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.