Wednesday, October 17, 2012

What about that would-be retiree? - And - The Mother of all Bubbles

The Fed—through extreme, and unprecedented, measures—strains to keep interest rates at all-time lows. Bernanke reports that present circumstances demand that the Fed place its full attention on its full-employment mandate—and that maintaining historically-low interest rates is key to that aim.

(I am sympathetic to the notion that politically-induced uncertainty has much to do with today's lack of job-producing capital investment. That—even though cash is cheap and abundant—until there's clarity, there'll be scant long-term allocation of capital.)

There's this pervasive, and logical, belief that access to low-cost capital ultimately induces job growth. But what happens when, like the present, it's slow to come? What happens when, for whatever reason, companies aren't putting all that capital to work—and hence the Fed pulls out every conceivable stop to keep interest rates at, or (inflation adjusted) below, zero? What happens when that sixty-two year old gent with a million bucks in his 401(k)—who had planned to retire once his 401(k) hit a million bucks, who figured a million bucks would yield him a cool, safe, $40,000 per year, who vividly remembers the two bubbles (tech and real estate) of the past twelve years, and who is understandably ultra-conservative—looks at today's CD and treasury rates? What's he to do when a million dollars today in a 10-year treasury note would yield him a safe, but not cool, $17,000 per year? Do you suppose that he—not willing to buy junk bonds or high-yielding stocks—hangs onto his job? A job that—were he to leave the workforce as originally planned—would have been available to one of the 7.8% (i.e., a little [headline] job growth).

Clearly the Fed has calculated that maintaining low borrowing costs (and inflated asset prices) offers more to the economy than does interest income to seniors. It's a plausible position. But let's not pretend the process doesn't cause a few unintended casualties along the way (Bernanke goes mute on this subject).

As for post-process: The buying down of interest rates—like Cash for Clunkers, Homebuyers Tax Credits, Payroll Tax Holidays and the like—provides, at best, temporary stimulus (and even that's in question). And I suspect that when that party ends, it'll end with a bang—recall sales plunging after expiration of the two aforementioned "stimulus" programs. Although, make no mistake, the pain of auto and home sales coming down off of their artificial boosts would pale in comparison to the impact of the bursting of the mother of all bond market bubbles.

No comments:

Post a Comment