The Fed prescribes more of what ails us
Today the Fed cut the target interest rate to 0%. This officially brings us to Zero Interest Rate Policy (ZIRP):
Under ZIRP, the central bank maintains a 0% nominal interest rate. The effect of a ZIRP is to encourage investment throughout the economy by making capital purchases more financially attractive. Whether ZIRP succeeds in achieving this goal is a matter of much debate (Wikipedia).
Whether ZIRP works is “a matter of much debate”. The folks that say it does work are the Keynesians who didn’t see this recession coming. The folks who saw this coming, the Austrians, say it won’t.
Who do you trust?
History also says ZIRP doesn’t work. Japan has lost two decades of economic productivity due to following ZIRP:
The Japanese asset price bubble was an economic bubble in Japan from 1986 to 1990, in which real estate and stock prices greatly inflated. The bubble’s collapse lasted for more than a decade with stock prices bottoming in 2003.
…
Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called “zombie businesses” (Wikipedia).
Real estate and stock prices greatly inflated? That’s what we had.
Subsidizing failing banks and business? That’s what we’re doing.
20 years of recession? That’s where these policies are taking us.
Common sense (which is increasingly uncommon in Washington) tells us that ZIRP will fail as well. We are in this mess because the Fed created excess credit and more credit can’t fix it. You wouldn’t give an alcoholic more alcohol. This isn’t any different.
Now that the interest rate is zero, the Fed’s only tool is to print money.
And as we know, no one gets rich going into debt. And no one gets rich by printing money. If we continue down this path, this recession is going to be really bad.
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