ZIRP and the effects

[LC]

Dalio posted an article on his thoughts on zero interest rates:

 

https://www.linkedin.com/pulse/implications-hitting-hard-0-interest-rate-floor-ray-dalio/

 

Long-term interest rates hitting the hard 0% floor means that virtually all asset classes go down because the positive effects of interest rates falling won’t exist (at least not much). Hitting this 0% floor also means that virtually all the reserve country central banks’ interest rate stimulation tools (including cutting rates and yield curve guidance) won’t work. The printing of money and buying of debt assets that central banks are now allowed to buy almost certainly won’t work much (because bonds can’t be pushed much higher and they are also less likely to be sold to buy other assets of entities that are in financial trouble). Further, with this hard 0% interest rate floor, real interest rates will likely rise because there will be disinflation or deflation resulting from lower oil and other commodity prices, economic weakness, and more credit problems. If that plays out in the typical way, rising credit spreads will raise debt service payments to weaker credits at the same time as credit lending shrinks, which will intensify the credit tightening, deflationary pressures, and negative growth forces

 

This is about the only concisely quotable passage. The article is well done, it tackles 'next steps' in terms of fiscal stimulus and is region-specific. Maybe you do not agree with all of his second- and third- order reasoning  but it is the first attempt to write down the answer to, "what will we do next and what are the those potential outcomes".

 

 

[Guest]

The consensus right now is that "this will be over in 6-12 months". I wonder if that'll be wrong. Like, the worse part of the virus might be over but there might be a hangover from the moves.

[Spekulatius]

The consensus right now is that "this will be over in 6-12 months". I wonder if that'll be wrong. Like, the worse part of the virus might be over but there might be a hangover from the moves.

 

ZIRP is very sticky and will not be over in 6 or 12 month. I think it’s more like a one way road.

[Guest]

The consensus right now is that "this will be over in 6-12 months". I wonder if that'll be wrong. Like, the worse part of the virus might be over but there might be a hangover from the moves.

 

ZIRP is very sticky and will not be over in 6 or 12 month. I think it’s more like a one way road.

 

 

Yeah, sorry I worded that poorly. I meant the main sickness effects from the virus should be over in 6-12 months.  I wonder if the financial effects will be longer that that (perhaps far longer).

 

I'm thinking that these zero rates will either shoot the market to the moon (80x is cheap!) or some type of deflationary environment due to other craziness we just don't see yet.