Zero Interest Rate Policy (ZIRP) has propped up bond prices and inflated a stock market bubble, but at what cost and when will it end? How will it end?
The cost of ZIRP has been a quintupling of the money supply that is certain to cause inflation, and the Federal Reserve knows it. The Fed is trying to gaslight investors into thinking inflation will be transitory. But they can't control our minds or interest rates for long.
Inflation will cause increases in interest rates despite Fed efforts to maintain control. Here again we're being gaslighted into believing that tapering will be the cause. Interest rates are going up regardless of who is turning the interest rate dial - investors or the Fed. Absent Fed manipulation against them, investors require a return on investment that is above inflation - a real return.
Insane money printing
The US government is poking the inflation bear, printing insane amounts of money testing to see its inflationary effects. We've even out-poked Japan. The M1 money supply has quintupled from $4 trillion at the beginning of 2020 to $20 trillion today and there is hot Congressional debate about printing another $4.5 trillion.
Forget the printing press. Money is "printed" when the Treasury issues debt. In "normal" times, investors, including foreigners, invest in this debt, but most of the new debt has been bought by the Federal Reserve. This game reveals itself in the money supply.
The money supply has increased because of spending on Quantitative Easing (QE), ZIRP, COVID relief and new government programs. Most are noble purposes, but the price tag is imminent inflation. Inflation will increase interest rates, putting an end to ZIRP.
The end of ZIRP
Some call it "Taking the punchbowl away" because the party is over. ZIRP has artificially inflated stock and bond prices. The inflation we haven't seen in the CPI has all been in security prices. Inflation goes where the money goes.
Bond prices will plummet because that's what happens when interest rates increase.
Stock prices will fall because the present value of future earnings will plunge. Stocks will be worth less because the discount rate will be higher.
We are currently getting a glimpse of the inflation that lies ahead. There is still time to protect. Cybercurrencies are a reaction to the possibility that fiat money could become worth less or even worthless. Other defenses include TIPS (Treasury Inflation Protected Securities), real estate, precious metals, and a host of derivatives (like put options) that bet on decreases in stock and bond prices.
Do you see ZIRP in your future?