By David Stockman
The ZIRP market is completely dishonest and therefore deeply subsidized. And every Econ 101 student knows that when you deeply subsidize something, you get more and more of it. In essence, by clinging obstinately and mindlessly to ZIRP the Fed is just systematically juicing the gamblers, and thereby inflating ever greater mispricing of financial assets and ever more dangerous and explosive financial bubbles.
In fact, after 73 months of ZIRP how can rational adults obsess over whether the first smidgeon of a rate increase should occur in June or September and whether the economy can tolerate a rise in the funds rate from 12 bps today to 25 bps sometime down the road? The difference is utterly irrelevant noise to the (M)ain (S)treet economy; it can’t possibly impact the economic calculus of a single household or business.
Having pinned the money market rate at the zero bound for so long and with such an unending stream of ever-changing and fatuous excuses, the occupants of the Eccles Building do not even know that they are engaging in a word splitting exercise that is no more meaningful than counting angels on the head of a pin. Indeed, if they weren’t mesmerized in their own ritual incantation they would not presume for a moment that a fractional variance of the money market rate from ZIRP would have any impact on main street borrowing, spending, investing and growth.
So why does the Fed persist in this farcical minuet around ZIRP? For two reasons that are not at all hard to discern.
In the first instance, the Fed is caught in a time warp and fails to understand that the game of bicycling interest rates to heat and cool the macro-economy is over and done. The credit channel of monetary transmission has fallen victim to peak debt. The main street economy no longer gets a temporary pick-me-up cheap interest rates because balance sheets have been tapped out.
The only actual increases in household debt since the financial crisis has been for student loans, which are guaranteed by Uncle Sam’s balance sheet and auto loans which are collateralized by over-valued vehicles. Stated differently, home equity was tapped out last time; wage and salary incomes have been fully leveraged for years and households have nothing else left to hock. So they spend what they earn, meaning that the Fed’s interest rate manipulations—-which had potency 40 years ago—-have no impact at all today. Keynesian monetary policy through the crude tool of money market rate pegging was always a one-time parlor trick.
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