The ZIRP can only create reflation in asset markets, in effect, another unsustainable bubble. Quoted from Dan Alpert’s essay:
“I am sure that Professor Krugman agrees that the Great Recession and its sluggish aftermath saw a mammoth decline in aggregate demand. But if present levels of aggregate demand are insufficient to revive our economy, such demand must be insufficient relative to something else. And in this case – seen from a global perspective – that something else is the global aggregate supply of labor, productive capacity and, yes, even capital. Much of this excess supply can be traced to the historically sudden emergence of the post-socialist nations into the global market economy – which nations are characterized by extremely low wages relative to those of the developed world.
As a result of the foregoing, wages in the U.S. and other areas of the developed world are unable to “track” (that is, to follow along with, even on a lagging basis) the type of inflation resulting from the ocean of liquidity that quantitative and credit easing policy of the Fed, the ECB and the Bank of Japan has produced – generally speaking, inflation in highly tradable commodities and financial assets. No wage growth (because of the dampening effect of excess emerging market labor, always standing by to work cheaply where it can compete with endogenous U.S., European or Japanese labor)…no sustainable inflation. As a result, high levels of inflation tend to collapse economic activity, as limited per capita wages are shunted to oil and food, rather than to more expansionary forms of consumption.”