Federal Reserve Policy IS Working ... Just Not For America

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Washington’s Blog

Richard W. Fisher, president of the Fed bank of Dallas, said last month:

In my darkest moments I have begun to wonder if the monetary
accommodation we have already engineered might even be working in the
wrong places. Far too many of the large corporations I survey that
are committing to fixed investment report that the most effective way
to deploy cheap money raised in the current bond markets or in the
form of loans from banks, beyond buying in stock or expanding
dividends, is to invest it abroad where taxes are lower and
governments are more eager to please. This would not be of concern if
foreign direct investment in the U.S. were offsetting this impulse.
This year, however, net direct investment in the U.S. has been running
at a pace that would exceed minus $200 billion, meaning outflows of
foreign direct investment are exceeding inflows by a healthy margin.

 

"[I]f
it were to prove out that the reduction of long-term rates engendered
by Fed policy had been used to unwittingly underwrite investment and
job creation abroad, then the potential political costs relative to
the benefit of further accommodation will have increased.

Shahien Nasiripour fills in some details today on why Fed policy is indeed helpful ... just not to America:

"Firms
continue to cut back on their capital expenditures and R&D
outlays," analysts at JPMorgan Chase said in a September report. Money
spent on long-term investments and research and development represents
less than 55 percent of operating cash flow at the non-financial
companies that make up the Standard & Poor's 500 index. It's down
from a high of more than 85 percent as recently as 2001, the analysts
noted.

 

But money is flowing overseas.

 

The proportion of
capital expenditures spent abroad has risen from 18 percent in 2001 to
27 percent in 2008, the JPMorgan analysts wrote. It's likely higher
today "thanks to growth opportunities prevalent in emerging markets."

 

On
Oct. 29, the Treasury Department reported that U.S. portfolios held
some $6 trillion of foreign securities at the end of last year. At the
end of 2008, U.S. portfolios held $4.3 trillion in foreign securities.

 

The
trend continues this year. There's been a net outflow of money from
domestic equities every month since May, according to the Investment
Company Institute. Foreign equities, on the other hand, have been
growing.

 

***

 

In other words, the Fed's next round of
asset purchases may not help American families. Rather, it may benefit
the citizens of other nations.

No wonder the developing world is experiencing a huge asset bubble. See this, this, this, this, this, this, this, this and this.

Indeed, as AP writes today:

Stocks
in developing countries are a likely candidate for the next bubble.
Cash from Europe and the U.S. has plowed into emerging markets, such as
Brazil and Chile, since the financial crisis, largely because these
countries have less debt and faster economic growth than in the
developed world.

 

***

 

"I think bubbles are the main villain in this piece," Grantham says.

Cheap
debt provided the fuel for the housing bubble, allowing home buyers to
take out larger loans on the belief that somebody else would buy the
house at a higher price. Fed chief Ben Bernanke's answer, Grantham said,
is to start the cycle over again by blowing a new bubble. "All they
can do is replace one bubble with another one," he said.

In fact, the Fed has been using our money to bail out foreign countries for years. See this, this, this, this, this and this.*

Nasiripour also documents:

  • Big corporations have gotten wealthy from Fed policies like quantitative easing, while Main Street hasn't seen a cent (see this for background)
  • Banks
    won't lend out extra cash sitting around, but will just deposit their
    excess reserves at the Fed or buy treasuries. "Dumping another trillion
    dollars into the system now will most likely mean they will follow
    the same path into excess reserves, or government securities, or
    'safe' asset purchases," Kansas City Fed president Thomas Hoening said
    Oct. 12. (see this, for background)
  • Jeremy
    Grantham, chief investment strategist at Grantham Mayo Van Otterloo
    & Co., told clients last month that "lower rates always transfer
    wealth from retirees (debt owners) to corporations (debt for
    expansion, theoretically) and the financial industry." "This time,
    there are more retirees and the pain is greater, and corporations are
    notably avoiding capital spending and, therefore, the benefits are
    reduced," Grantham, whose firm manages more than $104 billion, wrote
    in his latest quarterly newsletter. "It is likely that there is no net
    benefit to artificially low rates." (see
    this)

*In reality, as Michael Hudson shows,
the hot money flows into emerging economies do not really help the
people in those countries. Only the giant banks and mega-corporations
are benefiting from quantitative easing.