Never before in history have central banks printed so much money and taken interest rates so low. Never before have banks given savers almost no interest and still had takers. Mortgage rates are as low as we are ever likely to see in our lifetimes. The balance at the Federal Reserve has never been so large, not even close – ditto for the Bank of Japan. Never before has the Federal Reserve been by far the largest buyers of newly issued US Treasury debt.
Has it worked? With apologies to Bill Clinton, it depends on what the meaning of “worked” is.
Yes, the U.S. in no longer in recession, strictly speaking, since economic growth has been positive, running +/- 2%. But, the recovery from this deep recession has been anemic compared to other recoveries and has violated the rule that the deeper the recession, the stronger the recovery.
Part of that is because households were shell-shocked by the real estate and stock market crashes. Part is because households had SO much debt to start with, though they have done a good job of paying it down since. Partly, it is because the standard unemployment rate as reported is far lower than what unemployment truly is as measured by other statistics.
But, as Bill Gross write in his monthly newsletter, the extreme bond buying by the Federal Reserve and other central banks has produced disappointing results for other reasons too. Here are some he mentions and another one of my own.
1) The hundreds of billions of dollars of US Treasuries bought by the Fed are dead money. They cannot be used as collateral for loans by companies that want to grow by borrowing and they cannot be loaned out.
2) The money they give to the federal government has not expanded overall federal spending much. The rate of federal spending growth has been almost flat since 2010. Yes, I know, I had to look that up to be convinced myself.
3) With rates so low, the difference between the cost of funds and what they can return if loaned out is so low, it provides a disincentive for banks to loan money.
4) Even corporations are finding that they can’t earn much of a return on cash and quite a number have sent cash back to shareholders as special dividends.
5) Savers are not earning any income to speak of at banks and that kills their incomes and their spending
It may be that the economy will be helped therefore by higher interest rates. The asset markets for stocks, bonds, and real estate, not to mention commodities will probably not like it, as much of that money has found its way from banks into financial speculation. But, savers will have more to spend and banks can start making money again on loans rather relying on their trading desks.
Eventually, these extraordinary programs have to end. We’ll see how it works out. I don’t expect a big pickup in the economy soon, especially worldwide, so I don’t see rates going up a lot. But, we’ve never been here before.
In the meantime, I would be cautious on stocks and commodities and out of all but certain specialized classes of bonds. I do like real estate right now and have some good ways to invest there if you’re interested.