The ZIRPing of America

by Craig R. Smith
Chairman, Swiss America Trading Corporation
and Lowell Ponte

"Virtually zero percent interest rates are to long-term economic policy what junk food is to nutrition - it tastes great going down, but later come horrible results....[that] pose dangers for all of us.... ZIRP [is]...how the Fed gave the U.S. Financial Diabetes." - Gregory Bresiger, Business Journalist [1]

A Swiss America White Paper
Spring 2015
Copyright © 2015 by Swiss America Trading Corporation. All rights reserved.

Introduction

The biggest bank heist in history began on December 16, 2008 amidst the uncertainty and fear of the worst financial crisis since the Great Depression. The heist began with the Federal Reserve's Zero Interest Rate Policy, known as ZIRP, that has been used to take trillions from some and give it to others - especially to the giant banks and the government itself.

On that day in 2008, with one of America's largest banks in ruins and several others at risk of collapse, the Fed Open Market Committee (FOMC) ended almost a century of tinkering up and down with interest rates and simply slammed its economic accelerator pedal to the floor - driving the short-term Fed Funds Rate at which banks could borrow money from each other and from the Fed as low as it then could go - to between Zero and 0.25 percent.

In essence, the Fed offered the big banks and certain other entities virtually free money, a policy that continues almost seven years later.

ZIRP began, we are told, as an effort to provide the liquidity to stave off economic freeze-ups, meltdowns and burn-downs of "Too Big To Fail" financial institutions during a crisis. It continues because, although it hurts many, ZIRP greatly benefits government and other key powerful entities. But by imposing wildly unreal low interest rates, it has created a distorted, unnatural economic system.

What the Fed did in 2008 was no mere adjustment. Imagine those episodes of "Star Trek" where the Starship Enterprise escapes danger by going into warp drive, only to find itself in a whole different galaxy where the old familiar laws of economics and star charts that point the way home no longer work.

The former Vice Chairman of the Fed, Alan Blinder, in his 2013 book After the Music Stopped wrote of ZIRP: "To call such a low interest rate abnormal is an understatement."

"Many of the Fed's actions were previously unimaginable," wrote Blinder, now a Princeton economist, of ZIRP and other drastic measures that the Federal Reserve put in place during this crisis. [2]

The Fed's massive injection of liquidity and easy money arguably helped relieve a moment of crisis for several "Too Big To Fail" banks.

Yet what the Fed did may have changed forever the American economy and the values shaped by our views of money, work and the role of government.

From where the Fed's ZIRP drive has warped our economy and society, we might never be able to find our way back home to genuine free enterprise and honest money.

Having moved its key interest rate to zero, the Fed to deal with this liquidity trap turned to other tactics to influence the economy, including a series of Quantitative Easing (QE) and "Operation Twist" purchases which in 2015 have left the Fed with $4.5 Trillion in accumulated assets, which it expects to hold for a long time.

The Fed's "Reserve"

The Fed, in other words, has stockpiled in Treasury notes and other assets the equivalent of 26.25 percent of America's entire annual Gross Domestic Product....up from only 6 percent of GDP in 2007, just before the financial crisis. [3] These astronomical Fed purchases have certainly altered market supply and demand, and we do not know what the Fed's privileged "Primary Dealers" might have purchased in the marketplace using fungible Fed-provided money and credit.

The Fed by law each year returns much of the profits from its activities and assets, minus operating expenses, to the U.S. Treasury. In January 2015 this central bank sent the government a record $98.7 Billion, much of it from low interest that taxpayers paid on U.S. debt purchased by the Fed. [4]

Bolstered by ZIRP, our biggest surviving banks have bulked up in today's easy money environment, growing on average more than 30 percent larger than they were in 2008 - despite demands from critics that they be broken up for the public good.

Today, some Federal Reserve members say that ZIRP is no longer needed and that the Fed Funds Rate should gradually be raised back towards its historic average that lets banks lend at between five and six percent interest.

Truth be told, warns analyst Nicole Gelinas of the Manhattan Institute, "No one knows what will happen if the central bank raises interest rates." [5] The economy might move up or melt down.

"Zero is not the right number for this economy," says the President of the Federal Reserve Bank of St. Louis, James Bullard. "It is hard to rationalize a zero policy rate," says Bullard, 53, because America's economy has "a lot of momentum." [6] (Bullard will not again be a voting member of the FOMC until 2016.)

In early 2015, however, the Fed once again voted to postpone any such increase in this rate until at least June 2015. [7]

In recent years some Fed economists have argued that this key interest rate should not be raised until at least 2017 to avoid the risk of harming a still-fragile economic recovery. [8]

ZIRP policy, according to the Board of Governors of the Federal Reserve System, is that FOMC "anticipates...that it likely will be appropriate to maintain the 0 to ¼ percent target range for the federal funds rate for a considerable time." [9]

Fed Transformation

From the inauguration of President Andrew Jackson in 1829 to that of President Woodrow Wilson in 1913, America's leaders and legislators generally resisted empowering a European-style central bank in the U.S. to control our money supply and interest rates.

