THE U.S. FINANCIAL QUANDARY: ZIRP’S ONLY EXIT PATH IS A CRASH

Abstract

Interest-bearing debt grows exponentially, in an upsweep. The non-financial economy of production and consumption grows more slowly as income is diverted to carry the debt overhead. A crash occurs when a large part of the economy cannot pay its scheduled debt service. That point arrived for the U.S. economy in 2008, but was minimized by a bank bailout, followed by a 14-year boom as the Federal Reserve increased bank liquidity by its Zero Interest-Rate Policy (ZIRP). Flooding the capital markets with easy credit quintupled stock prices and engendered the largest bond market boom in U.S. history, but did not revive tangible capital investment, real wages or prosperity for the non-financial economy at large.

Reversing the ZIRP in 2022 caused bond prices to fall and ended the run up of stock market and real estate prices. The great 14-year debt increase faced sharply rising interest charges, and by spring 2023 a number of banks failed, but all their depositors were bailed out by the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve. The open question is now whether the U.S. economy will face the financial crash that was postponed from 2009 onwards by the vast expansion of debt under ZIRP that has added to the economy’s debt burden.