Zero interest rates

The (attempted) murder weapon was monetary policy. The culprit was the Fed. The location was everywhere.

We now turn to the role that monetary policy has played in creating the current generational dilemmas. Quite simply, the zero interest rate policy of the last decades created a consumption boom that borrowed from the future.

It's hard to overestimate the role low or zero interest rates have had on intergenerational welfare. The interest rate, as Chancellor (2022) points out right from the title of his book, is The Price of Time. It connects the world of future generations – who by definition live in a future time – with the current generation. As Sternberg (2019: 136) observes: ‘Given the negative consequences of ultralow interest rates and quantitative easing for Millennials, the obvious solution would seem to be to return monetary policy to something closer to normal.’ Since he wrote his book, we have had the pandemic and central banks have doubled down on lower interest rates. The post-pandemic inflation, rather than equity concerns both within and across generations, has led to some – at least temporary – reversal of the policy. For these reasons, it will be impossible to talk about generations without a couple of chapters on monetary policy, not always everyone's subject of choice. Should we follow Sternberg's advice and ‘return … to normal’?

A thesis of this book is that, for all the talk of unique challenges and extraordinary responses, for all the credit given to innovations in macroeconomics and monetary policy, very little that happened from 1980 to the time of writing is inconsistent with the economics framework from the early 1980s. It's like a car with 160 mph on the speedometer – in a country with a speed limit of 70 mph, the full capabilities of the car (and the no doubt lesser capabilities of the driver) will never be observed. The zero interest rate world – and its supporting cast of quantitative easing, forward guidance and (in Japan) yield curve control – was always on the monetary map, it's just that sailors were too cautious to go there. The map was clearly marked, ‘there be monsters there’. It just needed a whispered ‘Weimar Republic’ to stop a central bank in its tracks of monetary expansion.