Schrager: A zombie economy could be America's future
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Schrager: A zombie economy could be America's future
"Over the next decade, the U.S. economy will face two big challenges: higher interest rates and AI-generated disruption. Each invites the same solution: policies to keep rates below their market level. The strategy, also known as yield-curve control, is tempting, and it may even provide an immediate boost to the economy. But messing with rates would be a mistake. Japan's experience shows that the long-term costs of keeping rates artificially low far outweigh the short-term benefits."
"It's easy to see the hardship caused by higher interest rates. In the U.S., rates on long-term bonds (ones that mature in 10 years or more) have trended up since the pandemic. This means consumers pay more for their debt and mortgages. Businesses pay more for loans. The government pays more to service its debt. A lot of the U.S. economy is built around the historically low rates of the last several decades, so the longer rates stay high, the more disruption it will cause."
Over the next decade the U.S. faces two major challenges: rising long-term interest rates and disruption from artificial intelligence. Policymakers may be tempted to lower rates below market levels through yield-curve control, quantitative easing, or by requiring institutional buyers to purchase bonds. Lowering long-term rates can provide an immediate economic boost by reducing borrowing costs for consumers, businesses, and the government. Markets largely set longer-term rates, and many forces point to higher rates for longer. Maintaining artificially low rates carries long-term risks that can outweigh short-term gains. Japan's experience after its 1980s boom illustrates the potential costs of prolonged rate suppression.
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