That changed in December 1913 when Wilson signed a charter for a new Federal Reserve System that gave it the power to furnish "an elastic currency" for the United States. Wilson, like his fellow Progressives, hated our gold-backed dollar that politicians therefore could not print in limitless amounts to grow the government.

The Fed - a hybrid entity of 12 private banks, a ruling committee with quasi-governmental powers, and a Chair and Vice Chair appointed by the President of the United States - was originally chartered to protect the purchasing power of America's money and take monetary decisions out of politics.

Since the Fed began, the purchasing power of the dollar has fallen to only two pennies of its 1913 value. Private ownership of gold bullion and non-numismatic gold coins was outlawed in 1933 by another Progressive President, Franklin Delano Roosevelt. Then the last link anchoring foreign-held dollars to gold was severed in 1971 by President Richard Nixon.

The Fed has gradually evolved into a Fourth Branch of government, and its unelected Chair is the one person whose global power in important ways surpasses that of America's President. World stock markets rise and fall, and trillions of dollars can be gained or lost, based on a mere hint from a Fed Chair that America's central bank might raise or lower interest rates or adjust Fed economic stimulus by even a tiny amount.

Fed policies alter the quantity and hence the value of our dollar, the world's global reserve currency. Decisions by the Fed Open Market Committee have the power to influence presidential elections, help shape America's and the world's economy, maximize employment, and "levitate" the stock market.

Some analysts argue that the Federal Reserve has been helping to rig the stock market in various ways. As David Santschi wrote in TrimTabs Weekly Liquidity Review in 2013, "The Fed is exchanging about $4 billion in newly created money every business day for various types of bonds. All else being equal, the Fed's bond buying puts more money in investors' hands to buy other assets, including stocks." [10]

"[T]he Fed has rigged interest rates and asset prices to the extent that investors can no longer distinguish reality from fiction....," wrote investment advisor Michael Pento in 2014.

"[K]eeping interest rates at record low levels directly re-inflated bond, real estate and equity market bubbles. This further boosted money supply growth and fueled greater consumption," writes Pento.

"Once the Fed stops buying banks' assets...these institutions will have no need to replace them," writes Pento. "Therefore, the money supply will shrink as asset prices tumble. It is then logical to conclude that the end of the Fed's manipulation of interest rates and money supply will lead to a collapse of this phony consumption-driven economy, as it also takes the stock market along for the ride down." [11]

Prosperity Mirage

In ZIRP World and the Quantitative Easing (QE) Fed policies that zero interest rates led the Fed to turn to, a vast hallucinatory mirage of stock market growth emerged. Since ZIRP began, the S&P 500 has soared by 200 percent.

Financial Times Assistant Editor Gillian Tett noted in 2013 that Fed easy money policies were increasing the U.S. monetary base about 100 times faster than the growth of the economy. This could open the way for banks to lend vastly more at low rates. [12]

Hearing her remarks in the context of what he already knew, financial journalist Bill Bonner concluded that "central banks' monetary policies had become a kind of financial doomsday device." [13]

Take a step back from this frenzy of the Wall Street casino near 18,000 and you can begin to see more clearly. Through ZIRP and its related QE policies, the Fed has flooded the stock market with easy money.

Companies since the financial crisis began have spent more than $2 Trillion of this easy money not to make their companies more innovative or efficient, but to buy back shares of company stock. Imagine that you are a company with 10 million shares of stock and you buy back half of them, instantly putting the issues of dividends and debt and executive stock options in a more favorable light. The value of your remaining shares greatly increases, even though the company may be bringing in no more customer dollars than before.

Yet because of the easy Fed money from ZIRP and QE, your company now appears to be growing and successful, and you look like a genius. This then lures more stock buyers, desperately seeking the income that the Fed's low interest policies have taken away from their bank accounts. [14]

This "wealth effect" that former Fed Chair Ben Bernanke intended to create to stimulate consumer spending and the economy is based on inflation and easy money conjured by the Fed out of thin air. It is at best a self-fulfilling prophecy, a shared hypnotically-induced mass illusion that stocks now have more value than they really do. It is at worst a con game, a Ponzi scheme, a trick used to rob the gullible. As Forbes columnist Charles Biderman put it, what the Fed is doing to achieve this levitation of the stock market through conjured money "would be a crime if anyone other than the Fed did this." [15]

Illusion of Value

How much of current market value has been created by Federal Reserve manipulation and the odd bookkeeping and policies companies have adopted in ZIRP World? BlackRock's 2015 Investment Outlook said this:

Corporate earnings are a key risk. Analysts predict double-digit growth in 2015, yet such high expectations will be tough to meet. Companies have picked the low-hanging fruit by slashing costs since the financial crisis. How do you generate 10% earnings-per-share growth when nominal GDP is just 4%?

It becomes tempting to take on too much leverage, use financial wizardry to reward shareholders or even stretch accounting principles. S&P 500 profits are 86% higher than they would be if accounting standards of the national accounts were used, Pelham Smithers Associates notes. And the gap between the two measures is widening, the research firm finds. (Emphasis Added) [16]

If stock profits are in effect 86 percent overvalued, what happens if or when the Fed's easy money and zero interest rates that made this possible begin to go away? What happens if or when today's ZIRP-distorted market is forced to return to real values even lower than BlackRock and Pelham Smithers foresee?

