The complexities of fiscal policy are often easier for the average person to comprehend compared to monetary policy. Concepts such as income taxes, national debt, and budget deficits are tangible and relatable for many workers.
In contrast, the implications of Zero Interest Rate Policy (ZIRP) or Quantitative Easing (QE) are often elusive. While individuals may experience the dramatic fluctuations caused by central bank interventions, they frequently fail to attribute these changes to the Federal Reserve. This misalignment can lead to misplaced blame on capitalism, without recognizing the underlying influence of the Fed’s monetary manipulations.
Laborers may find themselves in a frustrating cycle, working harder yet failing to see improvements in their lives—or even witnessing a decline. Unfortunately, many remain oblivious to the role that heavy-handed monetary policies play in their struggles.
Take, for instance, a recent college graduate working at a low-paying job in a franchise coffee shop, burdened with $50,000 in student loan debt. While they may sense something is fundamentally wrong, they may not connect the exorbitant costs of college with the Fed’s expansive credit creation. Nor do they often reflect on the shattered promises that have led them to this challenging situation. When circumstances seem off, it’s a sign that something may be amiss.
Magnifying the Business Cycle
It would be unfair to lay all blame for widespread financial stagnation on the Federal Reserve. Factors such as lethargy and complacency are significant contributors to individual inertia. Globalization, too, would have progressed even without the Fed’s interventions, although its effects have been profoundly skewed.
Still, industriousness and creativity can triumph over ZIRP. Numerous examples exist of determined individuals who thrive despite the obstacles posed by government policies. Their resolve allows them to navigate challenging waters without hesitation.
The bottom line remains that the Federal Reserve’s misguided actions exacerbate current economic issues. Their efforts to smooth out economic fluctuations have unintentionally intensified them, leading to severe consequences for workers, savers, and retirees.
As the financial system strains to maintain the status quo, these misguided interventions are likely to proliferate. New, radical policies may emerge to combat the fallout from previous miscalculations, potentially leading to negative interest rates and the abolition of cash in future crises.
Regrettably, such “solutions” undermine capital, diminish freedom, and discourage hard work, while simultaneously rewarding excessive borrowing and high-risk speculation.
Potato Sack Economics
Currently, the Federal Reserve is realizing just how much they have skewed the economic landscape. Global markets are not aligning with their strategic visions, and the normalization of monetary policy may never occur.
Once the ZIRP genie is released, it’s exceedingly challenging to rein it in. The economy and financial system have become reliant on a continuous flow of inexpensive credit, creating a precarious situation. Each month requires an influx of digital currency just to maintain the status quo. Remove this cheap credit, even temporarily, and the economy may collapse like a sack of potatoes. After seven years of ZIRP, financial markets are so warped that a zero-bound federal funds rate now feels restrictive, and the dollar is rising against other currencies.
The Fed has learned that initiating ZIRP is much simpler than reversing it. As the next recession looms, their responses will likely need to become increasingly radical. What new measures will they consider?
Perhaps they will resort to debt monetization, currency debasement, or even more extreme actions. Rest assured, some economist on the Fed’s payroll is sketching out the theoretical framework, complete with graphs, for their next monumental monetary experiment.
Such decisions will undoubtedly lead to chaos and uncertainty.
Sincerely,
MN Gordon
for Economic Prism
