Most economists agree that lower interest rate will encourage American to borrow and spend and thereby stimulate the economy. Therefore the lowest interest rate of all (Zero) would pack the most stimulating punch for the economy.
Result? During our post-2008 economy stagnation, the Federal Reserve established a Zero Interest Rate Policy–commonly known as ZIRP.
That policy would certainly be reasonable if we still had a physical money (gold and silver) that would be effectively “trapped” in the US by the Atlantic and Pacific oceans. So long as the US dollar had physical substance, creditors’ dollars could not easily leave the US economy. Therefore, creditor had little choice but to accept whatever interest rate was established by the gov-co.
But, today we live in the age of digital fiat currencies which have no physical substance or reality and can therefore cross oceans at the speed of light on the internet.
Result? Currencies are no longer trapped in their domestic economies.
Result? When today’s interest rates are lowered, the net result is not to make borrowing more attractive but rather to drive domestic credit out of the US—where interest rates are ZIRP (Zero Interest Rate Policy) and irrationally low—and into foreign markets that pay higher rates of interest.
Result? Today’s irrationally low American interest rates (ZIRP) should push currency out of the US economy, reduce the money supply available for borrowing, and tend to cause monetary deflation (falling prices; rising purchasing power of the fiat dollar) which, in turn, push the economy toward recession or depression.
Because digital dollars are is no longer trapped in a particular economy, the assumption that lowering interest rates will stimulate the economy is no longer valid—or it’s no longer as valid as it was before digital currency and the internet came to town.
• More, I begin to suspect that interest rates may be more important than the “printing” of fiat currency.
“Helicopter Ben” and the Federal Reserve can print an additional four trillion fiat dollars to “stimulate” economy—but there won’t be much stimulation if the Fed simultaneously reduces interest rates to near zero. No matter how much currency they print, the low interest rates will push that currency out of the US economy in search of higher interest rates.
I believe that’s why the “emerging economies” recently enjoyed two or three years of “stimulation” and impressive growth while the US economy remained stagnant. The Fed printed an extra $4 trillion (purportedly intended to stimulate the US economy) but also lowered interest rates to near zero. Some or all of the $4 trillion fled the US economy in search of higher interest rates, found them in emerging economies, and stimulated those foreign economies.
Implication: In a world of fiat digital currency, the negative effects of irrationally low interest rates will be greater than the positive effects of printing trillions of more dollars.
Written by: ALFRED ADASK – continue to ADASK’S LAW