Trends - You Will Be Broke - Zero Interest Rate Policy (ZIRP) & Youth

The fear instinct. This term refers to our inclination to focus on the scary. In today’s world, there’s an ungodly amount of information available at the swipe of a finger, and as humans we’re risk-averse. This means we gravitate toward news that sucks, and consume a lot of it. It’s natural to feel fear. When I turned on my laptop today, I experienced a wave of anxiety, which isn’t ideal on a Sunday. I aim to articulate some of these fears and share my thoughts.

Thinking through trends is crucial for young people, as it helps us navigate the future. Knowing which way the winds are blowing, gives those of us with access to knowlege extra leverage. We hold a unique position compared to our elderly counterparts, as we are more likely to live through the distant future. Most think tank writers won’t see the 22nd century (whilst we probably will - a post on that another day), so it’s essential for us to contribute our own perspectives.

These are a collection of ramblings on short-, medium-, and long-term trends. The 21st century is an era of unprecedented disruption. In the following few posts, I’ll present my views on a few of the most disruptive events on the horizon such as ZIRP (Zero-Interest Rate Policy), Genomics & Gerontocracies, Labour force participation rates, CBDCs & Energy.

Since 2008

I’ll begin with the short term. In the short term, a primary concern should be the economic consequences of the past 14 years of ZIRP. Since the Great Financial Crisis of 2008, central banks have maintained artificially low interest rates to stimulate the economy, which has proven to be a bit too effective.

What has this led to? Accessible loans and mortgages, great. Affordable? Absolutely not. The government encourages borrowing by keeping interest rates artificially low. This debt serves as one of the primary channels through which money flows from the artificial “financial economy” to the “real economy”, and it’s been a leaky sieve for a while now.

When rates are low, people borrow more money. The velocity of money plays a significant role in economic growth. As people borrow money, they inject it into the real economy, which dilutes the value of everyone else’s money. Momentum of money is also crucial, but momentum is not perpetual. It eventually reaches an inflection point where it stagnates, typically in assets. This stagnation explains the massive asset explosion we’ve seen, particularly in house prices and equities. People who make money generally use it to generate more income, but unfortunately, it doesn’t always result in revolutionary businesses. Instead, it often goes into mundane ventures like rentals and Airbnbs.

Kicking The Can Down The Road

A fundamental axiom behind a loan is that it isn’t free money. It reduces your future self’s purchasing power at the cost of your current self’s purchasing power. In a capitalist system, there is an assumption that we can kick the can down the road. This is done in three ways:

1. Outpace the rate at which we claim the debt via growth
2. Reduce claims via bankruptcies and restructuring
3. Quantitative easing (money printing) inflates it away, strategically.

The first option requires a good economy. We can bin that. The second option is happening, and the third option was the strategy they’ve previously applied, and we’re now feeling the pain of it. In a capitalist system, there is an assumption that we can postpone addressing the issue. As long as the growth rate outpaces the rate at which we need to service debt, growth occurs. Here’s a hypothetical: suppose inflation is at 1-2% and growth is at 2-3%. In this case, the growth rate exceeds the inflation rate, and everything works well. However, when inflation increases, so does interest. High interest leads to higher debt servicing costs, causing the growth rate to decline. If this answer sounds cyclical, it is because it is; it’s a delicate balancing act.

This strategy involves national governments and their corresponding central banks. Central banks currently face a dilemma: they can either let inflation skyrocket, or they can allow a few banks to fail and some livelihoods to suffer as a result of the ensuing economic correction. The latter is happening now. A new economic tool, quantitative tightening, is being employed, particularly by the US Central Bank. This untested monetary policy is the reverse of money printing. They don’t know how much tightening is necessary before seeing its effects on the job market.

Central banks will continue tightening, hoping nothing breaks. This situation is worrisome. However, economies tend to revert to the mean. We have just experienced a period of unprecedented growth. Brace yourselves for challenging times ahead. For readers around my age, the road ahead may be less than ideal, but in the short term, we should expect a (warranted) capital market contraction.