On Artificial Interest Rates And The Forfeiture Of Growth For Dividends

Tyler Durden's picture

Diapason Commodities' Sean Corrigan provides an insightful introduction to the critical importance of a market-set rate of interest and central banks' manipulated effect on the factors of production.

"Fixated with using their illusory ‘wealth effect’ to avoid a full realization of the losses we have all suffered in a boom very much of those same central bankers’ creation - or else cynically trying to achieve the same denial of reality by driving the income-poor into accepting utterly inappropriate levels of financial risk - they are destroying both the integrity and the signalling ability of those same capital markets which are the sine qua non of a free society."

As Ron Paul also confirms in the clip below "with artificial interest rates, we get an artificial economy driven by mal-investment leading to the inevitable bubbles" and while central banks hope for this 'created credit/money' to flow into productive means (Capex), instead it has (in today's case where QE is no longer working) created an investor-class demand for yield - implicitly driving management to forfeit growth-and-investment for buybacks-and-dividends.


Ron Paul's interview with Laisses Faire outlines the impact an artificial interest rate has on the economy...

and Sean Corrigan of Diapason Commodities provides a more in-depth look at the process by which a manipulated interest rate impacts the factors-of-production (or the risks and rewards of the real business cycle)...

What is not to be overlooked is that the applicable rate of interest is not some abstract entity, utterly variable according to the whim of the banking system, but rather is one of the fundamental ratios prevailing in the vast, interconnected topology of exchange - in this case, between the value put on goods available at once and on those only accessible at some future date...


Take the act of deciding upon the launch of a new or expanded line of business. Obviously the entrepreneur will make his best guess as to the stream of revenues he may gather and will set these off against his estimates of what it will cost him to achieve them. Thus it is, of course, that a lowering of the rate of generally accepted rate of interest makes his challenge seem a less daunting one: our man will not only have less to pay out on any hired capital he requires, but the possibility of earning a greater return in some other fashion...Yet - whether he recognises this or no - his reckoning is intimately bound up with the information which the interest rate is conveying with regard to the likely relative abundance of his inputs and the relative demand for his outputs over the entire investment horizon of his project...


It should be all too apparent by now that if we are to enjoy conditions which are favourable to both the greatest degree of co-ordination between the market’s multitude of actors; if we are to remove all impediments to the early recognition of such lapses from that co-ordination as must inevitably occur in a shifting world of imperfect knowledge and changing tastes, then any interference with the spontaneous, holistic formation of prices is not to be countenanced, much less embraced as a tool of dirigisme.


Rather, it is vital that the myriad interactions between buyer and seller, producer and consumer, saver and spender, employer and employee should be allowed to make its due contribution to the universal field of prices thence to reveal how best to marshal our limited resources in order to deliver more of what appears to be the more urgently required and to expend fewer efforts on the less. This is not true only in the here and now, but also over time.

Clearly, we have no gold standard to impose discipline on either the ruling elite or the bankers who are their political symbionts... granted, we have a wider range of  non?bank and other credit instruments to confuse the issue; but none of them alter the fact that investment is best undertaken when both the money and the means corresponding to that money have been voluntarily set aside to finance it, or that, conversely, investment is worst entered upon when it is launched on a soon cresting wave of counterfeit capital, conjured up by the banks or the government printing press.

12-11-20 TA - As a Matter of Interest


which leads to the current remarkably non-traditional text-book situation that Citi describes - where equities are now the yield-providing asset as management is punished for spending capital on growth or investment and is praised for buybacks and dividends as the Fed's artificial premise in which we live has created a monster...

Policy-makers have adopted aggressive methods to push interest rates and bond yields down to unprecedented levels. It is hoped that these low rates will trigger a stronger recovery in corporate capex and jobs. Evidence of this remains sketchy...


We think that QE may be having the opposite impact to that intended. Instead of encouraging capex and job creation, ultra low interest rates are bringing yield-starved capital into the global equity market. These investors are more interested in dividends and share buybacks than corporate expansion. Those CEOs who give them what they want should be rewarded by share price outperformance. Those who do not may find themselves replaced.


Citi Equity Yield


If we are to salvage any residue of our liberty, restore any semblance of our prosperity, and again secure to ourselves the right to enjoy our property, this [manipulation] must be ended before it consumes our capital...

If all this means that we have fewer projects underway at any one time, so be it: we will waste far less of what we hold scarce and end up holding fewer things as scarce as we do now.

