The Paul Krugman if we only do more ZIRP model has officially and finally been proven a failure with absolute certainty. Anybody asserting this economic nonsense should be embarrassed by the Academic community writ large. New legislation is required for restricting Central Bank Authority going forward.

Central Banks are doing the exact opposite of what they should be doing, causing the very conditions they are trying to fix through continued policy methods of ZIRP and Asset Purchases. Not only are Central Banks the initial cause of the existing deflationary growth spiral around the world, they are exacerbating the problem by doubling down on ineffectual policy and thereby causing additional downward impetus to the negative feedback loop of inefficient capital allocation choices by investors and capital markets.

If you want to spur growth around the globe start respecting capital, pay a respectful interest rate for capital, positively reinforce investors to put capital to work in the actual economy with real growth projects and not stuck chasing low margin yield strategies in bond markets further reinforced by Central Bank Asset Purchases – this is the definition of Capital Hoarding and Deflationary for Global Growth from a capital allocation standpoint.

The Japan Economic Model has failed and the closer other Central Banks come to emulating this model the more their economies will resemble Japan`s slow growth economy. I realize this is a hard concept for economist`s to get because it is slightly counter intuitive to economics in general, but makes sense when talking about setting incentives for financial markets and capital investment choices. If you want to incentivize positive investment strategies and get this money out chasing real growth opportunities you don`t do this with negative interest rates but the exact opposite you do it with higher interest rates. You don`t effectuate this change in investor behavior by charging interest on deposits this is backward thinking policy, you just raise interest rates dramatically around the world and watch what happens to all this hoarded capital in storage around the globe in the banking and financial market system.

Because we are just not talking about the banking system but financial markets as well which have become inexorably linked and meshed with the banking system even more so with the advent of ZIRP. A low interest rate has negative consequences that reverberate throughout the entire financial market system and eventually resulting in what we have now – a capital hoarding bubble just on the verge of a tipping point of absurdity reflected in the German 10 Year Bund today finally going negative in one of the best performing economies in Europe.

Forget about providing the necessary conditions for the next financial market instability black swan event, ZIRP and Asset Purchases just plain don`t work on any extended time frame past an emergency liquidity shortage phase of 6-8 months. Where is the academic community in all this as well, we have over 30 years of documented evidence that ZIRP fails …read more

Source: There Needs to be a Chinese Wall between Monetary Policy and Markets (Video)

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