Choking On the Salt of Debt
Life After ZIRP
Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death. At the time, the monetary order was approach peak ZIRP.
Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]
We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of blooming crop fields within the setting of an arid desert wasteland.
Given today’s changing financial conditions, namely the prospect of a sustained period of rising interest rates, we have taken the opportunity to refine our analysis. What follows is an attempt to bring clarity to disorder.
The natural starting point for the topic at hand is from a place of delusion. That is, the popular delusion that central planners can stimulate robust economic growth by setting interest rates artificially low. The general theory is that cheap credit compels individuals and businesses to borrow loads of cash – and consume.
Over a sample size of five to ten years, say the growth half of the business cycle, central bankers can falsely take credit for engineering a productive economy. Profits increase. Jobs are created. Wages rise. A cycle of expansion takes root. These are the theoretical benefits to an economy that central bankers claim they impart with just a little extra liquidity. In practice, however, this policy antidote is a disaster.
Without question, cheap credit can have a stimulative influence on an economy with moderate debt levels. But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy. In fact, the additional credit, and its flip-side debt, distorts prices and strangles future growth.
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