The Garden of Eden may well be denied us, but that does not mean the only remaining choices are the debtor’s gaol or the soft totalitarianism of de Tocqueville’s worst imaginings...

...it is saving that makes us rich, not spending, and it is only by saving – not through authoritarian fiat ? that a naturally lowered interest rate confers a lasting aid to capital formation.

If policymakers hope that listed companies can help drive down current high levels of unemployment then it could be a long wait. Corporate expansion plans are likely to remain constrained by uncertainties about the global economy and a shareholder base that is more interested in share buybacks and dividends than capex and job creation.

Source: Citi, Diapason Commodities

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tango's picture

How does an economy operating under artificial Fed mandated rates differ from a Soviet-type system where prices are set arbitrarily?   Both deny the reality (or power) of markets and choice.   Ron was clear about this  - both in 08 and 12.   The forced artificial interest rates create an economy based on false premises - and it is destined to fail.

sumo's picture

Bernanke's "economics"  = Lysenko's "genetics"

Monedas's picture

Remember that Louisiana congressman who had $90K cold cash in his freezer .... he was trying to alter the genetics of the currency .... a la Lysenko !  A mind is a terrible thing to waste !

markmotive's picture

The government messed with interest rates after WWII and prices during the seventies. Weimar Republic messed with interest rates in the 1920s.

This is not new.


Next Time Perhaps We Should Let The Market Set Interest Rates
cranky-old-geezer's picture



As I stated yesterday, there's nothing meaningful left to report about this farce of a financial system, so ZH is left with analyzing the farce from every possible angle as the last FOUR articles do, and, like everyone else, fearing to call it what it really is, and damn LOOTING SPREE, the final end-game looting of America and its people by Wall Street and the government.

Yes, it IS the end game for America.  It will destroy the US dollar's value.  It won't be reserve currency much longer, and when it stops being reserve currency, that's it, game over for America.

No financial blog worth a damn will keep analyzing an obvious blatant problem six ways to sunday without saying what the true outcome will be.  


Ben Bernanke is the BIGGEST THREAT to America's national security now.  He's destroying the US dollar, and when it happens he destroys America too. 

When other nations holding US dollars and US govt debt as reserves wake up one morning and see it's all worthless, they'll turn on America with a vengeance this world has never seen. 

Our military scattered all over the damn planet will be sitting ducks.  Their dollars won't be worth shit anymore, they won't be able to buy supplies, they won't be able to buy fuel, they'll be stranded where they are in openly hostile nations wanting revenge on America for destroying the value of reserves they hold.

What kind of government would stand by watching a central bank destroy the nation's currency, putting the nation in grave danger of unlimited vengeance from a multitude of pissed-off nations, and do nothing about it?  

Simple.  A government involved in the looting, benefiting from the looting, benefiting from that currency destruction.

Yes, America's government is openly putting America in danger, openly committing treason against America.

Wana go after terrorists Obama?  The biggest terrorist of all is right there at 33 Liberty.  Bernanke, the currency terrorist, blowing up the nation's currency.

And yes, "unlimited vengeance" means thermonuclear.  Like I said, vengeance this world has never seen.

infinity8's picture

Nice new avatar, Cranky. And I'm in total agreement except, hating the Berstank as much as the next guy, I can't hate him as much as the government that is allowing him to do what he does. I just don't believe he's "the decider" convincing the DC assholes to go along. Another puppet but who's, exactly.


cranky-old-geezer's picture



The banksters' puppet of course.  Banksters who own all the Fed stock and have prominent seats on the FOMC.  The banksters looting America via bailout after bailout after bailout till so much currency has been created it loses all value.

Yes I know the government is borrowing twice as much as banks get in bailouts.  About 2 to 1 ratio now.  $150 billion a month to the government, $80 billion a month to banks.   It's hush money they have to give to the govt so the govt will keep playing along. 

That's $230 billion a month being printed now, 2/3 of it going right into the circulating money supply. 

A trillion dollars printed every 4 months now.  $3 trillion a year added to a $10 trillion money supply.  30% expansion a year, when GDP is shrinking.  That's hyperinflation.  

So how come prices don't climb 30% a year?  Simple, they're killing demand, plunging the economy into deep depression and keeping it there so demand drops off.  That's how Bernanke gets away saying inflation is only 2%.  Of course that number is bullshit, it's more like 15%. 

Only reason it's not 30% is they're keeping the economy in depression and keeping demand low, along with choking off credit.   Yea, the govt gets to borrow at 1%, but we pay 10% - 30%, if banks will even loan money at all.

