America’s Zero InterestRate Will Lead to AWorldwide Tectonic Shift

America’s Zero Interest Rate – Let Us Prepare for a Worldwide Tectonic Shift

America’s zero interest rate is an extreme prescription designed to stimulate the near-dead economy. America is even ready to engage in disregarding limits by printing unlimited dollars, at the risk of falling into a liquidity trap. For our economy, this is, in the short-term, definitely a boon. The Seoul index has rebounded, and the Won-Dollar exchange rate has declined to 1,200 won per dollar levels. It has also given room for the Bank of Korea to further reduce interest rates. If household interest burdens decline, the real estate market will find stability.

Extreme prescriptions, however, are accompanied by serious side effects. Japan also once tried “quantitative easing” with zero interest rates, but did not see an effect for three years. Rather, it further exacerbated the flight of capital overseas. The problem now is the fact that the world’s key currency, the U.S. Dollar, is unstable. Normally the only way a key currency regains its status is the so-called “Bagehot’s prescription” – a massive cut in spending along with large increase in interest rates. In this case, however, the U.S. is going along the opposite road: it has injected astronomical sums for the bailout while also reducing interest rates to zero.

In the foreseeable future, the value of the U.S. dollar is sure to weaken. Already, the authority of the dollar as a key currency has been diminished as it weakens against the major currencies. Who would invest in dollar-denominated assets, facing low interest rates and foreign exchange losses? Moreover, since the abolition of the gold standard in 1971, the value of the dollar is no longer guaranteed by gold. When the key currency becomes unstable, a supermassive tectonic shift in the world economy is inevitable. Such were the fates of the Roman silver denarius and the British pound sterling, that once ruled the world.

We also need to prepare for long-term consequences. China has revealed that it will not indefinitely continue to buy U.S. treasury bills. Japan is suffering from a big yen-high. If the tendency to evade the dollar spreads, the value of the dollar will further plummet. To face such a nightmarish scenario, the fundamentals of the economy must be strong. The speed of structural reforms must be heightened to improve the economy and the financial system must be quickly stabilized. When in the 19th century the British pound was unstable, the Deutsche mark did not budge – due to Germany’s strong manufacturing industry and healthy financial sector.