Welcome to the world of ZIRP zombies
Interest rates in the US, Europe and the UK were reduced to close to zero in the wake of the Lehman crisis nearly seven years ago.
Initially zero interest rate policy (ZIRP) was a temporary measure to counter the price deflation that immediately followed the crisis, but since then interest rates have been kept suppressed at the zero bound. It had been hoped that the stimulus of close-to-zero interest rates would also guarantee economic recovery. It has failed in this respect and the low bond yields that result have only encouraged the rapid expansion of government debt.
It is clear that monetary policies of central banks are the problem. Instead of boosting recovery they have simply destroyed the mechanism which recycles savings into capital for production. They have brought about Keynes’s wish, expressed in his General Theory that he “looked forward to the euthanasia of the rentier”, whose function in providing finance for entrepreneurs is to be replaced by the state: entrepreneurs “who are so fond of their craft that their labour could be obtained much cheaper than at present.”[1]
Instead of storing the fruits of his labour in the form of bank deposits to be made available to the investing entrepreneur, the saver is discouraged from saving, instead being forced to speculate for capital gain. In that sense, ZIRP is the logical end-point of Keynes’s ideal.
The mistake is to subscribe to the ancient view that interest is usury and that it only benefits the idle rich, a stance that appeared to be taken by Keynes. What Keynes missed is that interest rates are an expression of time preference, or the compensation for making money available today in return for a reward tomorrow. If you try to ban interest rates by imposing ZIRP, then the vital function of distributing savings in the interests of progress simply ceases. An economy with ZIRP joins the ranks of the living dead.
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