Posts Tagged ‘Ultra-Low Interest Rates’

Fed keeps financial markets on life support

April 27, 2018

Ever since the 2008 crash, the Federal Reserve Board has had the U.S. financial markets on life support.

The Fed has used its influence on the banking system and bond market to drive interest rates down to near zero.  Taking inflation into account, many interest rates are less than zero.

This drives investors who want a return on their investment into the stock market, and the fact that we’re in the market helps keep prices up.   But the rise in stock prices is not based on profitability of underlying businesses.

The idea is that low interest rates and a rising stock market will encourage new investment and a growth in the real economy.  But when the Fed hints that it may allow interest rates to return to normal levels, investors panic and the market falls.

Another way the Fed has tried to stimulate the economy is by “qualitative easing”—buying up banks’ so-called toxic investments.   This is supposed to empower the bankers to find better investments, which would enable the economy to grow.   But this was never a requirement.

Right now wages are rising and unemployment is falling.   It would be great if this continued for a long period of time.

Artificially low interest rates cannot go on forever and, as Stein’s Law says, if something cannot go on forever, someday it will stop.

LINKS

Donald Trump and the Next Crash: Making the Fed an Instrument for Disaster by Nomi Prins for TomDispatch.

The mini crash and class warfare by Larry Beinart for Al Jazeera.

The U.S. economy on life support

September 4, 2015

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The Federal Reserve Board will soon decide once again whether to continue to hold down interest rates or to allow them to rise.

The board is in more or less the same position as a physician trying to decide whether to remove life support a patient who is in intensive care.

All the indicators are that the patient is too weak to be removed from life support.  Yet the patient can’t stay on life support forever.

I used to criticize the Federal Reserve Board on the grounds that it preferred tight money and high unemployment to the possibility of inflation.  That’s yesterday’s news.  Now the Fed’s concern is how to get the country out of its long-term recession.

The historic Keynesian remedy for recession is to increase the money supply and hold down interest rates.  The idea is that putting money in circulation and making credit readily available will encourage consumers to buy things and businesses to invest.

But this time around, it didn’t happen.  Banks and financial institutions invested in debt rather than in production of tangible goods and services.   Savers invested in stocks and bonds because they couldn’t get any interest on their bank accounts, but this didn’t stimulate the real economy either, or at least not very much.

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Low interest rates haven’t spurred a recovery

October 10, 2014

It’s a financial axiom that central banks can make money available and set the rates, but they cannot dictate where it goes.

Yet, the IMF just now seems to be figuring that out.

As for central bank sponsored “risk taking,” haven’t we seen enough already?

Where the Money Went

  • Junk bond speculation
  • Stock market speculation
  • Stock market buybacks at ludicrous prices
  • Robots in lieu of hiring
  • Free profit for banks thanks to interest on “excess reserves”
  • Private equity firms buying up houses
  • In Europe, banks loaded up on their own allegedly risk-free bonds
  • In China, property bubbles and profitless SOEs [state-owned enterprises]

Where the Money Didn’t Go

  • Higher wages
  • Infrastructure
  • Investment

via Mish’s Global Economic Trend Analysis.

(Hat tip to Naked Capitalism)

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Who benefits from ultra-low interest rates?

November 22, 2013

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Governments, large corporations and American banks have been the main beneficiaries of lower interest rates, according to a study by McKinsey Global Research.  The results are shown in this chart,

To understand the chart, you have to keep in mind the meaning of the word “net”.  The U.S. government had a “net” improvement in interest income in 2012 over 2007, but what that meant was that it was paying out $900 billion less in interest at the end of the period.   Large corporations and governments in other countries also lowered their borrowing costs, and this constituted a “net” gain for them over the five-year period.

Banks in the U.K. and continental Europe were hurt, but U.S. banks gained because they increased the spread between their borrowing costs and the interest rates they charged.

Families with savings were hurt.  Interest on my own bank account is virtually zero.  Pension funds took a hit.  So did insurance companies; a lot of their income comes from investing the money paid in premiums until it has to be paid out in claims.

The McKinsey analysts, unlike me, don’t think that ultra-low interest rates are driving people into the stock market.  But they didn’t see any signs of increased business investment or economic activity as a result of low rates.  The economy is stuck in low gear, and artificially low interest rates haven’t shifted this.

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