St. Louis Fed Promotes the Mathematically Impossible

It's bad enough when economic writers are clueless about how markets work. It's worse when Fed economists are clueless.

Check out this Tweet by @StLoiusFed.

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Understanding the Math

  • Negative interest rates cannot push people into more stimulating investments.
  • No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation.
  • In the equity markets, for every buyer of stocks, there is a seller, thus the sideline cash argument fails as well.

It's bad enough when analysts fail to understand basic economics, but even Fed economists are clueless about how markets work.

Negative rates cannot possibly do what the Fed suggests, but they can foster an artificial wealth effect when people borrow or spend more than they should.

Any economic gain spurred on by reckless borrowing will all be taken back and then some, in the next recession.

Zombie Corporations

Negative real rates also foster zombie corporations. The BIS defines zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

As it sits, 10% of corporations are zombies, unable to make interest payments from profits.They need cheap money to survive.

If the St. Louis Fed economists see a sustainable benefit from spurring zombie corporations, they are wrong about that too.

Mike "Mish" Shedlock...

Mish, you forgot one chart :the CPI.

If the ECB CPI = +1.00% and government notes/bonds are bellow the CPI, the government get a nice discount on debt, in real terms. If the 2 years in Germany is (-) 0.7%, they are paying, in real terms,==> (-)0.7% - 1.0% (CPI) = (-)1.7% in dividends to investors. German debt is shrinking !

The sheeple love it. They think the Fed works for them. Things have never been better. Keep repeating it.

Combined with real rates of inflation, the super low interest rates make capital appear to be worthless. 20 years ago, a person who retired with a Million Dollars could reasonably count on income, net of inflation, of $30 to $40,000. Today that same Million Dollars, net of inflation, will yield zero, net of inflation.

Guess who gets killed in this? The middle class. It is now much harder to save for retirement, to send the kids to school or to save to start a business. "Savings" has been perverted to allow the Treasury to cheaply finance its $20 Trillion of debt. So, the real cost of government excessive debt is the destruction of the middle class capacity to improve their lives. Borrowers are enabled, but they, of course, cannot get ahead. Leaving the middle class as wage slaves without the capacity to resist government support (and control). Freedom comes from economic independence. Mssr's Bush II and Obama have pretty much destroyed that concept.