Posted on 11/09/2016 6:25:28 PM PST by TigerLikesRooster
The Fed Has Failed: Business Investment Efficiency Is "Worst Since The Great Depression"
The Summary:
1.Economic policy objectives (monetary and fiscal) are meant to incentivize domestic private business investment, which drives incomes and the money multiplier effect, i.e. the engine of the economy.
2.Economic policy objectives have failed because CEOs, the private capital allocators, simply cannot accommodate business investment when the demand function is as weak as we currently find it, no matter how available and how cheap the capital.
3.The demand function is weak because we misunderstood and ignored the side effects of trade policies and their reliance on new world economies that naturally have a lower money multiplier effect than old world economies.
4.A materially damaged demand function leads to a misallocation of resources; for the past 15 years capital has been and continues at an accelerating rate to be allocated to cash distribution (the most economically inefficient use of capital) rather than investment, further deteriorating the demand function (economic death spiral).
5.The only question that matters now then is; How do we get private sector capital allocators to allocate capital more efficiently? I’ll give you a hint, it requires indications of sustainable demand improvement and neither monetary nor fiscal policy have the capacity to generate sustainable demand improvement when the demand function is damaged to the point that CEO’s refuse to invest productively. This then requires a new economic policy framework, one that CAN generate sustainable demand improvement, which will allow capital allocators to invest productively
(Excerpt) Read more at zerohedge.com ...
P!
All the Fed can really do is offer cheap credit. If no one wants to take out a loan the Fed runs into the “pushing on a string” problem. They can’t force anyone to borrow money.
A “damaged demand function” sounds like a fancy way of saying that consumers haven’t got any free cash around with which to buy anything. Which isn’t surprising when you take into account soaring Obamacare costs, taxes, wages suppressed by competition from immigrants, and the loss of high paying blue collar jobs.
Never underestimate the effect that endless rules, regulations, a myriad of taxes and an anti carbon energy policy over eight years has on business development and wealth formation. If creative entrepreneurs allowed and encouraged to do what they do best, the role of the Fed would be much different. Interest rates would naturally rise as those entrepreneurs would compete for capital and raise interest rates due to increased demand. The Fed would be worried about “inflation” and an “overheated economy”. Right now all they are doing is the equivalent of monitoring the air conditioning in a funeral parlor.
I seem to recall bankers being threatened if they didn't accept government monies. (TARP, I think.) Almost as if they didn't want to take the strings it was attached to, and then they were made an offer they can't refuse
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I have one: go back to the gold-standard.
That immediately makes the fed useless (they can't print gold).
Our economy is hollow.
Imagine what our “natural” economy would look like if you backed out the $10 trillion Obama borrowed and dumped into the economy (or even just the foreign component of that) and the effect of the massive flood of money/credit the Fed has been trying to push out into the economy.
With the foregoing, we have 1% growth. What would it have been on a “natural” basis? In other words, how bad a depression are we REALLY in?
Our best chance is the one Trump is offering, taking back some of our old world economy from the other countries to which it has moved. The ‘free traders’ as the writer suggests are unwilling to acknowledge the connection between our high government expenditures and debt, and private debt, with the loss of old world economy jobs or jobs moving down the value-added ladder.
That’s probably mixing together a couple of separate issues, TARP being a special case rather than the Fed’s everyday practice. But it ends up at the same place I suppose.
To stimulate the economy the Fed would like retail banks to make loans to businesses and consumers. They offer banks money at low interest rates to encourage this. But if retail bankers don’t have customers who want loans, or don’t have customers who are credit worthy, then the retail banks don’t want fresh credit from the Fed.
IIRC TARP was designed to take bad mortgage loans off the books of banks when the bubble collapsed. Banks that accepted TARP money could be identified as banks at risk and this could attract short sellers and other problems. A bank that didn’t need TARP money was unlikely to accept any. I think the Fed pressured everyone to take TARP money in order to keep banks in trouble harder to identify.
” That immediately makes the fed useless (they can’t print gold).”
Well that’s not accurate. The gold standard existed for many years of the Fed’s history. Even under the gold standard a large portion of the money supply is ‘credit money’ aka ‘bank money’, and it is this portion of the money supply over which the Fed has influence.
“Never underestimate the effect that endless rules, regulations, a myriad of taxes and an anti carbon energy policy over eight years has on business development and wealth formation. If creative entrepreneurs allowed and encouraged to do what they do best, the role of the Fed would be much different.”
+1
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