Market Discipline and the Glaring Correlation that Bernanke and Yellen Ignore
In a distant galaxy, in a land far away governed by the law of economics, an increase in supply would have a resultant effect on price. More of something would reduce the price of that something. Hence, more debt sold via bonds and notes would depress the price of both, resulting in higher interest rates. The interest rates paid on that debt is the cost of “servicing” the debt.
The higher that “service," the higher the cost to those who create the debt. The higher cost would thus deter further creation of debt. An economic balance would ensue.
Japan is our lead indicator in detecting the ramifications of zero interest rate policy (ZIRP). Japan was the first, about 15 years ago, to move to this policy. The United States via the strangely empowered Federal Reserve followed in a knee jerk reaction to the 2008 financial meltdown. The “knee jerk” reaction has thus morphed to a permanent policy. There is pretense that a special and clever “exit” is possible. Ben Bernanke even outlined such in a Wall Street Journal article. That was nearly five years ago. Yellen now keeps the “promise” alive, and will likely hand it off to her successor. For the fact is that no country has gone to a ZIRP and exited the policy.
This chart below is an indication of why. The creation of debt surges when the cost of the creation of that debt plummets.
This is the great and indisputable correlation that Bernanke and Yellen pretend doesn’t exist.
They would rather attempt to think cheap money begets maximum employment. What it begets is maximum debt creation. Once that debt is created, either the holder of that debt will eventually suffer or the servicer of the debt will suffer. Unfortunately, the creator of the debt will determine, for a while, the outcome via temporary controls implemented by Central Banking (Planning).
Japan has shown us where we are headed. We turn our heads, divert our eyes, and pretend it won’t happen. History will shake its head. Our country suddenly, via the Federal Reserve and their protracted “emergency” policy of ZIRP, has left the free market economy and its market forces to the delight of the debt creators. Question the Federal Reserve, for they embody a departure from a free market society and lead us to the fate of Japan.