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We’ve Been ZIRPed

It isn’t easy to earn interest income these days. Interest rates on government T-bills, banks’ savings accounts, and certificates of deposit are microscopic. You can blame our government and central bank. They have “ZIRPed” millions of American savers. Here are the details:

According to the U.S. Treasury Department, the average interest rate paid on federal debt, as of July, was just under 2.4 percent, implying an annual interest expense on $14.5 trillion of debt of nearly $350 billion. (Net debt, subtracting intra-governmental debt is lower; actual debt, including off-budget items, is higher.) If the average interest rate rose to 5 percent, the annual debt burden would rise correspondingly to well over $700 billion and consume approximately one-third of total federal revenues. 

At some point, higher interest rates would consume such a large portion of federal revenues that only massive dollar creation by the Federal Reserve could provide funding for government’s myriad programs. Washington simply cannot afford interest rates to rise, and therefore, the Fed will keep them abnormally low for as long as possible. In essence, the Fed has declared an end to a free market in interest rates.

The market price of interest rises when demand increases relative to supply and falls when supply increases relative to demand. Today’s record-low interest rates imply that the supply of money saved, i.e., capital, is abundant relative to the demand for capital. It isn’t.

Today’s low interest rates are not the result of superabundant capital, but are the result of massive intervention by the Federal Reserve System. In response to the financial panic in 2008, the Fed adopted what is known as ZIRP—a “zero interest rate policy.” This August, Fed Chairman Ben Bernanke announced his intention to maintain this policy for two more years. Doubling down on this engineered low-interest-rate policy, on September 21 the Fed announced “Operation Twist”—its plan to force down long-term interest rates even more.

Without Fed intervention, the supply of savings—genuine capital—would not be sufficient to finance and refinance all of the world’s debt. Interest rates are this low only because the Fed has been using its extraordinary powers to boost the supply of capital with “fiat capital”—money that nobody has earned and saved, but that the Fed conjures up ex nihilo.

As with the supply of capital, Federal Reserve interventions, along with various government interventions, have manipulated the demand for capital. If the U.S. Treasury had to compete with vigorous private demand for capital, interest rates would rise, so it has been necessary to squelch private demand.

Government and its central bank have suppressed demand for capital in several ways:

First, the torrent of anti-wealth policies unleashed by the Obama administration have produced the “turtle phenomenon”—many businesses have gone into shells, postponing plans to open or expand until the cloud of uncertainty and fear of arbitrary wealth-destroying policies blow over.

Second, the Fed has been paying interest (albeit a modest .25 percent) on banks’ excess reserves, and that has reduced the incentive for banks to lend those funds.

Third, there is abundant anecdotal evidence that banks have been rationing credit so severely that even low-risk customers often are denied loans.

American savers are taking it on the chin. With interest rates on Treasury debt being ultra-low, when you factor in inflation and taxes, savers are paying the Treasury to hold their money instead of earning a positive and market rate of interest. By creating artificially low interest rates, the federal government benefits by making artificially low interest payments on its massive amount of debt. In effect, ZIRP is bailing out our bankrupt government at savers’ expense. This is one way that wealth is being “spread around” in the age of Obama.

By ZIRPing us unrelentingly, the Fed is proving that it is no friend of the people. To paraphrase the Gettysburg Address, the Fed is a tool “of the [government], by the [government], for the [government].” One is tempted to add: [May it soon] “perish from the earth.”


Dr. Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision & Values at Grove City College.
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  • fishman

    Could you image a world where it was not possible to loan money and expect back interest for the loan?
    How terrible would that be?

    Oh wait, that is exactly what the Church commanded should be the case for many years.

    A first good step would be to outlaw credit reporting as a privacy violation, forcing each vendor to actually have a relationship with it’s customer.

    Also, how about outlawing ‘selling’ a loan. The original lender should be the only one paid back.

  • Credit reports and credit scores are an unbelievable scam. Your FICO score is a secret piece of information used to make critical judgments about your character, and two of the three companies that calculate your score will charge you for it. The third company, Experian, does not make it available to consumers at all.

    If lenders are going to use information in a computer file to judge your character – instead looking you in the eye and feeling the firmness of your handshake – then they need to embrace transparency, which includes at a minimum making the scores available to consumers as often as they want them. This is an industry crying out for legislative reform, in my opinion.

  • Mary Kochan

    Fishman, I just hate that your retirement account is forcing you to go against your conscience by accruing interest for you, so I would like to do you a favor. Just loan all your retirement funds to my family. We will pay them back with no interest and keep all that bad interest they accrue from sullying you. Deal?