The United States’ Financial Quandary: ZIRP’s Only Exit Path Is A Crash
The comments below are an edited and abridged synopsis of an article by Michael Hudson
“Interest-bearing debt grows exponentially, in an upsweep. The non-financial economy of production and consumption grows more slowly as income is diverted to carry the debt overhead. A crash occurs when a large part of the economy cannot pay its scheduled debt service. That point arrived for the U.S. economy in 2008, but was minimized by a bank bailout, followed by a 14-year boom as the Federal Reserve increased bank liquidity by its Zero Interest-Rate Policy (ZIRP). Flooding the capital markets with easy credit quintupled stock prices and engendered the largest bond market boom in U.S. history, but did not revive tangible capital investment, real wages or prosperity for the non-financial economy at large.”
“Reversing the ZIRP in 2022 caused bond prices to fall and ended the runup of stock market and real estate prices. The great 14-year debt increase faced sharply rising interest charges, and by spring 2023 a number of banks failed, but all their depositors were bailed out by the FDIC and Federal Reserve. The open question is now whether the U.S. economy will face the financial crash that was postponed from 2009 onwards by the vast expansion of debt under ZIRP that has added to the economy’s debt burden.”
Up for discussion: Introduction; the Obama Administration’s decision to bail out Wall Street, not the economy; inflating asset prices by flooding the financial markets with credit; the Fed reverses ZIRP to cause a recession and prevent wages from rising; ending ZIRP reversed the Fed’s asset-price inflation policy; and where will the financialized US economy go from here.
