View Full Version : Welcome to ZIRP

12-16-2008, 05:35 PM
Welcome to ZIRP (http://market-ticker.denninger.net/archives/691-Welcome-to-ZIRP.html)

It doesn't take any more description than that.

There's nothing bullish about this folks. Nor is there any common sense behind this.

Bernanke clearly thinks (from the FOMC statement (http://federalreserve.gov/newsevents/press/monetary/20081216b.htm)) that he can "restart borrowing." After all, that's what he really means when he says "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth."

Again, the graph:
From 1980 The Federal Reserve has defined "economic growth" as "borrow faster than you grow output." This, as I have repeatedly shown, leads to declaring growth that never really happened.

Bluntly - Bernanke and the rest of the FOMC need their lithium dose increased.

We are here because of excess credit creation which The Federal Reserve caused, and their solution is more borrowing?

That gives new life to the statement "when all you have is a hammer, everything looks like a nail."

Unfortunately the impact of this decision was a total implosion in the TNX (or 10 year Treasury); in other words, a total flattening of the yield curve.

And since banks borrow short to lend long, this means that the very foundation of that which allows banks to make money is being systematically destroyed at the same time.

Worse, this is causing the dollar to get slammed - at least for a little while. Japan suddenly looks prudent compared to us, and the Yen is screaming.

What comes next?

Do you really want to know?

These sorts of actions ignite wars.

Choose between a trade war (about 75% chance) and a shooting war (the other 25%)

The dollar weakness, by the way, won't last. Either sort of war puts every other nation in the world in worse shape than us, which over time leads to the same place - "we're screwed but they're screwed worse."

The only nations that won't be are those who are intelligent enough to repudiate this stupidity in public and back up their mouth with acts.
That's likely to be a short list.

Bernanke needs to be removed from office and Congress needs to grow a pair and shut this crap down while we still have an economy left to save.


12-16-2008, 05:38 PM
It's not quite the zero point. Still room for 2 more quarter rate cuts or 1 cut of 50basis points. If that happens, we'll be at ZIRP. Don't get me wrong, it may happen. It just hasn't quite happened yet.

12-16-2008, 05:46 PM
It's not quite the zero point. Still room for 2 more quarter rate cuts or 1 cut of 50basis points. If that happens, we'll be at ZIRP. Don't get me wrong, it may happen. It just hasn't quite happened yet.

They cut the rate to between zero and 25 bps. Why is that not zero and how would they get two more 25 bps or one 50 bps cut?

12-16-2008, 05:53 PM
The dollar will be the only currency soon.

12-16-2008, 05:59 PM

Mother of all Hail Mary's....

Nothing much left in the quiver.

This will not end well. :cool:

12-16-2008, 06:06 PM
They cut the rate to between zero and 25 bps. Why is that not zero and how would they get two more 25 bps or one 50 bps cut?

You're right, they cut the rate to 25bps with discretion to allow it to drop below that. So there is only enough room for 1 more cut of 25bps. It's darn close to the ZIRP.

12-16-2008, 10:17 PM
Well, in any case, while Wall Street seemed to like this, the currency markets around the world didn't... look at the dollar drop 2 points almost instantly, and it's trading against the Euro at $1.40 (last week it was in the high $1.20s). So far, oil hasn't reacted, but I suspect it will tonight or tomorrow... what happens after that is anyone's guess...

Franc (penguinzee)

12-21-2008, 06:09 AM
Helicopter Ben Goes ZIRP!
Nouriel Roubini, 12.18.08, 12:00 AM EST
The Fed's zero-interest-rate policy.

The Fed decision to cut the Fed Funds range to 0%-0.25% has formalized the fact that, over the last month, the Fed had already moved to a zero-interest-rate policy, or ZIRP, and started a policy of quantitative easing (QE) as its balance sheet has surged over the last few months from $800 billion to over $2 trillion.

The Fed is now undertaking even more unorthodox policy actions. These actions are occurring while the U.S. and the global economy are at risk of a protracted bout of "stag-deflation" (stagnation and deflation).

While it is now fashionable to talk about such deflationary risks (and the latest U.S. Consumer Price Index figures confirm that we are entering into deflation) some of us were worrying about the coming deflation well before the mainstream--concerned with short-run and unsustainable increases in commodity prices--discovered the deflationary risks in the global economy.

It was clear to those who saw, early on, the risks of a severe U.S. and global recession, that deflationary rather than inflationary pressures would emerge alongside a slack in goods, labor and commodity markets. Welcome to the world of stag-deflation or, as Paul Krugman would put it, the world of "depression economics."

So what is the outlook for 2009? And what is the likely policy response to the risks of a global stag-deflation?

The outlook for the U.S. and the global economy is now very bleak and getting worse as the global economy experiences its worst recession in decades. In the U.S., recession started last December and will last at least 24 months until next December--the longest and deepest U.S. recession since World War II, with the cumulative fall in gross domestic product possibly exceeding 5%.

