Economic Outlook for 2013: ZIRP, Zombies, and the Japanization of the American Economy
Editor’s note: A version of this article first appeared at Forbes.com.
I recently indulged in some wistful, year-end nostalgia, but now that 2013 is underway, let’s turn our attention to a time more crucial to our well-being: the future in which we will live.
Forecasts for sluggish economic growth are common. Investment superstars and gurus such as Bill Gross of PIMCO and Jeremy Grantham of GMO, and researchers such as Dr. Robert Gordon of the National Bureau of Economic Research, all have predicted anemic growth for the next several years. With the caveat that when too many “expert” opinions agree, the resulting consensus can be spectacularly wrong, I agree with the pessimists.
The American economy is stuck in the molasses of unfathomably colossal debt. Team Obama will block any attempt to curtail the federal government’s chronic overspending or to reform its unsustainable growth in entitlements. President Obama’s regulators are ramping up costly, suffocating rules on massive scale. A compliant Federal Reserve continues to enable the destructive over-spending by further debasing the currency by aggressively increasing its supply. And don’t be fooled by modest rises in the Consumer Price Index; the Federal Reserve Note’s purchasing power is shrinking.
Looking ahead, I see no end to ZIRP – the Fed’s zero interest rate policy. Besides depriving savers of an opportunity to earn a measurable return on their savings, I suspect that the Fed will do everything in its power to keep interest rates artificially low, whether that power has been explicitly authorized by enabling legislation or not. The Fed simply cannot permit interest rates to rise several percentage points above current rates, because the ensuing cost of servicing the federal debt would consume so much of Uncle Sam’s tax revenue that the Fed would have to undertake a quantum increase in quantitative easing (raising it from a river to a flood of new monetary units) to provide enough liquidity to fund the government.
The continuation of ZIRP serves to keep large economic zombies – inefficient, dead-on-their-feet banks, corporations, and, of course, the grand-daddy of them all, Big Government – on life support. For healthy economic growth rates to return, these zombies need to be allowed to expire – that means bankruptcy for the private-sector zombies, and a massive down-sizing, if not the outright dissolution, of the federal leviathan – so that valuable economic resources can be reallocated to more rational, wealth-producing ventures.
If market forces were allowed to follow their natural course, the moribund, rickety structure of mistakes, malinvestments, and misguided government planning would be euthanized, clearing the way for renewed vigorous and sustainable economic progress. Both for ideological reasons (i.e., the progressives' preference for government planning over free markets) and pragmatic reasons (i.e., no politician, Democrat or Republican, wants to be blamed for a wrenching-but-healing reallocation of resources to their most valued economic uses) the powers-that-be will do everything possible to thwart market forces and preserve the sluggish status quo.
My suspicion is that we will take the route that Japan has been following since 1990. The Japanese political class has averted a full-fledged deflationary cleansing of their economy by engaging in endless rounds of Keynesian fiscal stimulus and loose monetary policy. One might expect near-zero interest rates to lead to an economic boom (i.e., bubble). Indeed, that is possible, but don’t discount the possibility that Team Obama and Federal Reserve Chairman Ben Bernanke will, like their Japanese counterparts, manage to keep a lid on economic activity as they strive to prevent a surge in economic activity that would cause interest rates to rise significantly and unleash a government-insolvency-followed-by-central-bank-hyperinflation sequence.
Team Obama’s army of regulators is prepared to restrict and subdue vigorous private-sector growth so that it won’t compete with public-sector spending and push up interest rates. The financial regulators in particular, now that Dodd-Frank has given them great power to ration credit and direct it toward the public sector, will be able to deprive the private sector of the fuel it needs to pick up speed and push up interest rates. Indeed, Dodd-Frank, which does so much to centralize control of credit in the state, may well be Team Obama’s greatest success in implementing Marx' 10-point platform.
I sure hope I’m wrong, folks, but it looks to me like 2013 will see a progressive Japanization of the American economy. Bernanke will persist in his ZIRP policy to prop up politically connected economic zombies, and official Washington will do everything possible to prevent a needed economic restructuring from taking place. The good news is that, against this unpromising backdrop, American ingenuity and creativity will find ways to prosper – but it won’t be easy. Good luck.
Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.