February 2023
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Has ZIRP really solved all our problems?

We all know the official narrative: Britain is recovering from the 2008 financial meltdown thanks partly to the Government’s policy of keeping interest rates near to zero – (ZIRP – Zero Interest Rates Policy). This makes it cheaper for businesses and those with mortgages to borrow. So, fewer companies have gone bankrupt and fewer people have lost their homes than would have happened if interest rates had remained at a ‘normal’ (3% to 5%) level.

However, the main beneficiaries of ZIRP are not ordinary people, but governments (like the British Government) that are borrowing and spending too much and which would be bankrupted were interest rates to rise to ‘normal’ levels.

And, of course, while helping those who have borrowed too much, low interest rates also harm some groups, particularly those with savings:

1. Savers – due to low interest rates, savers are losing roughly £24bn a year as they’re not getting any real interest on their savings. As savings are taxed at a rate of 20% (or more for higher earners), this means HMRC is losing perhaps £5bn to £6bn a year in tax

2. Pension schemes – Perhaps the more serious effect of low interest rates is one we seldom hear anything about because it ‘s probably far too complicated for most journalists, even supposed financial journalists. Low interest rates result in pension funds earning less than expected on their money in bonds and cash and therefore being unable to meet their liabilities.

The number of companies facing pension deficits – meaning the assets in their schemes will be insufficient to meet the pensions that are to be paid out – rose to a fresh high of 5,175 in January, according to data compiled by the Pension Protection Fund (PPF).

The aggregate balance of those schemes took a further dive, falling to a deficit of £367.5bn, compared with just £46.4bn a year earlier.”

So employer pension schemes are being driven into the red by the Bank of England’s loose monetary policy, requiring firms to pile ever more cash into their funds. UK companies are having to find another £320bn+ of pension contributions from somewhere..and that in a single year! I wonder what effect that is going to have on their wage, staffing and profitability levels going forward? Not a positive one, you can be sure of that.

And as companies are forced to plough ever more money into their failing pension schemes, their profitability will fall resulting in a reduction in the tax take leading to an even greater deficit

We’re seeing the same thing in public sector pensions. According to the OBR’s last Fiscal Stability report, public sector pension liabilities increased by £166bn last year too…..also thanks to lower rates. At some point taxpayers will have to make good this gap between liabilities and assets

It’s probably true that, given the financial incontinence of our rulers (Labour and Coalition), a ZIRP policy was the only way of saving the economy from a 1930s style collapse. But there are many hidden effects of ZIRP that have yet to manifest themselves.

The failure of our rulers to cut public spending has forced them to keep interest rates low and has allowed governments to kick any real reforms a long way down the road so they can concentrate on important things like legalising gay marriage and fighting supposed ‘global warming’. And, of course, ZIRP has allowed our useless Coalition to more than double our national debt from £700bn to £1.5trn while hiding behind the smokescreen of “we’re cutting the deficit”. Meanwhile we continue to be ripped off by overpaid bankers and greedy energy companies, while large multi-national firms laugh at the idea of paying any tax in the UK.

Or as the wonderful ‘Mad’ Max Keiser puts it: “This might have been blindingly obvious to others, but I finally caught on to the dismaying reality: the only purpose of central bank monetary policy is to keep the bloated, corrupt, inefficient and self-liquidating vested interests of the state-cartel crony capitalism from having to suffer the consequences of real reforms”

1 comment to Has ZIRP really solved all our problems?

  • MGJ

    Yes, whether it is ZIRP, negative interest rates, Help to Buy, Funding for Lending, Quantitive Easing, Cash for Clunkers or any of the other daft UK and EU schemes, they all have one thing in common. Namely addressing a debt problem by adding more debt.

    Unfortunately the naughty economy just won’t behave itself and the economists – one-trick ponies with no other ideas – are very cross with it. Most of us would entertain the possibility that we could be wrong at this stage; but they prefer to blame it all on savers and those paying off loans. In fact anybody acting responsibly.

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