Editorials

Zero Interest Rate Trap

Central bankers are not bankers. They are central planners who believe they know better than free markets. Central banks have trapped themselves into a corner. It is a trap with no escape, without causing a major economic crash. Boom and bust cycles cannot be stopped, only delayed.

In the U.S. Federal Reserve Chairman Allan Greenspan bailed out the largest equity bubble with the world's largest real estate bubble. Ben Bernanke and Jerome Powell bailed out the real estate bubble crash with zero interest rates and quantitative easing (QE). They have created a real estate, bond and equity bubble. Bank of England, Euro Central Bank, and most other central banks are moving to monetize 100% of domestic net issuance of government bond.  Many believe it is only a matter of time before Jerome Powell will join the club. 

Bank of America analyst Michael Hartnett calculates that the Treasury supply will outstrip Fed purchases in Q1 2021.  The U.S. Treasury is scheduled to issue $2.371 trillion in new treasuries in 2021, but is on schedule to purchase only $960 billion treasuries in 2021. The open market can only absorb so many Treasury bonds.  The foreign market is drying up. China and Japan are no longer the largest buyers. The Federal Reserve will have to double its current QE to monetize the current deficit, without factoring another fiscal stimulus.

Total public and private debt in the U.S. is currently $82 trillion.  Global debt is now $255 trillion, which is 330% of global GDP. Central Banks are now trapped.  If they raise zero interest rates and stop QE, world markets will crash.  If they continue with ZIRP and QE, currencies will devalue and inflation will spike.  Jerome Powell's  playbook is to follow the Bernanke-Krugman-Svensson theory to keep interest rates at zero, devalue the dollar by quantitative easing and manipulate opinion to, create fear of inflation.  This is a currency war to increase U.S. exports and stimulate the economy. Chinese, Arabs and other emerging markets have complained about the Fed's policy of devaluation of the dollar.  Central banks are in a race to the bottom.  
 

© 2016 - 2021 Steve Johnston - All Rights Reserved.
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