that this phenomenon is due to extremely low velocity. In other words, that money is sitting in bank vaults going nowhere. That’s somewhat true, but most of that money went into the stock and bond markets, exacerbating the great wealth divide and creating money illusion, the mirage that stocks and bonds have become tremendously more valuable – stocks have become three times more “valuable” in the past decade.