Richard Salsman, President and Chief Market Strategist at Intermarket Forecasting Inc., has written a pithy commentary in the Financial Post suggesting the Federal Reserve is open to a negative interest rate policy (NIRP) if it determines that economic conditions warrant such action.
The final few sentences are key:
"In finance there’s a standard “risk-reward trade-off.” With ZIRPs [zero interest-rate policy] and NIRPs, policymakers effectively seek to eradicate return, then wonder, in disbelief, why an economy lacks risk-taking and entrepreneurial spirit, and why banks, firms, and household alike persist in hoarding cash."
A reader from Calgary, Alberta posted a laughable comment stating that the article is ignorant of basic economic facts. Such a comment could only be written by someone so steeped in Keynesian nonsense that he believes corporate investment is weak because of "the persistent low rate of inflation (and the fear of deflation)". The reader obviously didn't grasp the passage cited above.
Quite simply, the Federal Reserve (and other central banks) cannot distort (e.g. artificially depress) one of the most important prices in the world (the benchmark overnight lending rate) and not expect serious consequences to the economy. Just because the Fed has managed to keep short-term interest rates at abnormally low levels does not mean the credit is cheap and plentiful. Price controls do no such thing. As long as central banks continue to manipulate vital market prices via a "ZIRP" or "quantitative easing (QE)", the economy will be robbed of vigor. Those with resources to lend will not offer those resources up to borrowers absent a return on that capital reflective of the risk taken. Capital will not migrate to its highest and best uses absent market-based price signals. This is pretty basic stuff and completely lost on most of the pathetic economics profession.
Note: For more information on Intermarket Forecasting Inc., please click here.
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