They have to do that.  They have to choke off lending to the economy so the govt can borrow it all.  If they didn't, we'd have 30% inflation, 40% inflation, who knows.



Freewheelin Franklin's picture

It is very simple. If the politicians and central bankers do not address these issues, the markets eventually will.


Right now, the government has the luxury of being able to borrow at 1.6% on a 10-year. If and when that changes, we are in for a shitload of hurt.


But I'm not telling you anything you don't already know.

cranky-old-geezer's picture



Yep, markets will address it alright, forex will pummel USD down to nothing.  EURUSD will fucking $500, $1,000, whatever.

...assuming ECB doesn't print Euros to oblivion, which they might.  Ditto for Japan, BOJ might print Yen to oblivion too. 

We're approaching a time where all major currencies are gonna be printed to oblivion to keep the massively growing sovereign debt bubble going ...and keep bailing out banks of course, keeping the looting spree going till there's nothing left to loot.

Tango in the Blight's picture

The military abroad will still have weapons. They'll simply take what they need. And then come home as there won't be any point in staying.

cranky-old-geezer's picture



The military abroad will still have weapons. They'll simply take what they need.

Good luck with that. I suspect host nations like Germany will have other ideas.

And the few who do get home will be coming back to a nation in chaos anarchy and civil war caused by a worthless currency which the Fed destroyed.  Sure, people will still get paychecks but the dollars in those paychecks won't be worth anything and won't buy anything.  Sure, the military will still get paid, but the dollars in their paychecks won't be worth anything and won't buy anything.

If I was an American soldier stationed in Germany when the dollar goes bust, I would seriously consider defecting and just staying there.  Life would be much better in Germany than coming back to America in chaos and anarchy with its worthless currency.

DoChenRollingBearing's picture

Carmen Reinhart, Kenneth Rogoff and Jim Chanos all have great minds, and those minds were put to work in the new edition of Barron's out this weekend.

Review of Barron's -- Dated 26 November 2012


Offthebeach's picture

1. Ours is called The Federal Reserve. The Soviet mobsters called theirs, Gosbank( ? ).

2. It's not central planning/rigging when we do it.

Were fascist, not Communist.

Caviar Emptor's picture

The vultures are feasting off the carcass of the post-bubble US economy. And Vulching has become the only ez money game left in town, most everything else is diminishing returns. We look more and more like Japan every day as ZIRP and QE push all other economic endeavors to the margins. 

Yen Cross's picture

 That has to be one of your best / Thoughts / EVER!   Screen shot on my "hard Drive" GOOD!

rhinoblitzing's picture

Ahhh.. get with the program and... Open A Bank!

prains's picture

vulching sounds like the corporate form of felching

ebworthen's picture

Wait...this makes too much sense...must be subversive propaganda from wild-eyed gold hoarding libertarian terrorists.

sumo's picture

Don't forget those silver hoarders. They're just as bad.

THE DORK OF CORK's picture

These guys are rentiers..........


They do not hold Gold as a wealth asset but to loan it out at interest in the goverements unit of account.

They may be acceptable with private bank money.............


But Fiat goverment (taxable) money is the commons....or at least should be.

Its much like Extracting money from your local village , destroying the medium of exchange function of money and thus money tokens utiltiy and therefore soon after the villages complex life support systems.


True goverments should just issue the note and not the bond...........this will restart the flow stopped since 2007.


The CBs efforts at financial repression is to preserve the private issuance of money credit.

As the value of the banks assets is not important  , whats important to them is the legal right to farm the fiat.

THE DORK OF CORK's picture

They clearly want to create a bigger deflation.........

But this wastes far more real physical capital then a inflation of the money supply............


Talking of villages here is a good example of village breakdown caused by a deflation of the money supply in France.




For example
In this part of very rural southern France they closed a railcar line in July
Well the replacement bus route is now suspended…………..



People must now burn more real resourses using their cars.

Deflation appears to work for the few winners (who hold the commons money claims) that can afford a car but in the long run it will not work out as their village slowly dies.


I keep thinking of ancient Rome now and its decay.
When the physical systems could not grow anymore due to the technological limitations of the time I imagine the people who held money claims charged a rent on it to sustain the lifestyle they had grown accustomed to.
But money as a token is not a private good.
It is the very heart of the commons , the state.

What is striking about ancient pompeii is that most free people did not have much kitchen facilities
The money supply was available for them to eat out in Tacco bars……..when the money supply became constrained in other cities during 200s & 300s I imagine city life became impossible destroying the Efficiency of the city as people spent more time & energy cooking in their tiny apartments.


