(Here’s an executive summary for a potential primer on ZIRP. I invite you to share any thoughts or suggestions on Discord if there are areas that need further detail or clarification.)
Zero Interest Rate Policy (ZIRP) Primer
A Fairer, More Stable, and Prosperous Economy for the UK
This primer outlines why the Zero Interest Rate Policy (ZIRP) is the most effective and equitable approach for the UK economy. It explains why interest rates should be permanently set to zero, how banking reform can create a more stable and fair financial system, and why clear, enforceable, and accountable loan regulation is essential for long-term prosperity.
Key Points
- The natural interest rate is zero in a modern, floating exchange rate system.
- Raising interest rates is a political choice, not an economic necessity.
- The financial system must serve the real economy, not just banks and financial traders.
- Loan regulation must be robust, transparent, and enforceable, with regulators held accountable.
Why ZIRP?
The Natural Rate of Interest Is Zero
In a modern economy, the government creates money through spending and removes it through taxation. When the government spends more than it taxes, the extra money flows into banks as reserves.
Left unmanaged, these reserves would naturally push overnight interest rates to zero. The only way to artificially maintain higher rates is for the government to intervene - by paying interest on reserves or issuing bonds.
Why should the government subsidise wealthy bondholders with risk-free returns? This hidden giveaway serves no public purpose. ZIRP eliminates this unjustified subsidy, creating a fairer and more transparent financial system.
A Fairer and More Transparent Financial System
ZIRP restructures banking to prioritise the real economy over financial extraction. Here’s how:
1. No More Bank Rate Manipulation
The Bank of England ceases using interest rates as a policy tool. Constant rate adjustments create instability, disrupting businesses and hindering long-term planning. A stable zero rate provides certainty, enabling businesses and individuals to plan with confidence.
2. End Gilt Issuance
Government borrowing is not required to fund spending. Gilt issuance is a relic of the gold standard era, serving no functional purpose today. Eliminating gilts removes an unnecessary drain on public funds. It stops financial markets from extracting risk-free profits at the public’s expense.
3. Banks as Public Agents – With Accountability
Banks operate as extensions of the public monetary system, lending only for productive purposes. This ensures that finance supports real economic growth, not speculation.
Banks receive an unlimited overdraft from the Bank of England at 0%, directly exposing the Bank to commercial banking risks. This necessitates strict loan regulation:
- The Bank of England takes on ultimate responsibility for every loan issued.
- Regulators must set clear criteria for acceptable loans that will promote productive investment.
- Regulators must ensure a commercial bank has enough capital to cover any issues with its regulated assets.
- If a bank fails, the regulator and the Bank of England governor are held accountable. Liquidating a bank becomes a resigning matter for both.
This system forces regulators and bankers to act responsibly, knowing that failure means professional consequences. Mismanagement isn’t just a policy mistake; it’s a career-ending event.
4. Bank Deposits = Money
Every deposit in the banking system becomes actual money, regardless of size. This ensures secure access to funds for businesses and individuals. Deposit insurance schemes and special protections for large institutions become unnecessary.
5. Loans Must Fund Real Investment
Banks can only lend for activities that grow the real economy, such as housing, infrastructure, and business investment.
- The Bank of England maintains a list of approved loan types, such as residential mortgages at sensible ratios, working capital funding and business development loans.
- If a bank breaks the rule - by lending for speculation or financial manipulation, for example - the courts won’t enforce repayment. Banned loans become shareholder gifts.
This prevents banks from misusing their monetary powers and directs finance toward productive uses. No loopholes. No bailouts. Just real lending for real growth.
6. Stronger Banking Oversight – No More Bailouts
The Bank of England holds debentures over regulated banks. If a bank is mismanaged, the Bank can place it into creditor administration at any time.
If that happens:
- Shareholders and bondholders are wiped out - no bailouts.
- The payment system remains protected, ensuring depositors always retain access to their money.
- The Bank of England’s balance sheet absorbs the impact of bank liquidations, but failure reflects directly on the regulator.
If a regulated bank collapses, it is a resigning matter for the financial regulator and the Bank of England governor. This ensures strict, responsible oversight focused on stability.
7. Job Guarantee as the Price Anchor
Instead of using interest rates to control inflation, the UK implements a Job Guarantee:
- Anyone willing to work can always find a job at a fixed living wage.
- The Job Guarantee acts as an automatic stabiliser, expanding during private sector slowdowns and contracting during growth.
- A constant yet disciplined fiscal policy allows the Job Guarantee buffer to keep prices stable, negating any concerns that ZIRP could lead to inflation.
This eliminates the need for monetary policy adjustments, creating a stable economic environment for businesses and workers.
The Benefits of ZIRP
1. A More Stable Economy
Eliminating interest rate manipulation removes uncertainty, boosting investment and job creation. Businesses and households can plan ahead with confidence.
2. More Housing and Infrastructure Investment
Under ZIRP, asset prices are no longer artificially suppressed. Investment in tangible assets - particularly housing - accelerates, increasing supply which then drives affordability for owners and renters.
3. Lower Borrowing Costs for Everyone
With ZIRP, mortgage rates stay low, helping families achieve the dream of homeownership and providing stability for future generations. Businesses can expand without fearing sudden spikes in debt costs. No more boom and bust.
4. Financial Markets Serve the Real Economy
Without free money from government bonds, investors must fund real businesses, innovation, and infrastructure to generate returns. This strengthens the real economy and reduces financial speculation.
5. A Leaner, More Efficient Financial Sector
ZIRP eliminates unnecessary complexity caused by interest rate manipulation. The financial sector shrinks to a natural size, redirecting talent and resources into productive industries.
6. A Transparent, Accountable Banking System
With regulators having skin in the game, they must enforce strict loan regulations and ensure banking stability. Mismanagement leads to real consequences for those in charge.
7. An Economy That Works for the Many, Not the Few
ZIRP gradually eliminates the largest unearned income stream in the economy - interest payments on government debt. Wealthy individuals and institutions must invest in real growth rather than extracting risk-free returns from the state.
8. A Seamless Transition to Digital Currency
With ZIRP, bank deposits become money at all amounts, just like physical banknotes, making digital transactions as simple, safe, and universal as cash.
Historically, private mints charged fees for coins until they were replaced by a single Royal Mint. ZIRP does the same for electronic money by eliminating middlemen and allowing seamless, fee-free digital transactions.
A Fairer, More Stable System
ZIRP isn’t just about setting interest rates to zero. It’s about creating a financial system that supports the real economy rather than draining it.
- No more economic instability from rate hikes and cuts.
- No more free money giveaways to the wealthy.
- More housing, infrastructure, and business investment.
- A stable economy where financial regulators are held accountable.
With a zero interest rate and strong banking oversight, the UK can build a prosperous, fair, and resilient economy for all.
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