Investing like it’s 1999

Investing like it’s 1999

There’s a lot going on…

Before we look at what’s going on today, let’s go one step back.

To February 1999, to be exact.

A time when Alan Greenspan was in charge of the Fed.

The euro was a month old, but the currency was yet to circulate the eurozone.

The market crash of the 80s was a distant memory for most.

Except the Japanese, whose economy collapsed in 1991 and began what we now call the ‘lost decade’.

To revive the country’s flagging economy, the Bank of Japan (BoJ) did the unthinkable.

It lowered interest rates to 0%. And they stayed that way for almost a decade…

Uncharted territory

Japan’s move to zero was the first time in global central bank history that a zero interest-rate policy was used.

Compare that to the rest of the world at the time.

Both the US Federal Reserve Bank and the Reserve Bank of Australia had a cash rate of 5%. The Bank of England set its benchmark to 5.5%. The Deutsche Bundesbank (central bank of Germany) set rates at 2.5%.

Former Fed chairman Ben Bernanke was incredibly critical of the decision, as he wrote in a report titled ‘A Case of Self-Induced Paralysis’.

Bernanke suggested that zero interest rates were not necessary and that ‘to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan’.

Less than a decade later, when the financial panic unravelled in the US, Bernanke changed his tune and followed BoJ’s lead.

The Fed dropped rates to near zero and flooded the US with cheap money.

Bernanke did this despite knowing that the BoJ’s decisions crippled a nation of savers. The zero interest-rate policy didn’t boost spending. Instead, people hoarded money…

Japan led the world into a new monetary experiment.

In spite of the disappointing economic outcome for Japan, Bernanke followed suit nine years later.

And now, today, Jim says the Fed finds itself in a precarious position.

He says the Fed kept rates too low for too long.

Plus, it was coupled with trillions of dollars in government spending.

These debt-fuelled emergency monetary policy measures have taken the US into the ‘red zone’, says Jim. Read on for his full analysis.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia