policy of ZIRP has had little to do with protecting the health of the capitalist system, but rather has been a ruse to protect the rich. The policy is not only failing to deliver growth, it is also immoral.
The stock market impact
Pretty much every equity bear market in the US over the last 30 years has occurred against the backdrop of the working poor experiencing a decline in living standards (the one exception was 1987 when the market was reacting to over valuation).
Conclusion
Every US recession that I can recall was preceded by a fall in long rates and I doubt the next will be much different. As such, do not expect the next US downturn to arise from the Federal Reserve pushing rates higher, an overvalued dollar or even mal-investments. Expect it to result from a decline in the income of the working poor. Early warning signs are likely to show up in the shopping isles of stores such as Wal-Mart Stores, Inc. (NYSE:WMT), average driving miles, and the price of houses at the cheaper end of the market. I suspect the lesson that will eventually be learnt is that in a modern industrialized economy there are few worse things a central bank can do than deliberately attack the spending power of the poor.
Given the Fed’s asinine policy stance, at least since 2002, it seems likely that the prices of discretionary items bought by the least well off are likely to slip into a protracted decline. Hence, the deflationary tendencies that have been visible for some years are likely to explode during the process of a deflationary contraction. The fact that the price of oil, gas and rents has continued to rise only hardens my conviction in this view.
I make no claim on the timing of this outcome. But the end game for this cycle is surely for US long rates to decline and quality spreads to open massively. My advice would be to maintain a deflation hedge in all portfolios, improve liquidity and boost the quality of both bond and equity holdings.
