|Mmm . . . money . . .|
—er, I mean: Mmm, chocolate . . .
So free chocolate for the next three years? Great! . . . uh, only not right now, thanks very much: I’m kinda full.
But then what if I said to you, “Chocolate is free now—but I’m definitely going to raise the price in the near term. In a month, chocolate might be free—or then again, it might cost $1,000 an ounce. So get some while you can, because tomorrow, you never know!”
Well, obviously, to such an uncertain outlook, you’d go out and buy some chocolate now—because tomorrow, it might well be unaffordable.
In fact, it seems quite obvious that if you don’t know when I’m going to raise the price of chocolate, you’ll probably wind up buying—and eating—more chocolate than if it was free. A paradox? Sure—but true.
In point of fact, if the chocolate is free, you might not eat any chocolate at all. Every time you make the decision as to what to eat, you might well find yourself repeating the same mantra: “Chocolate is free—I can have it any time I want. So I won’t have any now.”
This is the problem Ben Bernanke and the Federal Reserve currently have—and it’s their own stupid fault: They have promised to maintain interest rates at effectively 0% until at least the end of 2014—they have in fact announced this zero interest-rate policy (ZIRP) as the hallmark of their strategy to reignite the economy—
—but then they’re surprised when businesses aren’t borrowing more. They’re surprised when lending is in fact contracting. They’re surprised when the American economy doesn’t start borrowing—and thus growing—like crazy.
So the American economy obviously doesn’t benefit from ZIRP. In fact, it stagnates because of ZIRP.
Leaving aside the deplorable notion that debt-fueled consumption is “growth”, businesses are not going to borrow to expand during the announced period of ZIRP, because business owners will say, “I’m really not sure if my market is growing—and since I can get a low-interest loan for at least the next three years, I think I’m going to hold off on any expansion of my business, hold off on hiring new workers, and instead wait and see if the economy really does pick up. If it doesn’t pick up, I won’t have more debt to service. And if it does pick up, I can always borrow and expand later.”
“I can always borrow and expand later”: That’s what every sensible business owner is saying today. Why eat free chocolate now—when I can eat it for free later? Why borrow for free now—when I can borrow for free later?
And of course, later becomes never.
See, mainstream economists presume that uncertainty—by definition—is bad. This is why Ben Bernanke and the FOMC are doing this whole “transparency” thing: By announcing their interest rate targets, they think they are giving the markets security. They are trying to eliminate uncertainty insofar as their bailiwick is concerned, by making their monetary policy predictable.
Predictable? Hell, they’ve flat-out announced it.
But uncertainty is not by definition bad. Uncertainty is essentially ambiguity about the future. And as any novelist (such as myself) can tell you, ambiguity per se can be bad—just as easily as it can be good. Why? Because uncertainty about the future can lead people to think that the future will be bad—but also lead them to think that the future might be better.
In fact, most people—especially business people—are fundamentally hopeful, occasionally to the point of delusion: Ask any person, and nine times out of ten, they will tell you that the future will probably be better than today. Ask a business person? Eleven out of ten will tell you that tomorrow will be better than today. After all, entrepreneurship attracts fundamentally hopeful people: Nobody starts or runs a business if they think they’re going to fail.
So if business people see their markets picking up—even if it’s only just a little bit—even if they’re only really imagining it—and if they are uncertain for how long this free Fed money will last—then they’ll jump at the chance to expand their market now: Borrow the free money now, expand now, pick up more customer now—
—and therefore hire more people now, and turn their irrational hope into a self-fulfilling virtuous circle.
But that’s not happening—because of ZIRP.
Mainstream economists—and Ben Bernanke and his Merry Gang of FOMC Fools in particular—don’t get the value of uncertainty at all. They rightly realize that uncertainty about the future makes some people wary. But it can also make them take chances now—something that their rigid worldview cannot seem to entertain.
Thus the Fed insists on offering free money to the economy—and the economy insists on politely declining. Why eat free chocolate now, when I can eat as much free chocolate as I want later?
So then, if businesses—and the wider economy—do not benefit from ZIRP, who does?
Why, the banks and the Federal government! (Yeah, I know: How am I not surprised . . . ?)
See, the banks get their 0% loan from the Federal Reserve—and promptly go out and buy U.S. Treasury bonds, yielding 2% or so. Sure, a 2% yield is nothing—but it’s a whole lot of something when it is risk-free, and adds massively to the banks’ bottom line. And ultimately to the banksters’ bonuses. After all, the Federal government isn’t borrowing twenty bucks for gas: It’s borrowing $1.6 trillion a year—every year.
Thus the Federal government, that glutton for debt, also benefits from ZIRP.
Worse still, ZIRP is a disincentive to reduce the deficit and the overall debt. Since Bernanke and the Federal Reserve are putting out 0% money over the next three years, the Federal government will be under zero-pressure to reduce the deficit and pay down the debt. In fact, ZIRP encourages fiscal irresponsibility. After all, it is the rising coupon payment which eventually leads to rising debt levels being choked off.
ZIRP doesn’t eliminate the Minsky Moment—that is, the Day of Debt Reckoning. Rather, ZIRP merely postpones it—while making it a whole lot bigger.
Thus the Federal Reserve’s zero interest-rate policy does not help businesses expand and thus hire more workers to restart the economy; it does not encourage banks to lend to economically productive sectors; and it does not get the Federal government to begin reducing the deficit, let alone the debt.
In fact, ZIRP makes all these problems worse.