Wednesday, September 30, 2015

ZIRP as Passive Aggressive Protectionism

The U.S. has been the leader in international banking for at least 50 years. And for nearly all of that time a policy of supply side economics has been in play. This has meant continually lowering interest rates to accommodate business. The result is that the world is awash in US Dollar denominated debt. Now the Federal Reserve bank has interest rates at essentially zero, a "Zero Interest Rate Policy" (ZIRP) and the U.S. seems to be the only economy on fairly firm ground. Seems is a deception. We are interdependent with the rest of the world. The politicians and "conservative" economists in the U.S. are clamoring for a rise in interest rates by the Fed and looking for a strong dollar. This would in essence bankrupt many of the companies and countries in the emerging parts of the world, as we would be raising interest rates around the globe and demanding repayment of debts in a more valuable currency. Ours. The effect of a move like this is to cause inflation in those countries whose currency values decline, thus making food and energy more expensive to the people who live in these places. We, the U.S., should fall on our sword this time by letting the U.S. Dollar go. If we do not, and demand repayment, we will have what amounts to a global insurrection. We are seeing this in the middle east already with the results of the Arab Spring uprisings of a few years ago that were caused by economic downturns in these countries and rising prices of food. An interest rate rise will cause the same in Latin and South America. And we will have plenty of food to export but no one will be able to afford it.

The U.S. Federal Reserve is managing the primary currency of the world and must manage it with an eye to long term stability. And that means long term world stability. Even at the expense of the long term supremacy of the U.S. dollar. A weak dollar will also put Americans to work again. It is the importers who object. We must assist China in a transition to domestic consumption, and do it without protectionism. Keeping interest rates at these levels will put the world on notice.

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