Reference News Network, October 18 report: The Bloomberg News website published an article titled "Zombie Economy May Become the Future of the United States" on October 13. The following is a compilation of the content:
For the next decade, the US economy will face two major challenges: rising interest rates and the disruption caused by artificial intelligence. Each challenge requires the same solution: keeping interest rates below market levels. This strategy is called yield curve control, and it is appealing and may bring immediate economic benefits. However, intervening in interest rates is a mistake. Japan's experience shows that artificially low interest rates have long-term costs far exceeding short-term gains.
It is easy to see the dilemma caused by rising interest rates. In the United States, since the pandemic, the interest rates on long-term bonds (bonds with a term of 10 years or more) have been rising. This means consumers will pay more interest for debts and mortgages. Businesses will pay more interest on loans. The government will pay more interest on debt. The US economy is largely built on the foundation of historically low interest rates over the past few decades, so the longer interest rates remain high, the greater the damage will be.
Artificial intelligence presents another challenge. Even in the best scenario (i.e., artificial intelligence reshapes the economy, making Americans wealthier and more productive), artificial intelligence will bring massive disruptive changes. Some people will lose their jobs, and some positions will never exist. Some companies will fail or simply not get off the ground. Rising interest rates mean that struggling companies will face higher funding costs, making it harder to sustain their businesses and keep employees employed.
Therefore, the government will try every means to lower long-term interest rates. Traditional monetary policy often affects short-term interest rates; long-term interest rates are determined by the market. Various market factors indicate that interest rates will remain high for a long time.
The government can influence long-term interest rates through policies such as quantitative easing, i.e., central banks purchasing long-term bonds. The government can also lower interest rates by requiring pension funds or banks to purchase large amounts of bonds. However, this is a risky plan.
Japan provides a warning example. After the prosperity of the 1980s, Japan faced a slowdown in economic growth. To keep the economy running, it kept long-term interest rates low while implementing a combination of financial repression and quantitative easing. In a way, the policy worked. Japan experienced decades of slow growth and high debt, maintaining a relatively high standard of living, stability, and little unemployment, becoming a typical example of how a country can recklessly accumulate debt.
However, maintaining artificially low interest rates for too long comes at a cost. Japan is full of so-called "zombie companies": these companies neither make a profit nor have a viable business model, but they survive by relying on low-interest loans. However, when inflation eventually returns and global interest rates rise, Japan had to raise its own interest rates.
As many family businesses declared bankruptcy, these "zombie companies" are now going bankrupt. From a human perspective, this is a sad and painful process that also harms the broader economy. "Zombie companies" reduce Japan's economic efficiency, slow down growth, and trap generations of Japanese in unprofitable companies. Since the 1990s, Japan has started to artificially suppress interest rates, and its actual GDP growth rate has consistently been lower than that of the United States.
In the coming years, the United States and Europe are likely to implement some form of financial repression, using various means to force interest rates down. This not only makes America's dependence on debt appear manageable, but also helps ease the transition to an AI economy. Low-cost debt will allow more "zombie companies" that should have been eliminated by technology to continue surviving.
The Trump administration of the United States has already hinted at this possibility. Trump certainly wants to lower short-term interest rates, and Treasury Secretary Scott Bessent has openly expressed his desire to lower long-term interest rates. However, it is currently unclear how the US government will act. Moreover, Bessent has also stated that he is skeptical about taking more quantitative easing measures.
Bessent is right. Some of the current economic problems in the United States are the result of past attempts to control the yield curve. The Fed's quantitative easing during the pandemic is still causing problems in the real estate market; it artificially lowered mortgage rates, and when inflation returned, mortgage rates increased. At the same time, the US Treasury's bond portfolio is losing money, and as the Fed reduces its massive balance sheet after the pandemic, the bond market is experiencing distortions.
All of this is the result of trying to control the yield curve in just a few years. If this becomes the norm, more severe distortions are expected, and the independence of the Federal Reserve will face greater threats. Japan implemented policies for decades that gave rise to thousands of "zombie companies." The danger facing the United States is that if large-scale financial repression is implemented, it could create a "zombie economy." (Translated by Zheng Guoyi)
Original: https://www.toutiao.com/article/7562466061972210222/
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