Riding ZIRP Into The Doom Loop—–Monetary Central Planning’s Dead End
What the Fed really decided Thursday was to ride the zero-bound right smack into the next recession. When that calamity happens not too many months from now, the 28-year experiment in monetary central planning inaugurated by a desperate Alan Greenspan after Black Monday in October 1987 will come to an abrupt and merciful halt.
Why? Because Keynesian money printing is in a doom loop. The Fed’s ZIRP policies guarantee another financial crash, which will trigger still another outbreak of panic in the C-suites of corporate America and a consequent liquidation of excess inventories and labor on main street. That’s the new channel of monetary policy transmission, and it eventually leads to recession.
This upcoming recession, in turn, will prove beyond a shadow of doubt that in today’s financialized global economy you can’t manage the GDP of a single country as if it were isolated in an economic bathtub surrounded by high walls; nor can you attain domestic macro-targets for employment and inflation through the blunderbuss instruments of pegged money market rates and wealth effects levitation of the stock market.
Instead, the Fed’s falsification of financial asset prices simply subsidizes gambling in secondary markets; enables daisy chains of collateral to be endlessly hypothecated and re-hypothecated; causes vast misallocations and malinvestments of corporate resources, especially stock buybacks and other financial engineering; and sends money managers scrambling for yield without regard to risk, such as in junk bonds and EM debt.
What it doesn’t do is get households all jiggy, causing them to boost their leverage and spend up a storm. That’s because they reached “peak debt” at the time of the financial crisis, and have been struggling to reduce debt ever since. In the most recent quarter, in fact, household debt posted at $13.6 trillion or 3% lower than in early 2008.
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