Truth be told, the Fed over the past quarter-century "has only really tightened policy three separate times," wrote CNNMoney's Patrick Gillespie, and never before from the warped unreality of ZIRP World. Writes Gillespie: "Making money as the Fed raises rates won't be easy." [17]

Worldwide debt has risen since 2007 by $57 Trillion and now stands at almost $200 Trillion. The Fed raising the interest rate on borrowing U.S. dollars, the world reserve currency in perhaps 80 percent of all major trading, could bury many countries beneath mountains of hard-to-pay debt. This could make both economic and political earthquakes around the world more likely.

"Overall debt relative to gross domestic product is now higher in most nations than it was before the [2008-2009] crisis," warned consultants McKinsey & Co. in a February 2015 report. "Higher levels of debt post questions about financial stability." [18]

ZIRP World helped create this over-leveraged situation, and in the winds that will soon blow as rates rise, our own economy built of overvalued paper stocks and easy paper money could be severely damaged.

Fed decisions and policies now arguably shape America's economy more than any free market factor, as we explore in our chapter "Dawn of the Fed" in our 2014 book Don't Bank On It! The Unsafe World of 21st Century Banking. [19]

The Fed's growing power has transformed and politicized the U.S. economy into a hybrid like itself, no longer truly free enterprise, but not yet fully collectivized as Progressives desire. Our money is now Federal Reserve Notes unbacked by the gold that America's Framers looked to for independent value.

Our society and values are at a tipping point of fundamental change. Few decisions may have more impact on our future than the Fed at least temporarily giving up its power to reduce interest rates by taking them to zero with ZIRP.

We have been taken far away from America's founding ideals of personal and economic freedom. The night sky is full of unfamiliar constellations. Are we trapped on this brave new world, or can we find our way home?

The ZIRP Trap

After a central bank such as the Fed launches a policy of zero interest rates, it soon finds it difficult to escape from "The ZIRP Trap."

The ZIRP Trap is a term coined in a 2015 study by Philipp Bagus, an Economics Professor at the Universidad Rey Juan Carlos in Madrid. His study shows the many ways that this policy transforms a nation's economy and social values into a very different matrix he calls "ZIRP World." [20]

"The exit from ZIRP is likely the most difficult and important policy issue for Western economies today," writes Bagus. [21]

Most economists recognize that ZIRP was intended to be a short-term measure used to deal with an economic emergency, but that it cannot sustain a healthy economic recovery or long-term prosperity.

In the long run, ZIRP will turn America's economy into a stagnant, fetid swamp where we are neck deep in a stinking, unnatural liquidity that stunts growth and is too toxic to quench anyone's thirst.

In the long run, ZIRP World is a dead world.

It eventually conjures the kind of artificial, unnatural economics concocted by a ruling Progressive elite that workers in the former Soviet Union grimly joked about by saying: "They pretend to pay us, and we pretend to work."

Exiting this doomed economic policy is urgently necessary if we are to regain genuine health and prosperity in America.

In the short run, the political and economic cost of exiting and escaping this ZIRP Trap can be high and painful.

"Like a drug one can't stop taking, artificially low interest rates initially seem harmless," writes business journalist Gregory Bresiger. "Cheap money even seems to produce good results in the early stages. However, later comes disaster, which, once again, is looming." [22]

Condemning the Fed's easy money schemes "is a little like condemning sugar," wrote Agora Financial's Eric Fry. "Everyone knows sugar tastes wonderful. But no one really knows how much is too much...and, more to the point, almost no one wants to know how much is too much."

"The delicious sensation is immediate; the adverse side effects are distant," Fry continues. "That's reason enough for most folks to make their double ice cream cone a triple...." But like Bresiger, Fry warns that long-term gorging on the sugar of easy Fed money will destroy the needed healthy balance between speculation and prudence, and between spending and thrift. This will cause "Financial Diabetes." [23]

How ZIRP Grows Government

"Governments are one of the great beneficiaries of ZIRP," writes Bagus. [24] This near-zero-cost money allows politicians to continue spending without having to cut government's fat. Indeed, this easy money lets inefficient government continue to grow, especially in welfare state social spending.

The result is an ever-enlarging number of government dependents who can be counted on to vote for incumbent politicians.

"A government which robs Peter to pay Paul can always depend on the support of Paul," wrote the Irish Fabian socialist playwright George Bernard Shaw.

As America's only President elected four times, Franklin Delano Roosevelt said in the same vein: "Tax and tax, spend and spend, elect and elect." Politicians of his Democratic Party continue to follow his divide-redistribute-and-conquer class warfare.

ZIRP makes government spending easy, at least until the bills to repay the borrowed trillions come due during some future politicians' time in office.

ZIRP thus seduces today's elected officials into letting deficits and government indebtedness soar into the stratosphere.

