Will America turn itself into a zombie economy like Japan?

Artificially low rates of interest tend to keep business failures alive

- ALLISON SCHRAGER

Over the next decade, the US economy will face two big challenges: higher interest rates and AI-generated disruption. Each invites the same solution: keeping rates below market level.

This strategy, also known as 'yield-curve control,' is tempting and it may even provide an immediate boost to the economy. But messing with rates would be a mistake. Japan's experience shows that the long-term costs of keeping rates artificially low far outweigh the short-term benefits.

It's easy to see the hardship caused by higher interest rates. In the US, rates on long-term bonds (ones that mature in 10 years or more) have trended up since the covid pandemic. This means consumers pay more for their debt and mortgages. Businesses pay more for loans. The government pays more to service its debt. A lot of the US economy is built around the historically low rates of the last several decades, so the longer interest rates stay high, the more disruption it will cause.