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The ZIRP/NIRP Gods and their PhD Priesthood Have Failed

The priesthood’s insane obsession with forcing people to spend their savings by punishing savers with ZIRP/NIRP has failed spectacularly for a simple reason: it completely misunderstands human psychology.
Let’s start with a simple chart of the Fed Funds Rate, which the Federal Reserve has pinned near zero for years. This Zero Rate Interest Policy (ZIRP) is the god the PhD economists in the Fed and other central banks worship as the supreme force in the Universe, along with its even more severe sibling god, NIRP (negative interest rate policy), which demands that banks and depositors must pay for the privilege of holding cash.
Precisely what have ZIRP and NIRP fixed in the global economy? The short answer is “nothing.” Instead of fixing what’s broken, ZIRP and NIRP have pushed a broken system further along the path of self-destruction.
Let’s stipulate that not all economics PhDs are members of the failed Keynesian Cargo Cult Priesthood. A few “professional” economists get it, but they are heretics who are kept far from the priesthood’s temples of power: central banks, central state Treasury departments, major university faculties, etc.
Effective Federal Funds Rate

Effective Federal Funds Rate – click to enlarge.


The basic problem with the professional priesthood is they believe that their cult is a “real science,” and their “proof” is a bunch of equations that they claim map and predict human behavior. Like the other social sciences, economics suffers from a pathologically obsessive envy of physics, i.e. “real science” that actually predicts the actions of materials and objects in the real world.
The truth that the economic priesthood cannot accept is that “economics” is more psychology than physics. Human behavior cannot be reduced down to simple models and equations, as the variables are many and difficult to quantify, and the spectrum of potential responses is too wide.
The entire Keynesian Cargo Cult Priesthood boils down to this absurdly wrong-headed model of capital and human psychology: the economy suffers when people “hoard” their earnings. So the goal of the priesthood is to persuade them to stop “hoarding” their cash and force them to spend it. (This spending is known as “aggregate demand” in the priesthood.) The priesthood worships the gods of ZIRP and NIRP because they are believed to force people to spend rather than “hoard.”
The ultimate goal of the Keynesian Cargo Cult Priesthood is to force people to borrow more money from banks, as this increases bank profits and boosts “aggregate demand” by tapping future earnings. Taking out a loan brings future demand forward by issuing a claim on future earnings.
All of this priestly mumbo-jumbo is of course insane. “Hoarding” is not an evil to be stamped out by the cruel god NIRP who destroys any yield on savings;“hoarding” is the foundation of capitalism, as savings (“hoarding” to the insane) are the capital that is invested in productive assets which generate the wealth that funds wages and taxes.
Destroy savings and you destroy productive capitalism.
The priesthood’s insane obsession with forcing people to spend their savings by punishing savers with ZIRP/NIRP has failed spectacularly for a simple reason: it completely misunderstands human psychology. Now that ZIRP and NIRP have destroyed the income that was once earned on savings, the only rational response is to save more, not less, despite the priesthood’s policy of negative rates.
The priesthood is absolutely blind to another key aspect of human psychology.The policy of negative interest rates is so extreme and so destructive that it proves the priesthood and its Keynesian Cargo Cult have completely lost their way, yet their grip on power only increases.
Who could possibly have faith in such insanity? The only rational response is to fear the future consequences of such craziness, and the only rational response to this well-grounded loss of faith in the future is to save more, not less, regardless of the costs imposed by the insane priesthood.
The Keynesian Cargo Cult Priesthood is not just clueless–it is forcing everyone to drink its toxic Kool-Aid. Like the crazed dictator in the Woody Allen comedy, the Keynesian Priesthood may well order us all to wear our underwear on the outside of our clothing, if they reckon that would boost “aggregate demand.”
My new book is The Adventures of the Consulting Philosopher: The Disappearance of Drake. For more, please visit the book's website.
The Adventures of the Consulting Philosopher: The Disappearance of Drake
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Charles Hugh Smith
At readers' request, I've prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the "Peanuts" comic character Lucy, who once issued this terse biographical summary: "A man was born, he lived, he died." All undoubtedly true, but somewhat lacking in narrative.
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