The Bill for ZIRP Is Coming Due

If two people you respect recommend the same book to you, do you order it? 

What if I told you the title were: A History of Interest Rates, covering 4,000 years of lending practices across civilizations? Zzzzzzzzzzzzzz…

The first person to recommend Sidney Homer’s treatise on interest rates was my friend David Kotok. We were sitting outside at a café in Havana, of all places. David walked me through his concerns about the unintended consequences of near-zero interest rates. He has a wonderful way of lulling you into agreement with his thinking. And as it turns out, his concerns were well-founded. Supplemented with mojitos, David’s case was quite compelling.

After lunch I wandered back to my hotel with every intention of ordering Homer’s book, but the internet in Cuba is… well, let’s just say it’s less than reliable. Amazon lost a sale, and I quickly forgot the suggestion.

This week I was reminded to read Sidney Homer’s book on the history of interest rates. This time by my guest on Global Macro Update, Michael Howell. The book was required reading for bankers at Salomon Brothers, where Howell was Director of Research.

Michael pointed out that you will find zero interest rates nowhere in those pages covering 4,000 years of lending history.

US policymakers slashed rates to near zero after the 2008 financial crisis—and again during COVID. An “everything bubble” followed, and Howell, founder of Global Liquidity Indexes, believes the bill is coming due.

I spoke with Michael Howell this week about his investment framework. His central argument is simple: forget debt-to-GDP ratios. The metric that actually predicts market behavior is the ratio between debt and liquidity.

Here’s why that matters.

The world economy carries close to $350 trillion in debt—government, corporate, and household combined. With an average maturity of about five years, that means $70 trillion must be refinanced annually (very little of this debt is actually paid off). That’s three-quarters of global GDP flowing through financial markets just to keep existing debts rolling over.

When there’s plenty of liquidity relative to debt, refinancing happens smoothly. Sometimes, too smoothly, as excess liquidity inflates asset prices and creates bubbles. But when liquidity tightens while debt stays high, the system struggles. Refinancing becomes difficult, leading to crises.

Howell tracks this ratio going back decades. He marks the danger zone at 200%. Above that line, trouble brews. Below it, bubbles form.

During and after COVID, policymakers flooded the system with liquidity and brought interest to near zero. Borrowers responded rationally: they termed out their debt, locking in low rates and pushing repayment into the late 2020s. The debt-to-liquidity ratio fell well below the danger zone. Asset prices soared across stocks, bonds, real estate, and crypto.

This is what Howell calls the everything bubble.

Now that debt is coming due for refinancing—just as the Federal Reserve is pulling back liquidity. Howell’s projections show the debt to liquidity ratio rising above the 200% threshold soon. When I asked if he was recommending caution, his answer was immediate: “Yes.”

Howell isn’t predicting an exact date for trouble. He’s describing a system moving from one extreme to another. The zero-rate era was, in his words, “an absolutely unique period in world history.” We borrowed against the future. The future is here.

His framework suggests a shift in how investors should position themselves. During liquidity upswings, risk assets like stocks perform well. Around the peak—where Howell believes we are now—commodities tend to outperform. During downturns, cash and long-duration government bonds offer safety.

We cover a lot of ground in this conversation—including why gold has decoupled from real interest rates, what China is doing to drive commodity prices, and his views on bitcoin as a liquidity indicator.

I encourage you to watch my full conversation with Michael Howell here. A transcript of our conversation is available here.

And please check Michael Howell’s excellent Substack, Capital Wars, here.

Thank you for reading and watching.

Happy Thanksgiving!

Ed D’Agostino

Partner & COO

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