FRONT PAGE CONTRIBUTOR
Less Than ZIRP
The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest…Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.
– John Maynard Keynes The General Theory of Employment, Interest and Money(HT: The Beacon)
With each meeting of The Federal Open Market Committee (FOMC), a certain effort is made to read the tea leaves of what took place. Charles Kadlec accuses them of devaluing the US Dollar. While Simone Foxman suggests they are working up the gumption to unleash QE3. This perhaps takes place because reading the actual minutes of an FOMC Meeting would rival watching paint dry on a wall.
Histrionics and prognostications aside, not a lot is actually happening at The Fed. Not a lot will happen between now and 2014. The policy direction is ZIRP and it will stay there for a long time. This is intended to remove all doubt that credit will remain abundant and capital will stay cheap over the short to intermediate time horizon. This is supposed to make people want to invest and expand more because they will have more confidence in the stability of current conditions.
Gonzalo Lira suggests that the Federal Reserve has this psychology precisely backwards. He compares three guaranteed years of ZIRP to free chocolate and makes the analogy below.
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.
If energy consumption can be considered a reliable barometer of economic activity, America is not growing more prosperous under ZIRP. According to the US Energy Information Administration gasoline consumption has declined by 13% between 2007 and 2011.
To the ecologically conscience, a 13% drop in gasoline consumption is a feature; not a bug. All hail Solyndra and The Almighty Chevy Volt! But it’s not just Gasoline consumption that is dropping. US electricity consumption has also never recovered to where it was in 2008 and it began to fall off again throughout 2011.
So if people aren’t consuming energy, and therefore must not be increasing their level of economic activity, they must be saving their money. If this is actually so, their level of reward for this thrift has fallen off the cliff. Personal Interest Income (PII) has been in terminal freefall since 2008.
So we aren’t growing our economy, haven’t created substantial new employment, aren’t using as much energy or electricity as we used to. What then is the ZIRP policy accomplishing? It has done exactly what John Maynard Keynes wanted; The Euthanasia of the Saver.