In physical chemistry, everyday principles seem to be suspended as temperatures approach zero degrees Kelvin. It seems that as interest rates approach zero, the normal laws of finance get suspended as well.
When temperatures approach absolute zero gas volumes contract to a theoretical singularity, electrical components experience superconductivity, and perfect crystals can form. When interest rates approach zero banks no longer have any incentive to hold excess reserves at the Fed, there will be more and more transactional failures, and interest rates can no longer be lowered to stimulate demand.
All through the 90s Japan had a zero interest rate policy coupled with aggressive fiscal stimulus. We’ve called that period in Japan’s history, “The Lost Decade.” Let’s hope we’re not headed down that dismal road.
Douglas R. Tengdin, CFA
Chief Investment Officer
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