Fed Loose Money Policy Crushing our Economy

Posted: April 7, 2014 in economics, politics
Tags: , , , , , , , , , ,

As I’ve written before our economy is based on bubbles. The Fed inflates a bubble, we have a crash, they reinflate and round and round we go. Right now we are seeing the cheap money find its way into stocks. Last time it was housing. Today’s report of an unexpected 0.5% increase in producer prices in March makes one think the freshly printed dollars may be finding their way into the economy at large. The dollar has taken a bit of a beating this week on the FX market. It was down 2.5% against the Yen which is tough to do given Prime Minister Shinzo Abe’s rampant money printing. Who knows if this is the beginning of a trend but, if nothing else, its a harbinger of things to come.

The main way by which the Federal Reserve seeks to “stimulate” the economy is by manipulating interest rates. It does this through its so called open market operations. In other words, it attempts (most often) to force interest rates down by changing the money supply, i.e. printing money.

The problem with these low interest rates is that they are artificial. They are not a true market rate of interest. Their effect is to send false signals to firms, investors, and business owners. These folks make spending decisions they otherwise would not have. The Austrian school of economics explains that firms will tend to begin long term projects when they really should be engaged in short or mid range projects. In a crash, many projects are left unfinished as sufficient funds are not available to complete them. This is entirely because of the false signals sent by the artificially low rates.

Another effect of the low rates is that people who are typically savers wind up chasing yield elsewhere. Responsible savers get punished by Fed policy so they put their money into the stock market instead of a savings account. This is part of the reason we see a stock market boom with loose monetary policy. Fed policy discourages responsibility; It encourages risk taking. When you start to see crazy valuations, PE ratios, and IPOs for companies who have never made a profit, you know you are at or near the peak of the risk taking.

Another reason for the equities boom is that companies take the cheap money and engineer all kinds of complicated maneuvers simply to elevate their stock price. We see leveraged buyouts (LBOs), cash M & A deals, and stock buybacks. None of the valuations are based on good old fashioned profits. Yet in their “irrational exuberance” investors are eating up the Twitters of the world left and right… Not a good sign.

One of the effects of all this is that we have become a consumption based nation. Because of the cheap money, we borrow, borrow, borrow… and then we borrow some more. We have gone from a net exporter to the largest net importer the world has ever seen. We buy tons of cheap goods from China and they loan us the money to buy it all! We have nearly $18 trillion of government debt (which is another reason the Fed must keep rates low), a student loan debt crisis looming, and massive mortgage and credit card debt. As a result of all the debt and consumption we are no longer a producer nation. Most of the jobs that a created since the crisis are service sector, hospitality type jobs, not real jobs that actually produce something. Our once mighty productive export machine of a country has become a country a college grads with $100K in student loan debt who work at Applebee’s. Their appetizers are delightful by the way.

This so called recovery we’ve “enjoyed” since the crisis is entirely a function of the Fed printing press. Any minute increase in GDP we have seen likewise was simply printed up out of thin air. The recovery is not real. It’s simply an artificial papering over of the underlying issues. In past crises the Fed would always lower rates to “stimulate” the economy. What are they going to do next crisis when rates are already at zero?


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