The Slog has posted several times on the idiocy of zero interest rates from a recovery perspective. I have yet to see a good Benthamite reason why rates were set so low – especially when on the banks’ own admission, the borrowing pressure from business has been close to zero.
In the UK, I do believe that the ‘reason’ given – freeing up cheap credit – was at best an abject policy failure, and at worst (far more likely) a convenient way for self-abused banks to rebuild their balance sheets: take sight money at 0%, invest in gilts at 3%…result, happiness.
Although virtually unknown as an acronym over here, American financial markets use the term ZIRP (Zero Interest Rate Practice) as an everyday description of what most national Governments in the West have been doing for around eighteen months now.
In the US financial village, most people think ZIRP will last a minimum of another 12-18 months. Despite a QE1 cost of $1.8 trillion, the patient is still flatlining. The QE2 that Bernanke seems likely to try in the late Autumn – just in time for the mid-terms – should at least double that amount. (It’ll be nowhere near enough: $15-30 trillion is nearer the required mark).
As with most things Friedmanite when they go tits up, the credit markets are today a command economy managed by the Fed. The magnitude of Fed purchases distorts any and all real supply and demand formations, but then it’s not meant to do anything else: ZIRP is there to keep false confidence from becoming falsetto panic – but primarily (in the US) to devalue savings and force consumption. The theory is that if Elmer and Maybelline can’t make a turn on their savings, they’ll buy a new trailer instead. (The past data in the UK actually suggest that Silvers don’t do that: higher interest rates keep them spending. Unfortunately, the average age of the folks at the Fed is 13.)
If ZIRP wasn’t being forced upon the ever-suffering consumer who refuses to consume, then short-term rates at least would normally be rising at this point on any ‘recovery’ curve. But the Fed still has the cost of money set close to Ground Zero….because it is a Kremlin saying precisely when and how everything will happen….or not. A more reasonable level for Fed Funds would be in the 1.5-3% range. But that wouldn’t give the banks a margin, see? So no point doing that.
Everyone in the West living on savings has been screwed by ZIRP. Having seen their tax-paper currency disappear to rescue the MoUs at stage one, Silvers have also been the primary losers when getting the banks back
to obscene bonuses on their feet again prior to Crash 2. For which – in some way as yet undecided by the Elite – we will have to pay again. Probably by the local hospital closing.
I’m not being patronising at all when I say that the Governbanks will get away with this, because very, very few people understand enough about it, and for a good 65% of the population it would be near-impossible to explain it. The Establishment do think the vast majority of us are dim, but they’re wrong: we’re mainly dim below 40 and the C1 social class, but primarily the rest of us are just rabbit-terrified and distracted by waiting for the next chapter of this Gothic novel to unfold.