If we don’t understand what ails us, how could we ever possibly figure out a cure? In essence, I believe that the ratio of policy makers that understands our present economic predicament is about the same as the Fed funds rate, i.e., ZIRP.
The prescription we followed for curing oversupply problems–in housing, cars, etc.–was to increase demand by lowering the price of money. That has ultimately yielded nothing but a more vastly oversupplied condition.
The prescription now should be to allow prices to go down and equilibrate supply and demand conditions such that existing supplies are cleared out and the least efficient suppliers along with them. This really is Econ 101. That people keep talking as if lower prices equate to deflation–a terrible bugaboo that is to be avoided at all cost–is quite troubling, because it is wrong. Lower prices may indicate deflation. They may also indicate simply that supply exceeds demand. Why don’t we let prices decline and see?
I know this. Problems caused by ultra-low interest rates, i.e., massive infusions of liquidity, (such as in the housing market) will not be resolved by even more massive infusions of liquidity. If one needs an example, just look to Japan. How this seems to escape our brilliant intellectuals shows nothing more than that intelligence and wisdom are two separate things, and the second does not necessarily follow from the first.