from John Mauldin’s¬†Thoughts from the Frontline


By encouraging a reach for yield in riskier investments because interest rates are abnormally low, the Fed has created an environment in which far more risk is being taken than is normal and healthy. It is as if the central bankers and economists have decided that individuals are not smart enough to do what is in their own best interests and think they need to be encouraged to make riskier investments. The problem is that many of those riskier investments are now being made with funds that should in be lower-risk investments meant to sustain people well into their retirement years.

Most retirement money should be put to work in lower-risk investments meant for the long term. Now that investors have been forced into seeking higher-yielding, higher-risk investments, at the first sign of danger they will be emotionally driven to withdraw their funds at just the wrong time, as they did during the Great Recession. Central bank policy, even if well-meant, has created an environment of risk that monetary policy cannot resolve. We have sown the seeds of the next crisis throughout the economies of the world by distorting markets with low rates and encouraging $9 trillion of dollar-denominated debt to flow into emerging markets.

The central banks of the major developed economies have once again dangerously distorted the real economy. It strains credulity to say that slowly raising rates by as little as 2% would somehow make it impossible for businesses to make money. A business that survives only because of 0% interest rates is a zombie business that is incapable of surviving in a normal economy. Repressing savers and destroying the income of those who have saved for a lifetime seems a very high price to pay to support businesses that would fail in normal times. Thwarting savers greatly reduces the consumption those savers would have been able to contribute to the real economy. And to prop up the very financial institutions that were part and parcel of the last crisis? The income inequality that so many in academic circles decry is actually a studied result of current thinking about monetary policy.

We have once again entered dangerous ground where central banks with their low rate policies have distorted the economy. Yes, the near-zero rate policies of central banks have benefited financial businesses and large corporations that can take advantage of access to low interest-rate financing, but they have not spurred the development of new businesses. Monetary policy does not create jobs. Businesses create jobs.