The same principal has left the nation’s public and private pension funds badly underfunded.
“We are actually more underfunded than we were at the end of 2008 because of the drop in interest rates since then,” said John Ehrhardt, who tracks fund performance for benefits consultant Milliman.
That “same principal” is The Fed’s ZIRP policy.
By picking winners – in this case the banks who made imprudent loans and should have been forced out of business, along with “protecting” the imprudent buyers of bonds in institutions that made those imprudent loans, the prudent are getting hammered.
There is no solution to this other than to stop doing that. And this means withdrawing liquidity and forcing the borrowing of money to have a reasonable cost, so that those who lend money through the purchase of bonds can earn a reasonable inflation-adjusted return.
The initial “impact” of low interest rates appears seductively good. It’s not – it’s always bad. It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.
As these people are eviscerated their ability to contribute positively to the economy is likewise destroyed, and in particular, capital formation is critically damaged.
This is the real story on how Japan lost two decades.
We will follow them unless we stop this insanity, and soon.
(PS: Are the unions still sheep on this issue, more than two years after I started sounding this alarm?)