Typically, interest rates are lowered when we enter recession to reinvigorate demand/the economy.

Once you’re at 0%, where do you go next? For this let’s go back to a 2002 speech written by Ben Bernanke, fmr FED chairman during 2008 crisis. (Link below)

“Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition”

“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

“To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys.”

“Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities.”

“A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.”

“Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital...

...and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.”

Everything suggested in this paper has been done so far in the last 18 years:

1. 0 rates
2. Discount windows
3. Taking corporate commercial paper of the same maturity as collateral
4. Fed to offer fixed-term loans to banks at low or zero interest

5. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

*IF* this doesn’t work... what’s next? He offers some clues:

“Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases & domestic money creation. The devaluation & the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly”

But history doesn’t repeat it rhymes.

The modern version of this isn’t devaluation against gold (we don’t have the gold std anymore). Rather, it’s dressed as modern monetary theory.

“MMT advocates argue that govt should use fiscal policy to achieve full employment, creating new money to fund Govt purchases. The primary risk once the economy reaches full employment is inflation, which can be addressed by raising taxes & issuing bonds to remove excess $$”

This is the plan for monetizing the Green New Deal FYI. https://www.npr.org/2019/07/17/742255158/this-economic-theory-could-be-used-to-pay-for-the-green-new-deal

Typically, countries that have tried this and failed.

BUT of course, we MAY be able to pull it off this time.

Plus, we don’t know how the $ reserve status impacts this.

Now, all other countries are doing this without the reserve status + have $ denominated debt.

Their currencies will experience pain.

Nobody knows how this big monetary experiment ends but I’m sure the 60-40 equity and bond portfolios aren’t hedged for tail risks coming out of this.

This is why I am dismissive of the “buy the dip” investment managers who use aphorism (“stay the course”) instead of reason to guide investment.

No the stock market doesn’t always go up. See Japan, Europe and EMs - never got back to their highs.

All this isn’t new. Peter Schiff, Taleb etc. have been warning about the tail risks from this for a decade now.

...while Wall Street was proclaiming that the boom-bust cycle is over (LOL). https://www.bloomberg.com/news/articles/2020-01-22/bridgewater-co-cio-bob-prince-says-boom-bust-cycle-is-over

So anyway, we are in uncharted territory and nobody knows everything.

Best to learn and think for yourself and if you must, work with an investment advisor who “gets it”.

Here’s the 2002 Ben Bernanke speech FWIW:

https://www.federalreserve.gov/boarddocs/speeches/2002/20021121/