Charged
with the duty of encouraging employment, the Federal Reserve has
implemented aggressive monetary measures. Expanding the Fed's balance
sheet by nearly 3 trillion dollars via the purchases of an array of debt
instruments, Bernanke and company have used traditional monetary tools,
and some not so traditional measures, to meet the challenges of its
employment mandate.
The impact has been paltry and disappointing. For, as Newton stated, for every action, there is an equal and opposite re-action. This holds true in the current interest rate environment as set by the Federal Reserve.
Some of these old monetary measures now utilized by the Fed could indeed have had a greater impact if we still had a large manufacturing base. But we have lost much of that manufacturing to China and elsewhere. We are left with a "service-based" economy. So what impact do these Federal Reserve actions have on a "service-based" economy? And what effect on governmental borrowing levels? Apparently, there are effects of an adverse and unintended nature. And here are some of those "equal and opposite" effects.
The Federal Reserve has set interest rates at what arguably are three percentage points too low. Historically short rates on Treasuries would yield enough to cover the inflation rate, currently circa 2%, plus an additional few points. The identifiable "false" rates obfuscate the asset evaluations and loan activity across the board. Speculation becomes one of the avenues to obtain a "fair" yield on one's money. And the low rates spur this activity in an environment where asset evaluations are false due to the false rates. What would gold be worth if three-month Treasuries were at 3%? What would 2% dividend yielding stocks be worth?
The impact has been paltry and disappointing. For, as Newton stated, for every action, there is an equal and opposite re-action. This holds true in the current interest rate environment as set by the Federal Reserve.
Some of these old monetary measures now utilized by the Fed could indeed have had a greater impact if we still had a large manufacturing base. But we have lost much of that manufacturing to China and elsewhere. We are left with a "service-based" economy. So what impact do these Federal Reserve actions have on a "service-based" economy? And what effect on governmental borrowing levels? Apparently, there are effects of an adverse and unintended nature. And here are some of those "equal and opposite" effects.
The Federal Reserve has set interest rates at what arguably are three percentage points too low. Historically short rates on Treasuries would yield enough to cover the inflation rate, currently circa 2%, plus an additional few points. The identifiable "false" rates obfuscate the asset evaluations and loan activity across the board. Speculation becomes one of the avenues to obtain a "fair" yield on one's money. And the low rates spur this activity in an environment where asset evaluations are false due to the false rates. What would gold be worth if three-month Treasuries were at 3%? What would 2% dividend yielding stocks be worth?
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