Central banks more of the same
Dec 11, 2020
–As we lead up to the last FOMC of the year next week, and the possibility of a tweak to Fed bond purchases, I’ve thought a bit more about the taper tantrum from 2013. To that end, I reviewed the April 30-May 1 2013 FOMC meeting transcript. I’ll likely write more about this over the weekend, but on a day of light trade volume without much else to comment on, I’m just using this excerpt for a daily note.
Below is a quote from Dallas Fed President Richard Fisher at that meeting. Note, this meeting was just prior to Bernanke’s May testimony that kicked off the tantrum.
“And I would say for the nth time, for the googolplex time, as I’ve argued at this table, I just want to reiterate my mantra: Unless fiscal and regulatory policy incents business to use the cheap and abundant capital we’ve made available, it will not be used to create jobs to the degree that we desire. It will be used to set the stage, but it cannot lift the curtain and act the play. And it has, I believe, had a wealth effect, but principally for the rich and the quick—the Buffetts, the KKRs, the Carlyles, the Goldman-Sachses, the Powells, maybe the Fishers—those who can borrow money for nothing and drive bonds and stocks and property higher in price, and profit goes to their pocket. But it has not done much, at least it seems to me, looking at the data, to put people back to work to earn a living by the sweat of their brow.”
There are those who accuse the Fed of being ignorant to the wealth disparities caused by QE. But of course, the Fed is not ignorant, as articulated seven years ago by Fisher. They know they’re the only game in town due to the inability of Congress to provide stimulus. There’s another tie-in to Fisher’s remarks that’s appropriate given the Fed’s release of the Z.1 quarterly report yesterday. That’s the “lead a horse to water but you can’t make him drink.” We have low rates that aren’t being exploited by businesses for productive growth, they’re being recycled into financial engineering.
Anyway, the Z.1 report contains summary stats on borrowing for major sectors of the economy. I have always thought of households, business and the Federal government as each being about a third of annual borrowing, each with about a third of the debt outstanding. For example, consider these debt levels for Households, Non-fin Business, and Federal Gov’t from the end of 2017: HH $15.015T, Biz $14.545T, Fed’l G $16.607T. Today we rec’d levels for end of Q3: HH $16.406T, Biz $17.544T and Fed’l G $22.993T. So over nearly 3 years, HH +9.3%, Biz +20% and Fed G +38%. Of course this has a lot to do with the Fed’l govt filling the COVID gap. But it also leads to gov’t crowding out, due to massive debt levels. And if regulatory burdens increase with the new administration, businesses will be dis-incented to use cheap capital for productive investment.