See 14.40 – 17.00
& 39.00 “fast food joints is the commonest feature of the Pompeii urban landscape”
I.e. the + money supply made the place work…
A negative or static money supply can never work.

This same monetary phenomenon is happening throughout the eurozone today which is forcing people to consume more real resources so as to preserve these money claims.

Village & market town life in France and Indeed Ireland – once the backbone of these countries real wealth base is being destroyed to achieve this goal.


sangell's picture

May have been true when Darwin ruled the earth ( and he did in Roman times) but it is simply not the case when, in order to sustain a 250lbs negress and her hoodlum children, the state sucks wealth from the those who produce it in order to allow the economic supernumeraries to survive.

THE DORK OF CORK's picture


You can keep your house and land and even your slave back in Roman times but the medium of exchange needs to dilute in value so as to preserve precious real physical capital.

And if you produce pure Greenbacks the banking system will not be able to waste capital through credit provision so it might not even devalue much.

disabledvet's picture

this is SO spot on i don't even know where to begin. the argument above makes sense if you consider that it was the BONDHOLDERS who got bailed out ("too big to fail" especially Fannie Mae and Freedie Mac) and thus didn't stick it to EQUITY holders as presumed here and elsewhere but the holders of ALL wealth via taxation and confiscation. "throw in a few Government overthrows for fun and call it an election." of course the idea that "one gets growth through dividends" is pretty hilarious...not as funny as raising taxes on said dividends of course. from whence the consumption? you know..."the thing that pays for everything"? hell...how about investment PERIOD! Marxism is nice...if you engage in it. But in the USA you have OUTSOURCING. You think Corporate USA is going to pay taxes? they're all preening about thinking they will be the next recipient of the fed's "phantom largesse" with cash hoardes as big as Washington DC's deficits. it's so preposterous it's hard to imagine this shit even sells. "but sell it does...and sell well" i would argue. Sorry but as stupid as Wall Street can be the Rockefellers are not. "you pay for my oil" is about as simple as it comes. and yes..."you will pay for that oil." the government will nationalize you say? really? at the same time allowing GM to reclaim Ally financial? i mean is anyone in charge of finances here? ANYONE? "not until the check bounces"? and when it does "it will be quite spectacular"? gotta say i have an urge to fill up the fuel tank every night now. this is some crazy shit that's being sold. the idea behind responsible budgeting is so we don't have to pay even MORE for oil "due to catastrophic situations" yes, yes? as in SANDY, yes, yes?

klockwerks's picture

disabledvet, good idea about the fill up. I fill up both cars when we have driven 100 miles plus keep 50 gallons in storage. You always have aout100 gallons between cars and storage. Folks on the east coast wish now they would have done it. Plus, when it all comes down I will have prepared for whatever.

Offthebeach's picture

Fiat farmers.

Back in the gold, PM days, their used to be Tax Farmers, chartered individuals that would collect taxes for a percentage. I don't know if they bought the rights and kept what the could get.

Anyway, I don't see the government reducing its self, ever. At each hit, it expands the FSA for popular votes/capture.

Personally I consider tax, permit license, etc cheating, lying, to be a patriotic commandment.
However, they just print, so PM are a strike at the root.

sumo's picture

"Policy-makers have adopted aggressive methods to push interest rates and bond yields down to unprecedented levels. It is hoped that these low rates will trigger a stronger recovery in corporate capex and jobs."

I like Ann Barnhardt's definition of money - a fungible proxy for human labor and creativity. Her take is that interest rates imply a price on time spent on labor, and that ZIRP steals the value of that labor by mispricing it.

ZIRP is the grand theft, the crime of the century: stealing from the "little people" to pay for the elite's gambling losses.

And why don't the Fed econotards understand this? Upton Sinclair can assist:

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

FeralSerf's picture

The "Fed econotards" do understand this.  Grand theft is their job.  They just don't like calling it by its correct name.

buzzsaw99's picture

and what product does Diapason Commodities produce (other than fancy blather)?

Mary Wilbur's picture

I don't agree that it was "blather," but it was definitely "fancy." Reading it was like wading through mud.

Cognitive Dissonance's picture

"If we are to salvage any residue of our liberty, restore any semblance of our prosperity, and again secure to ourselves the right to enjoy our property, this [manipulation] must be ended before it consumes our capital..."

