The curse of zero rates: How central banks’ effective instrument brought the US to a dead end

The curse of zero rates: How central banks’ effective instrument brought the US to a dead end

Vasily Koltashov

Cheap borrowed funds with a simultaneous increase in public debt since 2008 remain the basis of the policy of the Fed and the US administration. Having started the fight against the global crisis with a zero rate, the United States was unable to abandon it by 2022. The temporary measure turned into a permanent burden: government and corporate debt rose, but the economy did not recover.
Is there a way out?
In early 2008, the securities markets experienced several alarming falls. Few analysts saw this as a signal of an imminent collapse. The Fed responded to the challenge, trying most of all not to overestimate the threat. The rate was reduced on January 22, 2008 from 4.25 to 3.5%, and on January 30 – to 3%. In March it was reduced to 2.25%, in April – to 2%. This was considered sufficient: credit for commercial banks fell in price, interest should have dropped further, improving the position of businesses and households. However, in the fall, the real collapse of the markets began and the banking crisis opened. All of the Fed’s measures were crossed out by this.
On October 8, 2008, the FRS rate dropped to 1.5%. On October 29, it was 1%. All this did not help to stop the development of the crisis. Therefore, on December 16, a historic decision was made: the rate was set at 0.25%. A similar measure was taken in 2020, when the sharpest drop in the oil and securities markets occurred in April, – this is how the circle for the United States closed. They found themselves tied to an ultra-low rate.
Although at the beginning of 2009, American regulators did not at all consider themselves trapped in a zero rate – in a situation where the rate cannot be increased without strong destructive consequences for the US financial system and budget – and in 2009-2015, the United States more than once thought about normalizing the FRS rate … But the Fed decided to raise it to 0.5% only on December 16, 2015.
Then US President Barack Obama in his address to Congress said: “The shadow of the economic crisis has passed, and the position of the country is strong … Today, after a breakthrough year for America (2014), our economy is growing and creating jobs at the fastest pace since 1999.” In 2018, he added proud words about rising wages and his contribution to the cause: “So when you hear all this talk of economic miracles, remember who started it.”
Beautiful speeches could deceive anyone but analysts. The Fed was very slow to raise rates, aware of the fragility of the structure of growth and apparent prosperity. At the end of 2016, the rate rose to 0.75%. This was all the more logical since the second wave of the crisis was raging in the world in 2014–2016. Low key rates insured the United States from falling into the funnel of a new stock market decline. As the situation improved, the Fed became bolder. In 2017, the rate increased in several stages to 1.5%. By 2019, it was gradually raised to 2.5%. It seemed that it was possible to get rid of monetary dependence without losing the signs of economic growth.
Behind the “great success”
Perhaps the United States would have succeeded had it dealt with an ordinary – medium cyclical crisis or just a financial crisis. However, what appeared to be a temporary disruption to the stock market and banking system due to too many unsecured mortgages in America turned out to be more than that. That is why the Fed had to hold the zero rate for almost eight years, and then very slowly return it to normal. An unprecedented case in the history of economics.
At the same time, the Federal Reserve System carried out the buyback of distressed securities. These programs have gone down in history as quantitative easing (QE). The audit revealed that between December 2007 and June 2010, the Federal Reserve issued $ 16 trillion in interest-free loans to banks and corporations. The government has done its part by constantly raising the debt ceiling. The US national debt rose from $ 8.95 trillion in 2007 to $ 28 trillion in 2021 (the $ 20 trillion mark was passed in 2017). The rise in government debt and the cost of servicing it supported a continuous increase in estimated GDP.
The miraculous end to the crisis that Obama has been talking about has cost dearly. The government and the Federal Reserve had to constantly pump huge funds into the economy to maintain the visible success of the business. Positive declarations were made, but a significant increase in the rate was not possible.
In 2019, there were signs of overproduction in China. World GDP growth slowed down. The Federal Reserve has lowered the rate several times – at the end of the year it was 1.75%. But the measures turned out to be extremely inadequate. On March 3, the rate was reduced only to 1.25% and only on March 16, after short fluctuations, it was reset to zero – to 0–0.25%. So the United States spent colossal monetary resources, and ended up where they were at the end of 2008, only with the market in a more fragile state. At the same time, the state’s debts more than tripled.
