Hanging by a ZIRP Thread While Poking the Hegemony Bear

  • The stock market and economy are hanging by a thread over an economic abyss. That thread is zero interest rates.
  • Rampant inflation and foreign competition will snap the thread.
  • Jerome Powell is gaslighting the public.  The Fed cannot manipulate bond prices forever. Money printing really does create inflation.

Zero-interest rate policy (ZIRP is currently the only thing that is protecting the US stock market and economy from a shocking falloff. We are ”hanging by a thread.”  Federal Reserve (Fed) bond price manipulation pokes the hegemony bear, testing the world’s trust and respect for US bonds.  The Fed has signaled (warned) that it might increase interest rates as the pandemic fades, but the Fed does not own an Interest Rate Control dial, especially not for long-term bonds.

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Regardless of the reasons for increases in bond yields, the consequences are predictable and alarming:

  • Bond prices will fall. A simple fact.
  • Stock prices will fall because (1) earnings are discounted at a higher rate and (2) bonds again become a reasonable investment with an actual rate of return.
  • Interest expense on Federal debt surges, triggering a debt spiral of ever-increasing money printing, AKA monetizing the debt, causing rampant inflation.       

The Fed cannot continue to suppress bond prices much longer because inflation is on the horizon and some foreign governments pay much higher yields on bonds that are comparable in quality to US bonds. 


Money Printing Brings Serious Inflation

The Fed has warned that it may have to increase interest rates to cool off rising inflation in a heated economy, gaslighting the public into ignoring the massive amount of money that has been recently printed. When the market recognizes serious inflation, it will require higher yields that the Fed cannot stop, although it’s setting the stage to take credit for the increase.  At some point, even the Fed will not have the resources to fight off market forces, although it might seem that its powers are unlimited.

Current money printing is poking the inflation and hegemony bears, supported by Modern Monetary Theory (MMT) justified by Japan’s early adoption and apparent success.   

There’s no doubt that the US government has printed an unprecedented amount of money since 2009: more than $10 trillion with a probable $6 trillion more on the way. Yet inflation has remained subdued, even though the CPI recently increased 5%, which some think is shocking.  The shocking reality is that imminent inflation is not transitory. 

For perspective, new money printing now exceeds the total costs of our most expensive wars. The money supply has tripled but inflation has remained low. Economists explain that this phenomenon is due to extremely low velocity. In other words that money is just sitting in bank vaults going nowhere. That’s somewhat true, but most of that money actually went into the stock and bond markets, exacerbating the great wealth divide and creating money illusion, the hallucination that stocks and bonds have actually become tremendously more valuable — stocks have become 3 times more “valuable” in the past decade.

We’ve had serious inflation but don’t know it because the barometer we use to measure inflation is missing security price inflation. The Consumer Price Index (CPI) measures increases in the prices of goods and services, but that’s not where the money went until recently. We are beginning to see inflation in CPI because some of the $5.2 trillion in COVID relief went directly to consumers. We’ll be seeing more.

 Investors realize that this massive money printing is inflationary, so they are protecting themselves, as they should. Cryptocurrencies exist as an alternative to fiat money.  Precious metals, especially gold, are a popular inflation hedge. Real estate is another historically good inflation hedge that is skyrocketing in price.


Foreign Competition

Investors searching for safe yields will find it in 10 foreign countries. Of course, you might want to hedge currency risk if you think the almighty dollar is stronger than the currency of another country. Or you could buy the bonds of all 10 countries to diversify both credit and currency risk.

The following exhibit shows 10 countries that are paying higher yields than the US on their 10-year government bonds, all with high A-or-above credit ratings. For example, China pays 2.9% on their 10-year government bond rated A+, more than twice the US yield of 1.2% rated AA+.  The average yield across all 10 countries is 2.5%, more than double the US.

In this global economy, money is free to flow to its most productive uses. Foreign competition is another reason that the Fed cannot control long-term bond yields if the Treasury wants to sell 10-year bonds.


The End of ZIRP

At some point, the Fed will lose control, and interest rates will return to “normal,” whatever that means. “Normal” in historical terms is inflation plus 3%; bonds have returned 3% above inflation on average over the past 95 years. Given the unprecedented money printing, rampant inflation above 50% is a possibility even though most mistakenly believe that 5-10% is as high as inflation can go.

ZIRP will end because the cost to manipulate bond prices is increasing and will become unaffordable in the face of high inflation. The government is poking the bear, daring something to break. Plus, other countries like China are paying higher interest on their safe government bonds.



Following the “Roaring 2010s” this decade is loaded with a host of investment threats that can destroy lifestyles, especially for baby boomers. Most of our 78 million baby boomers will spend much of this decade in the “Risk Zone” spanning the 5-10 years before and after retirement. They may not recover from the next market correction, so I wrote: “Baby Boomer Investing in the Perilous Decade of the 2020s to educate them on protecting their lifetime savings: save and protect.           


Ron Surz is co-host of the Baby Boomer Investing Show and president of  Target Date Solutions and Age Sageand CEO of GlidePath Wealth Management.

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