What happens if the Fed soon ends ZIRP, and future refinancing of government debt requires payment of several percent interest on money the government now borrows at near-zero interest? The historic average market interest rate for borrowed money is between 5 and 6 percent. Six percent of $18.6 Trillion would be more than $1.1 Trillion in yearly interest, an increase of roughly one-third to the annual tax burden Americans already carry....and that is already slowing our economy.

As ZIRP World Turns

The Federal Reserve has made sure that giant banks have ample liquidity, but it has also warned those banks to avoid making "risky loans" of the kind that liberal Presidents Jimmy Carter and Bill Clinton forced them to make under the Community Reinvestment Act. This law is a root cause of the 2008-2009 housing bubble collapse whose aftershocks plague us today.

This avoidance of risk left the banks with only a few entities to which they could safely lend money - the government, which has the power to tax and print money and therefore can never go broke; the largest corporations; and the Federal Reserve itself.

Today at least 18 percent of bank money is now deposited - and earning low but very safe interest - with the government and/or Federal Reserve.

What is unseen in this, writes Bagus, are the small businesses and entrepreneurs who have been crowded out, unable to secure loans or assets because of this ZIRP policy that preserves giant corporations and keeps bloated government afloat....but refuses loans at near-zero interest to the rest of us. [25]

"In general, a ZIRP environment makes an economy more rigid and less dynamic because low interest rates favor large established companies versus small, newer ones and shield them from their competition....," writes Bagus. "It becomes more difficult to start a new business in a ZIRP world where established companies have easy access to cheap loans...." [26]

Easy ZIRP money allows big companies to control more of the market via leveraged buy-outs, take-overs and stock buy-backs. The Fed's policy has made it easier for companies to buy new technologies, including robots, to replace human workers.

And ZIRP has let multinational companies move jobs and keep profits overseas, away from America's business taxes - the highest in the world: on average, a 46.3 percent combined federal, state and local tax burden on American businesses [27] - while running their United States offices and factories with tax-exempt, zero-interest borrowed money.

Apple, for example, has a "cash pile of $170 billion and counting," writes Forbes columnist Tim Worstall, yet it is borrowing $6.5 Billion, as it has borrowed more than $20 Billion over the past two years. Why? "The reason it's doing so is the tax system," writes Worstall. [28]

Meanwhile, money borrowed by the government to enlarge itself and its own "workforce" is money not available for the private sector to grow companies, innovate new products, or hire new employees who do real, productive work.

Welcome to BorroWorld

Another way to think of ZIRP World is what we call "BorroWorld," an unreal land where politicians and government planners assume we really can borrow our way back to prosperity.

Progressives may mock any religious belief in God, but they have their own dogmatic belief in Santa Claus - in the idea that Uncle Santa government has a bottomless bag of free goodies that can be given away, even if all the makers move overseas and only a slacker nation of Gimme Pig takers remains.

Prior to the economic crisis of 2008-2009, we were told that Americans had begun a 15-year period of "deleveraging," of ending our credit card binge, paying down our loans and other debts, and getting back to honest economic basics such as saving.

This claim was questionable. Millions of Americans during the early 21st Century turned their homes into ATM machines, borrowing against their rising equity as easy lending and politically-coerced lowered lending standards drove home prices into the stratosphere. We explain and document all this in our 2014 book Don't Bank On It! [29]

Thanks to the advent of ZIRP, the housing crash of 2008-2009 did not end BorroWorld. In some ways, the Progressive notion that we could tax, spend and borrow our way to prosperity expanded.

"ZIRP reduced the pressure to pay back debts for variable rate payments," writes Bagus. "Instead incentives were created to increase indebtedness even more at lower interest rates. Indeed, central banks wanted the private sector to start increasing its indebtedness." [30]

Many in the private sector reduced their indebtedness despite these incentives, but, "while private agents deleveraged, the public sector increased its leverage," going deeper into debt. [31]

ZIRP money quickly tilted market competition to favor borrowers over those using traditional equity. With ZIRP, writes Bagus, "leverage becomes extremely attractive, and companies that keep financing themselves with equity are at a disadvantage. Lower interest rate spreads also pressure banks to increase their leverage. The structure of the financial sector is weakened as the banks' equity ratio falls." [32]

The harm caused by near-zero interest rates thus spreads. When banks pay near-zero interest rates to savers, they discourage the capital formation that in an earlier era came from thrift - from people having the self-discipline to defer pleasure today and to save in order to earn greater rewards tomorrow.

Losing Interest

The Federal Reserve almost openly is practicing what economists call "financial repression," deliberately holding the rate of interest banks can pay savers below the rate of inflation. This guarantees that savers every day will lose more in purchasing power to inflation than they gain in interest paid on their bank accounts. [33]

Forget about accumulating a pleasant retirement nest egg safely through compound interest. ZIRP eliminates the cautious, prudent saver that uses traditional low-risk forms of savings. Like the 1923 hyperinflation in Weimar Germany, ZIRP erodes bedrock middle-class values on which genuine prosperity and free enterprise depend - thrift, prudence, independence, a work ethic and entrepreneurial virtues, among other things. [34]

This financial repression, it appears, is intended to force savers to look elsewhere and face moral hazard in order to receive a reasonable rate of return on what they have earned. As we argue in Don't Bank On It!, the government and Fed appear to be systematically closing off the relatively safe havens for savings - and to be herding ordinary Americans into the high-risk casino of the stock market, where they can be sheared by its sharpers.