In comparison, the last two recessions in 1990-91 and 2001 lasted only eight months each and the cumulative fall in GDP was only 1.3% and 0.4%, respectively. There is also a risk that this deep and protracted U-shaped recession (the mainstream consensus view of a V-shaped short and shallow recession is now out the window) may morph into a more severe Japanese style L-shaped recession unless aggressive fiscal policy and recapitalization of the financial system is enacted.

The recession in other advanced economies (the euro zone, the U.K., other European economies, Canada, Japan, Australia and New Zealand) started in the second quarter of this year, before the financial turmoil in September and October further aggravated the global credit crunch. This contraction has become even more severe since then. I donít expect growth in the advanced economies to recover before the end of 2009.

There is now also the beginning of a hard landing (growth well below potential) in emerging markets as the recession in advanced economies, falling commodity prices and capital flight all take their toll on growth.

Indeed, the world should expect a recession (growth in the -1 to -2% range) in Russia and a near recession (growth close to zero) in Brazil next year, owing to low commodity prices. There will also be a very sharp slowdown in China and India that will be the equivalent of a hard landing for these countries. In China the latest figures for electricity use, exports and imports suggest that the economy is already close to the hard landing scenario of a growth rate of 5%. The deceleration of growth in China is much more rapid than expected.

Other emerging markets in Asia, Africa, Latin America and Europe will not fare better and some may experience full-fledged financial crises. More than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey and Ukraine in Europe; Indonesia, South Korea and Pakistan in Asia; and Argentina, Venezuela and Ecuador (a country that has just defaulted on its sovereign debt) in Latin America.

What is the policy response in the U.S. and other countries to this risk of a global stag-deflation?

The Fed decision to cut the target for the Fed Funds rate to the 0% to 0.25% range is just underwriting what was already obvious and happening in reality: While the target Fed Funds was until Tuesday still 1%, in the last few weeks--following the massive increase in liquidity by the Fed--the actual Fed Funds was already trading at a level literally close to 0%.

So the Fed just formalized what had already been happening for weeks now, i.e., that the Fed Funds rate was already zero and that the Fed had already moved to quantitative and qualitative easing (QE) in the form of a massive increase in the monetary base and aggressive use of monetary policy to reduce short-term and long-term market rates that are stubbornly high in a sign that the credit crunch is severe and worsening.

I predicted early in 2008 that the Fed Funds rate "would be closer to 0% than to 1%" in the midst of a severe recession. Now, 12 months into this severe recession--a recession that will last at least another 12 months (if not, as is possible, much longer)--the Fed Funds rate is already down to 0% (the beginning of the zero-interest-rate-policy, or ZIRP, for the U.S.) and the Fed has moved into uncharted unorthodox monetary policy as a severe stag-deflation is taking place.

And, as predicted by me over a month ago, the Fed is now committed to keep the Fed Funds rate close to zero for a long time (as a way to push lower long term Treasury yields); purchasing agency debt and agency MBS in massive amounts; and even considering purchasing long-term Treasuries as a way to push lower long-term government bond yields that are already falling sharply.

More aggressive policy actions may be undertaken by the Fed as a severe credit crunch shows no signs of relenting. In a 2002 speech on deflation, Ben Bernanke spoke even of helicopter drops of money, monetizing fiscal deficits and even buying equities.

The latter actions have already been partially undertaken: The Fed is effectively already monetizing U.S. fiscal deficits as the purchase of markets assets is financed with the Fed printing presses rather than the TARP program. And now, with the Fed considering the purchase of long-term Treasuries, such monetization of deficits will be made more formal.

Also, since the TARP has been turned into a program to recapitalize financial institutions (and thus boost their capital and market value), the U.S. has already effectively intervened indirectly in the equity market (by partially nationalizing a good part of the financial system). Once the Fed starts to buy the long-term Treasuries financing the TARP program, this indirect Fed purchase of U.S. equities will be even clearer.

While Fed actions to reduce mortgage rates--via purchases of agency debt and agency MBS--are partially successful as long-term mortgage rates are falling, most of the Fed purchases of private assets have been so far limited to very high-grade securities.

Thus, the gap between the yield on high-grade commercial paper purchased by the Fed and the one that the Fed is not purchasing is sharply rising; ditto for the gap between agency MBS and private label MBS. Also, while long-term Treasury yields are sharply falling, the spread of corporate bonds--both high-yield and high-grade--relative to Treasuries remains huge as a sign of a severe credit crunch.

Thus, as a next step, the Fed may be soon forced to walk down the credit curve and start buying private short-term and long-term securities with lower credit ratings. That would mean the Fed will take on even more credit risk than it is already taking on today while purchasing illiquid private assets. But desperate times lead to desperate actions by desperate policy makers.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.


12-21-2008, 06:44 AM
what's "total U.S. debt" , how is it defined ?

apparantly not this one: