Tuesday, June 4, 2013

Federal Reserve Policies Hurting Not Helping

Now it's time for Bill Gross to catch up to  Zero Hedge with regard to the role of the Federal Reserve chairman and conclude this in his latest monthly letter:
"It’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution."   Which is why there simply is no way out as long as Bernanke stays in. From Bill Gross of PIMCO
For a more advanced discussion of the problems with zero Fed funds interest rates, which push all market interest rates lower (financial repression), have a look at the list below (also  from the same Zero Hedge article referenced above):

  1. Zero-bound yields deprive savers of their ability to generate income which in turn limits consumption and economic growth.
  2. Reduced carry via duration extension or spread actually destroys business models and real economic growth. If banks, insurance and investment management companies can no longer generate sufficient “carry” (Return on investment or ROI) to support employment infrastructures, then personnel layoffs quickly follow.
  3. With banks, net interest margins (NIM) are lowered because of “carry” compression, and then nationwide retail branches previously serving as depository magnets are closed one by one. In the U.K. for instance, Britain’s four biggest banks will have eliminated 189,000 jobs by the end of this year compared to peak staffing levels, reports Bloomberg News.
  4. Investment banking, insurance, indeed the entire financial industry is now similarly threatened, which is leading to layoffs and the obsolescence of real estate office structures as well which housed a surfeit of employees.
  5. Zombie corporations are allowed to survive. Reminiscent of the zero-bound carry-less Japanese economy over the past few decades, low interest rates, compressed risk spreads, historically low volatility and ultra-liquidity allow marginal corporations to keep on living.  Real growth is stunted in the process.
  6. When ROIs or carry in the real economy are too low, corporations resort to financial engineering as opposed to R&D and productive investment. This idea is far too complicated for an Investment Outlook footnote – it deserves expansion in future editions – but in the meantime, look at it this way: Apple has hundreds of billions of cash that is not being invested in future production, but returnedvia dividends and stock buybacks. 
  7. Western corporations seem focused more on returning capital as opposed to investing it. Low ROIs fostered by central bank policies in financial markets seem to have increasingly negative influences on investment and real growth.  Credit expansion in the private economy is restricted by an expanding Fed balance sheet and the limits on Treasury “repo.” The ability of private credit markets to deliver oxygen to the real economy is being hampered because most new Treasuries wind up in the dungeon of the Fed’s balance sheet where they cannot be expanded, lent out and rehypothecated to foster private credit growth. 

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