Savers are not the only victims of the decline in interest. "[D]efined benefit pension funds become troubled as they fail to earn sufficient returns with ZIRP," writes Bagus. "Similarly, life insurance companies that also invest in safe financial titles such as bonds incur difficulties to earn sufficient returns on their investments."

"In such a situation, we can expect insurance companies as well as money market funds to 'reach for yield,'" Bagus continues, "i.e. assume more risk in order to obtain higher yields." [35]

ZIRP thus pushes people who used to have relatively safe options for their retirement savings into more and more risky investments and malinvestments. The overall effect of this is to further destabilize the economy and peoples' lives.

And in the productive sector, ZIRP "makes early debt repayment less attractive and encourages companies to borrow even more."

"This reliance on debt affects business culture, especially if ZIRP prevails for a sustained period of time," he writes. "Highly indebted or leveraged companies tend to behave differently than companies that have no or few debts." [36]

In such a ZIRP World, the owners of highly-leveraged companies lose a measure of independence, often needing the approval of creditors for their decisions. Both owners and managers feel pressure to generate cash more quickly, to adopt policies that bring in maximum money this quarter for debt repayment, not wiser policies that will improve company profits over many years. [37]

In many such ways, ZIRP undermines the health of the body politic and the free market economy. It not only sucks away the lifeblood of capitalism - capital - but also destroys the morals, values, entrepreneurship, work ethic and thrift needed for successful free enterprise.

Less Than Zero

We may, however, soon look back longingly on ZIRP as the good old days. From Europe a new, even more extreme approach to central bank interest rates is now rapidly spreading - less-than-zero, sub-zero or as it is becoming fashionable to call them, "negative" interest rates.

Facing negative rates, someone opening a bank account of, say, $100 will expect to get back only $98 a year later....and, thanks to deliberate inflation, this might have only $96 of purchasing power compared to the original $100 a year earlier.

Instead of increasing their nest egg, such depositors in five years will lose roughly one fifth of the total purchasing power they put in their bank.

The European Central Bank (ECB) cut a key interest rate below zero in June 2014. Small central banks in Europe have occasionally used negative rates before, and in July Sweden again cut its deposit rate below zero. Denmark followed in September, and Switzerland in December. [38]

Why take the 20 major bank depositor risks we document in Don't Bank On It! if your bank is paying you less than nothing - is charging you money just for the honor of having a bank account?

Many are now closing their accounts if all the bank offers them is risk and guaranteed loss. This is why commercial banks in Denmark have been paying for their depositors' negative rates, out of fear of losing customers.

As Bloomberg's Jana Randow reports, "When banks absorb the costs themselves, it squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend." [39]

Today's central banks tend to follow the views of the late British economist John Maynard Keynes, whose "paradox of thrift" holds that saving money in the bank is bad because it reduces the quantity and velocity of money in the marketplace. According to Keynesian macroeconomics, forcing savers to withdraw their money is good. The more and faster their money is spent, the more it stimulates economic growth. Both ZIRP and negative interest rates, in this view, are merely useful kinds of financial repression to force bank savings back into commerce.

Central banks are also trying to increase inflation, in part to help devalue their own currencies so that their nations' exports are less expensive and more competitive in foreign markets. Zero or Below-Zero central bank interest rates are becoming a standard tactic in today's currency wars.

Central banks also use deliberate inflation as an antidote to deflation, in which the currency increases in value. Inflation prompts people to hurry and spend their money, whose value keeps declining. Deflation encourages people to keep their money because it will be even more valuable tomorrow than it is today. (And governments eagerly use inflation as a hidden regressive tax, as we explored in our book The Inflation Deception. [40].

Giant banks go along with central negative interest policies not only because they must, but also because they can. If depositors are willing to pay the banks for taking their money, instead of demanding interest on what are really customer loans to the bank, then banks will happily take their customers' money.

And this shearing of compliant sheep is spreading rapidly to other parts of the economy. Governments and giant corporations such as Nestle have begun issuing bonds that pay less than zero interest - and customers are snapping these up.

Unyielding

The fashionable new term among these investors is "ZYNY," which stands for "Zero-Yield to Negative-Yield," as they seek desperately for some place to put their savings that will create some kind of gain. They listen when JPMorgan Chase reported in January 2015 that 16 percent of its Global Bond Index - roughly $3.6 Trillion worth of developed market government bonds - was at negative yield. [41]

"Zero yields on safe government debt pushes the search for yield into hyperdrive, swamping local fundamentals," said JPMorgan. "Term Premia, liquidity premia, and volatility premia are all under pressure." This is how hyperdrive likewise takes us to a strange, troubled future on what CNBC calls "A ZYNY world." [42]

Perhaps such buyers are gullible and unthinking. Or perhaps they sense that economies are in trouble all over the world, that huge losses are coming, and they are content if some entity can preserve most of their money. They hope their profit will come if their paper money rises in value after the crisis begins.

