Central banks around the world have failed. Their ignorance of the real world has been exposed for all to see.
Sharply lower interest rates was supposed to cause a boost to the world economy after the crisis of 2008. I’m still waiting.
Instead, the central banks have done nothing but support governments at the expense of the people. For example, the Fed has bought all the new Federal debt since 2008.
But central bank negative/zero interest rate policies (NIRP/ZIRP) policies are brutalizing parts of the economy.
Seniors mainly relay on the interest payments from their savings to live on. Zero interest rates means that the return on their savings or pension funds have disappeared.
It has been calculated that the decline in income to seniors equals the amount of government stimulus in the US. In other words, leaving interest rates at normal levels would have stimulated the economy as much as the the government stimulus without increasing the debt of the nation. Doing nothing would have been better than what they did.
Another sector that is suffering is endowments. Universities and many medical and charitable institutes rely on the interest income to fund their scholarships and operating expenses. NIRP/ZIRP dramatically reduces their income thus damaging their ability to provide learning, research, and charity. What is the value of those items. Money can’t measure it.
I contend that the economic orthodoxy doesn’t really understand economics as shown by the complete failure of their policies over the last 8 years. Make that 80 years.
Cui bono? Who profits?
Low interest rates should theoretically help anything that has to borrow money. This would include capital intensive industries like manufacturing and housing. And, it has, to a limited extent.
But what is the most capital intensive entity in the world? Government. They have run massive budget deficits for decades but put that policy on steroids after 2008. In the US, the government took in roughly $3 trillion per year in taxes but spent $4 trillion thus requiring them to borrow a trillion dollars per year.
In the US alone, federal debt alone has ballooned to about $20 trillion.
So NIRP/ZIRP helps the government more than any other entity. Interest payments are currently approaching 7% of all government spending with short term interest rates at effectively zero. Where does that number go when interest rates go back to a more normal 5%?
The answer is that rising interest payments will eat up money that currently goes to entitlements and other items. What will the government do when they have to switch money from defense and Social Security to interest payments? It’s not going to be pretty.
But governments profit in another way. As people’s savings and pensions are decimated, people will come to rely more on the government for their economic security in their old age. Governments will savage the pension and savings sectors of the economy and ride to the rescue for seniors to save their old age. Thus, more power will accrue to the government.
You may expect more and more governments to seize pension assets of seniors.
Seniors are becoming a much more important voting block so you may expect politicians to offer more goodies in the coming year.
NIRP/ZIRP is a failed policy that brutalizes important parts of the economy. Central bankers and their economic beliefs are massive distorting the global economy mainly to the benefit of the government, not the people.