The Big Read “Why rescue finance will slow the recovery” (August 27) argues that rescue finance for corporations increases the number of zombie companies. That hampers productivity, a main driver of growth.
Following the Fed’s new and higher inflation target Michael Mackenzie writes: “Fed plan for a hotter economy has no guarantee of success” ( August 29). It is a mild way of putting the issue. Lower policy rates, in trying to make way for the Fed’s new targeting of higher inflation, will again result in even more debt creation which again will make for less growth in the future. The reason is that debt accumulation today will come at the expense of growth tomorrow. One such transmission channel is by debt creation that misallocates capital by creating more zombie companies that cannot pay interest out of their earnings.
Lower policy rates and more debt contradicts another credo that underlies the Fed’s retargeting of inflation, a belief for which there is no evidence: that more inflation fosters growth, as also mentioned in the FT’s editorial “The Fed’s welcome inflation evolution” (August 28).
It looks very unlikely that the mere wish of the Fed for more inflation will also lead to it. Strong disinflation factors are in place: demographics, technology, globalisation, and a sentiment of insecurity in the labour market that dampens wages. To these disinflation factors is now added the Fed’s new higher inflation target, which implies even more debt creation that weighs on growth.
The aim should be to build a sustainable base for growth. The Fed’s new policy looks misconceived and unwise. It is likely to worsen the outcome.
Dr. Frank Boll
This letter was published in the Financial Times of 3 September 2020