Many seem unaware that today's fiat currency in a crisis might lose value faster than the promises of the politicians who printed it out of thin air. Never having lived under the stability of America's historic gold standard, many simply do not understand that far more reliable wealth preservers exist than paper money.

Up to a point, ZIRP and negative interest rates increase inflation in an economy. However, as current Fed Chair Janet Yellen testified during her 2013 confirmation hearing, the closer the deposit rate gets to zero, the bigger the risk of disruption to the money markets that help fund banks. [43]

"When rates fall beyond a certain point," warned the London-based Financial Times in February 2015, "hoarding physical cash becomes rational, as does sinking it into assets like gold or property...." [44]

With central banks boasting of their plans to debase national currencies via deliberately-created inflation - that is, to steal the value from those who trust their nation's money - today it makes urgent sense to diversify and convert a portion of one's savings from paper fiat money into solid, reliable stores of value such as gold.

"Life below zero interest must not become the new normal," says a Financial Times editorial. [45]

Yet for much of the world, this is becoming the latest giant step away from honest money and free markets - and towards the very unfree market of politicized, manipulated currency and economies.

Four ZIRP Future Scenarios

What is the future of ZIRP? Philipp Bagus sees four possible scenarios, which we expand as follows:

1. ZIRP continues and, at least in the short run, causes another artificial boom based on financial bubbles. The mass hallucination of hypnotized people continues. After all, as 19th Century French economist Frederic Bastiat once said, "The state is the great fiction by which everyone tries to live at the expense of everyone else. What we forget is that government lives at the expense of all of us." At some point these bubbles will burst.

2. ZIRP causes stagnation and an economy that "lingers in a recession-like, anemic state." The government has gone $7.5 Trillion deeper into debt since 2009, but the stimulus of all this money has produced a stagnant U.S. economy struggling to maintain 2 percent growth while America has the smallest percentage of working-age Americans with jobs since President Jimmy Carter's malaise in 1978. America today has almost as many people receiving Social Security Disability benefits as are employed full time in manufacturing, actually making things of value.

Fully 49.5 percent of American households have at least one person receiving a government benefit of some kind. In Hawaii a welfare recipient is given as much in tax-free benefits as someone earning $60,000 per year keeps after paying taxes. Tax increases to fund the welfare state are devouring the capital seed corn that used to grow future private sector prosperity. Our future is being lost in this downward spiral.

3. ZIRP triggers financial collapse as governments and giant banks default on the huge, low-interest debts they have run up. The economic landslide that began in 2008 can no longer be held back and this time drags the whole economy down with it.

4. ZIRP is overcome by American optimism and effort. The American people's hard work, faith and traditional values triumph over Progressive collectivism. We kick government-dependent addiction to Uncle Sugar's Progressive welfare state, and are cured of economic diabetes. Life again becomes naturally sweet, prosperous and free.

We would add that such a restoration of America depends on millions of us keeping traditional economic and ethical values alive in our own lives. [46]

One way to preserve such values is to teach our children by example. For instance, the government took away the dollar gold standard, but we can each rebuild our own gold standard by converting a saving remnant of our nest egg into this constitutional, Biblical money that needs no central bank or government to give it value.

Have you and your children ever held the kind of solid gold coin that George Washington and Thomas Jefferson carried? Just holding such a coin that needs no Fed behind it is a life-changing educational moment. It is a doorway back to the American Republic and values they established for future generations.

On the day that people have their own independent solid money again, the Federal Reserve and all its schemes like ZIRP can be bypassed on our road back home to America. The biggest bank heist in history will be over, and you will no longer be paying the price for Banks and Government getting gain from your pain.

[1] Gregory Bresiger, "ZIRP: Or How The Fed Gave the US Financial Diabetes," DailyReckoning.com, December 18, 2013. URL: http://dailyreckoning.com/zirp-or-how-the-fed-gave-the-us-financial-diabetes/

[2] Alan Blinder, After the Music Stopped: The Financial Crisis, The Response, and The Work Ahead. New York: Penguin, 2013.

[3] Craig Torres and Matthew Boesler, "Fed Prepares to Maintain Record Balance Sheet for Years," Bloomberg, June 11, 2014. URL: http://www.bloomberg.com/news/articles/2014-06-11/fed-prepares-to-keep-super-sized-balance-sheet-for-years-to-come; Jon Hilsenrath, "Fed Closes Chapter On Easy Money," Wall Street Journal, October 29, 2014. URL: http://www.wsj.com/articles/fed-ends-bond-buys-sticks-to-0-rate-for-considerable-time-1414605953; Ylan Q. Mui, "Fed Looks Toward Debate On Raising Rates As Quantitative Easing Ends," Washington Post, October 29, 2014. URL: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/10/29/fed-looks-toward-debate-on-raising-rates-as-quantitative-easing-ends/

[4]Michael S. Derby, "Fed's Bond Buying Yields Bonanza for Treasury," Wall Street Journal, January 9, 2015. URL: http://www.wsj.com/articles/feds-bond-buying-yields-bonanza-for-treasury-1420830368

[5]Nicole Gelinas, "Of Interest at the Fed," City Journal, Winter 2015. URL: http://www.city-journal.org/printable.php?id=11022

