COUNTERPRODUCTIVE DOESN’T BEGIN TO DESCRIBE WHAT THE FED IS UP TO
Andy Kessler has had it up to here with the Fed’s zero-interest-rate policy:
ZIRP is the problem, not the solution. Money is not stupid. Corporations are sitting on almost $2 trillion in cash. The humps in strategic planning or business development at every Fortune 500 company run spreadsheets that forecast the return potential of new projects or factories and compare that against the cost of capital or the risk-free rate of return before pitching said projects to upper management. But because of ZIRP, the risk-free rate of return is zero, so, in Excel anyway, it looks like every project or factory makes financial sense. But that can’t be right. This is what causes uncertainty, a financial compass that spins round and round rather than pointing to value creation. Which means managers sit on their hands. So in the real world, none of the projects makes sense. In other words, the very Fed policy aimed at growing the economy and creating jobs is instead causing cash to be held until morale improves. . . .
[W]hy not junk the ZIRP today and let interest rates rise, most likely to 2-2.5 percent, reflecting current inflation expectations? Several things will happen?-?rising rates would restore a generation of savers, unleash a torrent of corporate spending, which will create jobs, and yes, cause federal interest payments to rise, which may force rationalization of unnecessary government spending. Why is any of this a bad thing? [Emph. added]
There’s also something inherently worthwhile, one would think, in having a Treasury market that’s not rigged in the first place. . . More: Peter Schiff (Latest effort: “At This Point There’s No Way Out For the Fed”) is not nearly so sanguine. Then again, he never is. . . .