Behind the “great success” of many years of anti-crisis policy, statements about the successes of Barack Obama and Donald Trump, there was a grave unhealthy state of the American financial system. Ultra-low rates have changed from temporary to permanent. Refusal from them threatened to lose control over the stock market and the real sphere of the economy.
What was the global crisis
Thus, the US anti-crisis policy for many years only removed the symptoms of the crisis. He himself continued to exist in a latent form until problems got out of control in 2020. Then the American ruling circles returned everything to its former state. In the report “The Crisis of the Global Economy and Russia”, published in June 2008, Russian scientists warned: the world crisis is systemic, deep and long-term; the neoliberal model of growth has been exhausted due to the exhaustion of the possibility of expanding consumption in the old centers of capitalism; robotization is inevitable, the restructuring of trade ties, the strengthening of new centers and an increase in the role of the state in the economy. But most importantly, it was explained that the crisis produces a change in a long wave – a long era of development, which was born out of the crisis of 1973-1982.
The great multi-wave crisis of 2008–2020 repeated similar crises of the past in its own way, I spoke about this in the book Capitalism of Crises and Revolutions: How Formational Epochs Change, Long Waves Are Born, Restorations Die and Neo-Mercantilism Comes (2019). The United States was not ready for the arrival of a new mercantile system based on regulated trade, protectionism and rivalry between the old and conventionally new great powers. During the years of global financial turbulence, their foreign policy was aimed at obtaining resources from outside, through hacking into Russian, Iranian, Chinese and other markets. Perhaps the States would have done better here, but they kept internal economic ill health.
2020 has permanently cemented US problems in the form of a zero rate. It is impossible to refuse it, since a fundamental decision was made to leave everything as it is in the economy, that is, to prevent the depreciation of securities and real estate. Devaluation of the dollar is not allowed either. But its weakening in terms of commodity is guaranteed, which has already been interpreted as a “raw material crisis” and global inflation. Such a depreciation of the dollar, slow and even outwardly unnoticeable, would mean an increase in the weight of economies in the world with large commodity production and exports. For the US itself, it has become dangerous to act sharply in foreign policy, as this could throw the financial system out of balance.
Trapped content
By the end of 2021, global GDP is capable of growing by more than 5%. The International Monetary Fund (IMF) predicts record GDP growth in the United States – about 7%, in 2022 it is promised growth of 5%. The abundance of dollars in the global economy, the memory of the March 2020 market crash, are working like never before to increase commodity prices, including oil. This increases the activity in closing deals, although the expansion of production is proceeding cautiously. For example, OPEC + ignores US requests by refusing to increase production.
In this situation, everyone expects further price increases and strives to buy what is needed without delay. Almost zero rates in the West guarantee the superiority of the money supply over the commodity supply. The world economy is a system of communicating vessels, and for the first time in many decades it began to work for the new production leaders of the world system.
The United States cannot change this situation. If the crisis in America was relatively free in 2008-2009, the fall in the stock market and corporate defaults would clear the field for healthier structures, the devaluation of the dollar would reduce the pressure of debt on the budget, the price of labor and real estate would go down. The US would have come out on the basis of growth in a healthier form, and the Fed – with a rate of 6-7%.
However, the growth of US GDP today is more than anything else the growth of debt. Bubbles in the stock market persist and, in my opinion, are doomed to further inflate. The pre-crisis high of the S&P 500 stock index was around 1,550, in November 2021 the index reached 4,700. In 2020, on the cash infusions of the Fed and the government, US securities grew along with unemployment, which happened for the first time in world economic history. Such a mismatch of processes speaks of the strength of the imbalance in the American economy and the readiness to flood any market problem with dollars, which is absolutely wrong for capitalism.
The United States did not eliminate the crisis in its economy and did not allow it to do the job of correcting the problems. They first mothballed it (2009-2017), and then made the threat of getting out of control of its destructive manifestations an eternal companion of their credit and budgetary policies.
The key bet can be a great tool when in the right hands and when not overused.
The United States was led to a dead end by the abuse of the rate – they are doomed to lose their positions in the world economy and politics. The American state and economy will have to remain trapped in ultra-low rates for a long time, thereby fueling the growth of world prices and other economies.

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