To watch financial markets in the dead of August, one might think that the world economy is in a death spiral. That’s possible, but the more likely explanation for the escalating turbulence is that world decision-making is frozen, transfixed by the absurdity of zero interest rates, and worried that the Federal Reserve won’t come to its senses.

Many articles on this topic have cautioned that the Fed’s zero rate policy and huge bond holdings would harm growth. They did, even worse than expectations. The result has been the nearly intolerable declines in the U.S. real median income and wealth (a good measure of middle class prosperity and income inequality.)

The crash in growth-oriented commodities such as oil and copper is the front-page story, but the longer the Fed persists, the broader the global economic problems. With neighboring Mexico now getting dragged into the Fed’s maelstrom, the negative effects will hit home even harder.

A July Fed white paper by a Fed researcher, Stephen Williamson, focused on the utter lack of logic in the Fed’s policy choice. He explained that “there is no work, to my knowledge, that establishes a link from QE (the Fed’s bond-buying) to the ultimate goals of the Fed — inflation and real economic activity. ”

That’s a damning charge coming from inside the Fed. One wonders: did the Fed choose the policy by chance? Williamson makes it sound that way, saying the theory behind QE is “not well developed.”

Instead of promoting growth, the Fed is currently borrowing 17% of the banking system’s assets in order to buy dead-end government mortgage securities and Treasury bonds. This channels credit to over-funded bond issuers, primarily governments and well-heeled corporations, at the expense of savers and the smaller borrowers who normally create most of the jobs.

Mr. Williamson also criticizes ZIRP, the Fed’s zero-rate interest policy: “The central banker becomes permanently trapped in ZIRP… He reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to (this theory), ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely. This idea seems to fit nicely with the recent observed behavior of the world’s central banks.”

Almost on cue, the view from a central banker trapped in ZIRP came out in the August 19 WSJ commentary by the president of the Minneapolis Fed, Narayana Kocherlakota. He opposes a rate hike, observes low inflation, and asserts that a rate hike would be a “tightening”.

That defies the evidence. With interest rates near zero, there has been slow growth in credit and the M2 money supply under the current policy, and there’s no evidence that zero rates have been broadly beneficial (though Wall Street loves them). A rate hike would likely be stimulative, not a tightening, and would lead to faster credit growth, as the taper did.

Underlying the policy confusion is the press’s constant use of the mantra that central banks are “printing money.” That’s belied by both Fed accounting and data. Over the last year (through July), the M2 money supply growth provided by the reserve currencies (dollar, euro, pound, and yen) was a stunning -4.5pct in dollar terms. That shrinkage is massively contractionary. Including China, it brings the global M2 reserve money supply growth to zero pct. That’s still not nearly enough money, plus China’s currency isn’t fully convertible.

Dr. Kocherlakota actually defends a resumption of Fed asset purchases. That’s like the overweight Atkins dieter telling you he may enter a hot dog eating contest to try to lose weight.

The bad results of the Fed’s ZIRP and QE policies have been clear for years. Business investment, the explicit target of the QE theory of low bond yields, has been notably weak. With U.S. growth stuck at an abysmal 2% or so, many parts of the world are sliding into recession and economic failure.

The Fed has repeatedly reduced its GDP growth forecasts because actual results didn’t match its model. That would normally cause a rethinking of the model and a reversal in policy, but the Fed just keeps eating hotdogs.

From the perspective of financial markets and Wall Street, current policy works because it concentrates wealth in their clients. The Fed is assured of broad Wall Street support if it stands pat, and if the U.S. heads toward recession, it will be easy enough to let blame China.

Thus, doing nothing is probably politically safer for the Fed than a hike. Markets are focused on Fed uncertainty, the possibility that the Fed might duck in September, and the risk of a global recession. The Fed chairman, Janet Yellen, will decide the issue at the September meeting based on the latest data regarding employment, prices and, to an extent, the deterioration in global growth conditions.

The logic is for the Fed to take a leap of faith in September as it did with the taper under Bernanke. The current policy isn’t working at all, and a rate hike would open the door to a cyclical upswing in the U.S. and global economy as short-term credit markets unfreeze and uncertainty subsides.