Number one problem is the monetary system, it’s in big trouble. Do we prolong it? or bury it?
First question, can it be prolonged? Is that even possible at this point?
There are two paths to consider:
1) Lower rates to negative. I believe this path leads humankind to extinction level decision points. The extinction risk wouldn’t be immediate, but the possibility would grow with time as political leadership shifts from Bankers and Dictators, to the Generals.
As far as I can see, the number one issue with negative rates is that it turns assets into liabilities:
Anything that produces an income is an asset; but a negative rate environment is one that enforces a loss making environment upon all agents. Even keeping cash in a bank, or in Treasuries, would inflict a loss upon the owner. If we lift lockdown with a trend toward negative rates, then the smart money will fire sell all “assets” into Gold. Because they know, ultimately, that taxation (indirect and direct) will change the asset into a tax liability.
Why own a car? It’ll be taxed via insurance and licensing. A house? Taxed. Commercial property? Taxed. Stocks? Taxed. Treasuries? Taxed. Negative rates is like a tax on ownership, this will collapse flow forcing governments to raise taxes on existing stock. If the exchange value of an asset is depreciating due to taxation, then agents will soon learn that renting makes the most sense and they’ll sell everything.
This would result in anarchy. There’d be no investments. If rates are kept at zero, then same problem just not as imminent. The Fed can give Trillions to the banks, it just won’t matter. There’s nothing to do with those Trillions. It’ll generate no profit, and be run down by losses and costs.
Ultimately, government can tax two things: profit and assets. With rates at zero there’s no profit to tax, so that leaves them with taxing existing assets. Small businesses would fold first, then households. There’ll be huge political pressure on the central bankers to continually print to finance all levels of government: this results in hyperinflation of the cost structure and cascading bankruptcies, aka mad max scenario.
2) Raise rates above the general rate of growth. Say raise it to 6%, that would force all entities not earning enough revenue to service 6% to file for bankruptcy—forcing them to discharge debt and restructure their costs. It’s the inflating cost structure that is the number one economic issue inside the US; nothing can be fixed until that is fixed.
Unfortunately, Secretary Mnuchin had a great chance to do this in late 2018 and he bottled it. What a missed opportunity, a historical failure of leadership.
Now, this path is also very dangerous, because the oil system would be endangered by low pricing power. If rates are raised, Gold may need to be brought in-system to semi-permanently raise an inflationary backdrop to support those raised rates and oil consumption.
You could also block China to raise inflation, but that would only crash the profitability of American corporations and restrict supply to the US—supplies required for rebuilding—and third party nations would be forced to choose between abandoning Chinese investments and … fake money?
I think business is business, and the owners won’t like that.
Difficult situation, deadly.