Zirp, Nirp and Debt

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Finanza Operativa di Finanza Operativa 10 Maggio 2016 | 13:00

A cura di di Walter Snyder, Swiss Financial Consulting

This Newsletter has previously examined various aspects of ZIRP, NIRP and QE with relation to debt. With few exceptions, however, Venezuela among others, there has been very little inflation or hyperinflation, especially in the US, EU, Japan and China. The inflation that one would have expected because of QE has been dampened by ZIRP and NIRP. This Newsletter has also suggested different strategies that investors could employ in dealing with this situation.

What is rather disturbing is that the central bankers have had no experience with the policies that they are following. Theoretically, according to them, consumers should spend more if saving produces no returns and companies should invest in capital expenditure instead of engaging in repurchase schemes. The hope is that growth will be stimulated by low or negative interest rates. Stagnation seems to be the result, and the cyclical nature of economics has apparently brought on a slowdown after the so-called recovery that followed the Great Recession of 2008.

The conclusion is that the central bankers do not know what they are doing as there are no historical precedents for the current QE, inflation, ZIRP and NIRP situation characterized by huge debts. If the last crisis was fended off by taking on large sums of debt, lowering interest rates and showering the system with liquidity, the next crisis, which seems already to be upon us, will find the central bankers with few alternatives. One, which was suggested in an earlier Newsletter, would be for central banks to buy government paper and then cancel the debt. It remains to be seen if this would widen the credibility gap for fiat currencies and result in catastrophe.

What could happen is illustrated by the recent find in Spain of 590 kilos of bronze Roman coins from the end of the 3rd and early 4th century. The currency had been debased to such an extent by that time that the authorities did not even try to coat the coins with silver. The examples of hyperinflation in the Weimar Republic and more recently in Zimbabwe will hopefully not be replicated. This is highly improbable since the central banks are waging a war on cash, ostensibly to fight money laundering but really to make it possible to control totally all the money on account anywhere. Even those who buy gold run the risk of having the government confiscate their holdings as FDR did in 1933 with an executive order. Gold was bought by the government with paper dollars. Those who wanted to hold their gold either hid it or placed it outside the US.  In Germany people used outlawed gold to flee the country in order to save their lives. SOS, SOS, SOS (Save Our Souls).

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