Yellen’s Education – An Outside the Box Thought

At some point she may learn what has been constantly thrown in her face.

That is :  1) Extremely low interest rates do not boost real growth.

and furthermore:

2) Extremely low interest rates should be used as a temporary solution in major economic dislocations, a maximum of one year.

3) Extremely low interest rates are not a long term solution to economic growth.

4) Extremely low interest rates create a multitude of no growth business deals.

Back in the 80’s when Volcker was cleaning up an inflationary behavior problem, I had an old timer say to me ” Ventures financed at 5 % interest that have zero operating profits will go broke after 20 years (5 X 20) = 100.  At 20 percent interest rates, the tables are cleaned up in 5 years.”

By extension, at today’s  zero interest rates, stupid deals can theoretically survive forever.

Here is an outside the box thought, what if the lack of economic growth today, all the money sitting in speculative deals, is really a function of operating behavior.  Maybe the same solution that Volcker used to curb inflationary behavior, could be used to curb deflationary behavior. ie, 20 percent interest rates.

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