"Interest rates near zero risk propping up inefficient companies,"

[blazespinnaker]

http://www.businessweek.com/news/201...n-warning.html

Ok, here is an argument I buy for low rates causing stagflation.

Basically, our economy becomes distorted by low rates as zombie companies survive.

These companies only exist because the real rate is negative, their cost of capital is lower than inflation but the sale of their product/services is higher than the inflation.

They're living on the Central Bank Dole.

Basically, our economy becomes addicted to this money and starts to accept it as reality.. it becomes a part of their mentality.

It's like the Bear that comes dining on your garbage and has to be shot because it doesn't want to fend for itself anymore.

I get how that starts to lead to an inflationary spiral as unemployment #s stay high and the Fed is tempted to keep real rates negative until unemployment numbers come down.

Sorry, guys, what you gotta do is stop leaving the garbage out so the bears learn to forage for themselves.


HOWEVER... in that model, we have inflation. Right now, natural gas prices are hitting all time lows. We are deleveraging. Everything is going south right now.

We have a highly competitive global economy. We have outsourcing. We have the internet. We have global intellectual surplus and disintermediation. We have automation (why do you think Germany is doing so well?)

As long as we don't do some moronic thing like start a trade war and shut down all this creative destruction (ie, protect the garbage bears from the bear hunters) then we can and *must* keep rates negative.

As inflation starts to tick up, the real test of character will occur. Hopefully at that point though inflation is ticking up because unemployment numbers are dropping.

A part of me thinks though, that maybe we don't want to have lots of employment right now. Too much economic activity would lead to energy prices sky rocketing again.. maybe we need to keep economic activity low until they figure out the alt energy problem.

[Starving Steve]

Re: "Interest rates near zero risk propping up inefficient companies,"

Unemployment is co-related to inflation; the higher the unemployment rate, the higher the inflation is. The 1970s stagflation under Jimmy Carter proved that, and Latin America's experience with stagflation proved that too. Same experience in Israel, Zimbabwe, Russia, etc. As I have said, "Forget everything the textbooks tell you about economics."

Current central bank policies to keep interest rates negative in real terms do subsidize failing businesses. Inept CEO's are bailed-out. But that means making businesses uncompetitive with the world economy. That means inflation. And the inflation means UN-employment because inflation and unemployment are linked.

Inflation means higher costs of doing business, which means higher prices for product, higher unemployment, which means less demand, which means stagnation, which means stagflation, which means higher wage demands, which means inflation which means.... around and around. Inflation and unemployment are linked. Forget Samuelson's economic textbook, and forget Bernanke and his followers.

The longer central banks keep the ZIRP, the deeper we go into depression. The way OUT of depression is to do the exact opposite of what central banks are doing; the way to recovery is to hike interest rates, stop the bail-outs, curtail money supply growth, and tighten our belts.

Step #1 would be to get rid of Bernanke and his tokis-lackers seated on the FOMC in Washington.

[touchring]

Re: "Interest rates near zero risk propping up inefficient companies,"

China has very low unemployment but high inflation. The same with Singapore, there is a job almost for everyone willing to work, even the blind, disabled and crippled, but very high inflation.

How does that work out?

I'm quite sure that the rate of inflation in China, Singapore and many Asian countries is way much higher than in the USA.

High unemployment leads to high inflation, that might be true in the 1970s. But in a global economy where money flows to where there are opportunities, this is not guaranteed.

Unemployment is co-related to inflation; the higher the unemployment rate, the higher the inflation is. The 1970s stagflation under Jimmy Carter proved that, and Latin America's experience with stagflation proved that too. Same experience in Israel, Zimbabwe, Russia, etc. As I have said, "Forget everything the textbooks tell you about economics."

[Starving Steve]

Re: "Interest rates near zero risk propping up inefficient companies,"

Maybe if the central banks around the world would get out of the money-printing business, then money might stop flowing around the world chasing investment opportunity. And if that happened, i.e, capital became scarce, maybe prices might fall and interest rates might rise? Then we might enjoy --- and I mean ENJOY --- falling prices and a rising standard of living, everywhere in the world.

Un-learn everything in the economics textbooks to-day. Everything. And Bernanke is the dumbest of the dumb.

The word in Greenspanese for this so-called recovery is a "bi-variate economic recovery". The word in common English for this recovery is a "double-dip" or "square-root shaped recovery", and the word in Spanish for this economic recovery is "un fracaso" or an absolute failure.

[sunskyfan]

Re: "Interest rates near zero risk propping up inefficient companies,"

Zombie companies ... how about zombie industry ... REAL ESTATE