The Losers under Fed Policy

July 5, 2010

by Jerry O’Driscoll  

In Tuesday’s Wall Street Journal, George Melloan makes the case that savers and investors lose under the Fed’s low-interest policy.  He also argues that the policy leads to greater risk-taking by those pursuing yield. Presumably it is leading to the next asset bubble. But where?

6 Responses to “The Losers under Fed Policy”

  1. Bob Murphy Says:

    US Treasurys?

  2. Andreas Hoffmann Says:

    Hi Jerry,

    there is a lot of talk about a Chinese real estate bubble.

    A bond ‘bubble’ could affect other markets over the long-term interest rate channel. This was Bernanke’s argument prior to the latest crisis. Now it is definitely self-reinforced.

    This mix of high debt and low rates could become poisonous, if there is no turn-around soon.

  3. Richard Ebeling Says:

    Jerry,

    If I knew the answer to this question I’d be making my wife financially very happy.

    It reminds me of an economics conference I attended a very long time ago. At the dinner table was a fellow economist who told that he and a friend had constructed a wonderful econometric model of the stock market. It included every conceivable variable and the interdependent relationships were the best one could hope for.

    Then he sadly looked down and said, “But it wouldn’t work, so we published it.”

    Richard Ebeling

  4. KipEsquire Says:

    Both Verizon and AT&T are yielding over 7% with relatively little risk of dividend cuts (but, granted, also with little or no potential for near-term dividend hikes).

    It says a lot, none of it good, when mega-cap DJIA stocks can pay more than twice the yeild of long-term Treasurys for any length of time.

  5. Pietro M. Says:

    I just found a way to read the WSJ online.

    I’m impressed by the fact that a 8% return is assumed to be required to keep the Florida pension system afloat. It is like saying “You’re in good health, provided you submit yourself to brain surgery a dozen times”.

    It’s a very interesting article, and I would only hope what he says it’s not true. Unfortunately, it is.

    Anyway:

    When interest rates are too low, either high-risk investments or consumption is the standard response.

    Considering the present state of the economy, it is not unlikely that there are few available high-risk investment plans, so a bout of consumerism and capital consumption may be more likely.

    Of course, there is no limit to the fantasy of a financial system relieved from the fear of losses by government intervention, so some high-risk investment may still be found, and some new bubble may arise.

    Considering, however, that clean energy is a sham (especially photovoltaic), government bonds cannot be valued more than par (and long term yields are already low), there is a glut of houses, old-style industries seem unfashionable, and high-tech firms and raw material firms have already boomed and already busted, it is difficult to imagine something else (except foreign borrowing, which is rising again).

    Well, maybe another boom for raw materials? If China grows fast, a shortage of elements in the Mendeleev table may arise.

    And if there is another boom in US foreign debt, Andreas Hoffman may be right in pointing to China’s real estate.

    However, I wouldn’t exclude a boom in consumerism, i.e., a non-boom of frenzied capital consumption, but maybe this is not an option for pension funds looking for salvation from bankruptcy in fabolous and unrealistic returns.

  6. Efinancial Says:

    Prof. Ebeling does it again – insightful and humorous. I laughed out loud…

    Than I thought – What if Melloan is wrong and what we are experiencing is actually the Fed’s high interest policy? Does this mean there is no “bubble”?

    We won’t know until either Melloan becomes a wealthy man or he publishes the model on which he based his analysis.

    Thanks Prof. Ebeling.


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