As I do every Friday with my summary of the week’s events with both positives and negatives, here are my pro’s and con’s with current Fed policy and the possibility for more:
Positives:
1) By lowering the cost of capital, cheap money encourages businesses to lever up and invest the proceeds and consumers to borrow and spend to boost the economy.
2) Refinancing existing debt becomes highly attractive.
3) Lifts asset prices if you happen to own them as about 50% of households don’t own any stocks or mutual funds.
4) With a lower discount rate, the present value of future cash flow turns higher.
Negatives:
1) Negative real interest rates is killing savers in order to bailout over indebted borrowers.
2) Pension funds are becoming more and more dangerously underfunded, threatening the retirements of many individuals and the balance sheets of companies and governments.
3) Artificially set interest rates misallocates capital, results in malinvestment, and distorts and manipulates markets.
4) The pricing mechanism/discovery is damaged if the cost of money is fake.
5) Debases the US$ (CPI index, aka cost of living, is less than 1 pt from a record high).
6) Massive monetary inflation is price inflation tinder box.
7) Deeper the Fed digs, the harder it will be to climb out.
8) The wealth effect is fleeting and so is its economic impact.
9) Cost of money doesn’t matter when huge deleveraging needs to take place.
10) Fed engineered easy money creates illusory feel of an economic fix.
11) Cheap money is candy to the Federal Gov’ts love for spending money.
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