[6] Steve Matthews and Matthew Boesler, "Bullard Says Markets Wrong Not to Expect Mid-Year Rate Rise," Bloomberg, January 30, 2015. URL: http://www.bloomberg.com/news/articles/2015-01-30/bullard-says-investors-wrong-not-to-expect-rate-rise-by-mid-year

[7] Binyamin Appelbaum, "Federal Reserve Won't Raise Interest Rates Before June, at Earliest," New York Times, January 28, 2015. URL: http://www.nytimes.com/2015/01/29/business/federal-reserve-rate-decision.html?_r=0

[8] John Mauldin, "The Unintended Consequences of ZIRP," Thoughts from the Frontline (Newsletter), November 17, 2013. URL: http://www.mauldineconomics.com/frontlinethoughts/the-unintended-consequences-of-zirp

[9] "Why Are Interest Rates Being Kept at a Low Level?" FAQ response by the Board of Governors of the Federal Reserve System. Last updated: November 3, 2014. URL: http://www.federalreserve.gov/faqs/money_12849.htm

[10]Charles Biderman, "How The Fed Is Helping To Rig The Stock Market," Forbes, January 30, 2013. URL: http://www.forbes.com/sites/investor/2013/01/30/how-the-fed-is-helping-to-rig-the-stock-market/; for additional perspective see John Crudele, "Lessons from Stock-market Rigging History," New York Post, April 9, 2014. URL: http://nypost.com/2014/04/09/lessons-from-stock-market-rigging-history/; "How the Fed Began Rigging the Stock Market," New York Post, October 23, 2012. URL: http://nypost.com/2012/10/23/how-the-fed-began-rigging-the-stock-market/; John Crudele, "When Fed Takes Stock, Fed Really Takes Stock," New York Post, December 24, 2013. URL: http://nypost.com/2013/12/24/when-fed-takes-stock-fed-really-takes-stock/; Adam Shell, "How Much Longer Can the Fed Prop Up Stocks?" USA Today, May 2, 2013. URL: http://www.usatoday.com/story/money/markets/2013/05/02/can-fed-keep-propping-up-stocks/2129787/

[11]Michael Pento, "Fed Rigs Markets, Not the Flash Boys," Huffington Post, April 15, 2014. URL: http://www.huffingtonpost.com/michael-pento/fed-rigs-markets-not-the_b_5152500.html

[12]Bill Bonner, "Inside Ben Bernanke's Doomsday Device," Mises Canada, July 11, 2013. URL: http://mises.ca/posts/articles/inside-ben-bernankes-doomsday-device/

[13]Ibid.

[14]Dan Strumpf, "Companies' Stock Buybacks Help Buoy the Market," Wall Street Journal, September 15, 2014. URL: http://www.wsj.com/articles/companies-stock-buybacks-help-buoy-the-market-1410823441; Jonathan Clements, "The Downside to Stock Buybacks: There Could Be Better Uses for the Money," Wall Street Journal, October 25, 2014. URL: http://www.wsj.com/articles/the-downside-to-stock-buybacks-1414284206

[15]Charles Biderman, "How The Fed Is Helping To Rig The Stock Market," Forbes, January 30, 2013. URL: http://www.forbes.com/sites/investor/2013/01/30/how-the-fed-is-helping-to-rig-the-stock-market/

[16]BlackRock Investment Institute, Dealing With Divergence: 2015 Investment Outlook. New York: BlackRock Investment Institute, December 2014. Page 15. URL: https://www.blackrock.com/corporate/en-us/literature/whitepaper/bil-2015-investment-outlook-us.pdf; Tyler Durden, "Blackrock Stunner: S&P 500 Profits Are 86% Higher Than They Would Be Without Accounting Fudges," ZeroHedge, December 26, 2014. URL: http://www.zerohedge.com/print/499570

[17]Patrick Gillespie, "Making Money As The Fed Raises Rates Won't Be Easy," CNNMoney, February 3, 2015. URL: http:moneycnn.com/2015/02/03/investing/federal-reserve-rate-hike-2015/

[18]Richard Dobbs and others, "Debt and (Not Much) Deleveraging," McKinsey Global Institute, February 2015. URL: http://www.mckinsey.com/insights/Economic_Studies/Debt_and_not_much-deleveraging?cid=mckgrowth-eml-alt-mgi-mck-oth-1502 ; Ralph Atkins, "Debt Mountains Spark Fears of Another Crisis," Financial Times February 5, 2015. URL: http://www.ft.com/intl/cms/s/0/2554931c-ac85-11e4-9d32-00144feab7de.html#axzz3RNtOe4Vj

[19]Craig R. Smith and Lowell Ponte, Don't Bank On It! The Unsafe World of 21st Century Banking. Phoenix: Idea Factory Press, 2014. Pages 83-104.

[20] Philipp Bagus, The ZIRP Trap: Why Low Interest Rates Are a Tax on Recovery. (IREF Working Paper No. 201502). Paris: Institut de Recherches Economiques et Fiscales / Institute for Research in Economic and Fiscal Issues, January 2015. URL: http://de.irefeurope.org/SITES/de.irefeurope.org/IMG/pdf/bagus_2015_final.pdf

[21] Ibid., page 1.

