Fed seeks to end buyers' strike

With its announcement that it was going to pursue zero interest rate policies for a minimum of two more years, the Fed upped the stakes in its effort to end the buyers' strike.  The buyers' strike applies to all forms of investment.  This includes everything from risky assets like stocks and long term bonds to business expansion.

The question is will the knowledge that interest rates will be artificially held at zero forever change buyers' behavior?

If the experience of Japan for the last two decades is any indication, the answer is a resounding NO!

Why should the Fed or any other central bank pursuing similar policies expect zero interest rates to end the buyers' strike?

Investors are acting according to Mark Twains' observation that he was more interested in the return of his capital than the return on his capital.  Given what has happened since the start of the Great Contraction this makes sense.

What has happened since the start of the Great Contraction?

Investors learned two lessons from blindly chasing yield.

First, they learned the difference between investing and blindly betting.  Investing requires access to all the useful, relevant information in an appropriate, timely manner and evaluating this information so that the risk and return can be assessed.  Blindly betting is buying opaque financial innovations like CDOs cubed.

Second, they learned that return of their principal is more important than capturing a 1 - 3% higher return on their principal.  When the focus is on return, significant losses of capital result.

What has not happened since the start of the Great Contraction?

Policymakers and economists have not followed the advice that they freely gave to Japan when its bubble burst.  Their advice was that the most important thing Japanese policymakers could do to restart their markets and economy was to publicly recognize the size of the losses related to the bubble and who was holding them.

Why did they give this advice?

They knew that until the losses are recognized buyers will stay on strike.   Buyers know that the losses exist, but without the disclosure of how big the losses are and who holds them, they do not know how the losses will impact them.  So, rather than take a risk - which is what investing is - buyers go on strike and "invest" where they can get their principal back.

By not recognizing the losses, policymakers are perpetuating uncertainty in the economy that undermines buyers' willingness to invest.  In essence, until the losses are recognized, the losses are the elephant in the room that crowds out everything else.

I am not going to speculate about why western policymakers and economists did not act on their own advice since the start of the Great Contraction.  I will just note that they have not acted and the resulting economic malaise and related buyers' strike has been extremely predictable.