John Michaelson’s WSJ post, “The High Costs of Very Low Interest Rates,” presents the dark side of the Fed’s current policy. In it he makes the following points:
- low rates mean low earnings on savings giving consumers less to spend,
- folks close to retirement need to save more to get expected earnings,
- corporate pension plans need to fund more to make up for low earnings, which reduces money available for investment, and
- banks can borrow at zero and buy US bonds at a risk free return, so they do not lend to businesses for investment and job creation.
What’s sad is that the Fed has not learned from Japan’s lost decade experience. In 1990 following the burst of the credit bubble, Japan dropped it rate to an unprecedented .25% It’s government then borrowed to create massive “stimulus.” This froze out private borrowing, investment and consumption creating the lost decade.
Does any of this sound familiar?
I recommend the full article linked above.
Tom Motherway