[22] Gregory Bresiger, "ZIRP: Or How The Fed Gave the US Financial Diabetes," DailyReckoning.com, December 18, 2013. URL: http://dailyreckoning.com/zirp-or-how-the-fed-gave-the-us-financial-diabetes/

[23] Eric Fry, "Financial Diabetes," DailyReckoning.com, September 19, 2012. URL: http://dailyreckoning.com/financial-diabetes/

[24] Bagus, Op cit., page 7.

[25] Bagus, Op cit., pages 8-9.

[26] Bagus, Op cit., page 18.

[27] Paying Taxes 2014: The Global Picture: A Comparison of Tax Systems in 189 Economies Worldwide (Monograph). London: PricewaterhouseCoopers, 2014. URL: http://www.pwc.com/gx/ en/paying-taxes/assets/pwc-paying-taxes-2014.pdf ; Craig R. Smith and Lowell Ponte, Don't Bank On It! The Unsafe World of 21st Century Banking. Phoenix: Idea Factory Press, 2014. Page 138.

[28] Tim Worstall, "Why Apple Is Borrowing $6.5 Billion And What Obama's Trying To Do About It," Forbes, February 3, 2015. URL: http://www.forbes.com/sites/timworstall/2015/02/03/why-apple-is-borrowing-6-5-billion-and-what-obamas-trying-to-do-about-it/

[29] Craig R. Smith and Lowell Ponte, Don't Bank On It! The Unsafe World of 21st Century Banking. Phoenix: Idea Factory Press, 2014. Pages 105-133.

[30] Bagus, Op cit., page 14.

[31] Bagus, Op cit., page 14.

[32] Bagus, Op cit., page 14.

[33] Carmen M. Reinhart, "Financial Repression Back to Stay," Bloomberg, March 11, 2012. URL: http:// www.bloomberg.com/news/2012-03-11/financial-repression-has-come-back-to-stay-carmen-m-reinhart. html; Carmen M. Reinhart and M. Belen Sbrancia, "The Liquidation of Government Debt," National Bureau of Economic Research (NBER) Working Paper # 16893. March 2011. URL: http://www.imf.org/ external/np/seminars/eng/2011/res2/pdf/crbs.pdf; Alberto Giovanni and Martha De Melo, "Government Revenues from Financial Repression," American Economic Review, Vol. 83 #4 (September 1993). URL: http://www.jstor.org/discover/10. 2307/2117587 uid=3739560&uid=2&uid=4&uid=3739256&s id=21101221127691; Buttonwood, "Carmen Reinhart and Financial Repression," The Economist, January 10, 2012. URL: http://www.economist.com/blogs/buttonwood/2012/01/debt-crisis/print; Member of the European Parliament Nigel Farage, "Europe Is About to Impose Extreme Repression," King World News (Interview), June 22, 2012. URL: http://kingworldnews.com/kingworld- news/KWN_DailyWeb/ Entries/2012/6/22_Nigel_Farage_-_Europe_is_About_to_Impose_Extreme_Repression.html

[34] Bagus, Op cit., page 21.

[35] Bagus, Op cit., page 15.

[36] Bagus, Op cit., page 17.

[37] Bagus, Op cit., page 17.

[38] Jana Randow, ""Less Than Zero: When Interest Rates Go Negative," Bloomberg, December 18, 2014. URL: http://www.bloombergview.com/quicktake/negative-interest-rates; see also Charles Duxbury and Tommy Stubbington, "Sweden Cuts Interest Rate to Zero: Krona Falls After Riksbank Moves to Boost Inflation," Wall Street Journal, October 28, 2014. URL: http://www.wsj.com/articles/sweden-cuts-interest-rate-to-zero-1414486236; Brian Blackstone, Paul Hannon and Marcus Walker, "Aggressive ECB Stimulus Ushers In New Era for Europe," Wall Street Journal, January 22, 2015. URL: http://www.wsj.com/articles/ecb-announces-stimulus-plan-1421931011; Jason Karaian, "Welcome to Europe, Where the Bond Market Is Upside Down," Quartz / Atlantic Monthly, February 6, 2015. URL: http://qz.com/339843/welcome-to-europe-where-the-bond-market-is-upside-down/

[39] Ibid.

[40] Craig R. Smith and Lowell Ponte, The Inflation Deception: Six Ways Government Tricks Us...And Seven Ways to Stop It! Phoenix: Idea Factory Press, 2011.

[41] Leslie Shaffer, "Why Yields May Take Another Leg Down," CNBC, February 2, 2015. URL: http://www.cnbc.com/id/102387816

[42] Ibid.

[43] Randow, Op cit.

[44] "Life Below Zero Interest Must Not Become The New Normal" (Editorial), Financial Times, February 6, 2015. URL: http://www.ft.com/intl/cms/s/0/7a83595c-adf9-11e4-919e-00144feab7de.html#axzz3RBhKFm3W

[45] Ibid.

[46] Bagus, Op cit., page 24.