This sounds like a cry for help from a fool. Alas, a fool and his money are soon parted. Nobody makes you waste your capital as long as you can voluntarily direct where it is invested. If your choices are poor either you do nothing or you remove the source of your irritation. No one "makes" you do anything you don't want to do.

While in my bank one day I heard a clearly distraught man pleading with the customer service rep to fix his problem. As I walked past the desk I heard him say "Make me stop writing bad checks."

Poor fool.

formadesika3's picture

*As I walked past the desk I heard him say "Make me stop writing bad checks."*

All part of the infantilization of the public.

disabledvet's picture

the fact that the Government itself could be provoking disorder does not make the oil worth less but worth MORE. the only difference is between the CONSUMER and PRODUCER of said wealth. (with emphasis on the latter as the winner.) "if i pay for everything" that includes public safety does it not? i would argue "yes indeed." i still believe we're careening towards what the Japanese called "Shocku" http://en.wikipedia.org/wiki/Japanese_financial_system that's right folks...in the early 90's the 5 biggest banks in the world by assets were Japanese. in the 1980's Nomura was easily the biggest securities firm in the world. but that fiat ponzi collapsed in 1990. and where is that Nikkei today? 80% lower than it was then. not a problem if you were a bond holder. here is what became the world's largest bank in terms of deposits as a consequence: http://en.wikipedia.org/wiki/Postal_savings_system that's right, the Japanese Postal Service. how long can "the bond ponzi" last? a LONG time in world where equity is of no consequence. that was true in the USA until after WWII btw. but because of massive federal programs like the interstate highway system, public education, medicare, medicaid, the Cold War itself, etc...etc...massive amounts of equity in form of "sweat equity" or "housing stock" and "infrastructure" was built up in the USA. nothing soaring prices for everything can't solve, right? at least until prices fall. "then what"? is a good question. "a whole new bunch of Federal Programs" then...TALF, TARP..etc, etc. Most of which have been wound down actually. Now what? BLURF? BARF?

honestann's picture

Amazingly, that customer is easy to satisfy.  Just throw away his paper-checkbook and have him write checks with his plastic-checkbook (his debit card).  Then when he tries to write a bad check, the transaction is simply refused.

Problem solved.

If only we could solve the predators-DBA-central-banks and predators-DBA-goverment as easily.

StychoKiller's picture

[quote] Nobody makes you waste your capital as long as you can voluntarily direct where it is invested. [/quote]

Hmm, perhaps you've forgotten how the Govt takes your capital (and calls it taxation)

[quote] No one "makes" you do anything you don't want to do. [/quote]

Prove it - stop paying your taxes!

Never One Roach's picture

My neighbor just bought 2 more houses for almost zero down. "Why not?" he says, "if it doesn't work out I'll just walk away."


Until accountability is restored from the top down this reckless behavior at all levels will continue.

flacon's picture

Maybe the government will make a law that anyone who "just walks away" MUST spend a weekend at a FEMA camp. Just a weekend. 

sumo's picture

Nah, the govt recruits them for "regulatory" agencies like SEC and CFTC.

"Hey bud, how would you like a job where you don't have to walk away, you just have to look away? With free porn and donuts. Wanna know more?"

CunnyFunt's picture

There's a job for everyone in the panopticon.

Yen Cross's picture

In a mirror it spells " FUNNY CUNT"!

  learn to spell ya troglodyte
CunnyFunt's picture

Aye, you're a right clever one.

How's the trade going tonight? A bit rough, no?

Yen Cross's picture

If you layed of the whiskey/payed attention, I went flat/took profit last Thursday. I'm on my way to Asia for several weeks before cyclone season, (Queensland property), and to meet with some private equity friends of mine. 

The year end is pretty much over/ cashed in...  I'm tired of sniffing jet fuel CunnyFunt     You are a true financial "literate"... Good luck, and get over the [thin skin syndrome].

CunnyFunt's picture

Wonderful! Tell my mates in Mackay that they are all tossers. Enjoy your penis party with the PE friends.

Yen Cross's picture

 So now ya have a problem with the Aussies? If you used 1/2 of that hostility to make a 'quid' you would own the world!

  You are undoubtedly are a smart person.

CunnyFunt's picture

No! I have Aussie cousins and a Kiwi half-brother.

Yen Cross's picture

 Only been over to New Zealand once, was a great experience. North island.

  I don't wan't to spend the rest of my natural life fighting with you... Let's get it sorted, and move ahead.

CunnyFunt's picture

That's fine. Just understand that I'm from fighting stock and enjoy the challenge.

I hope you enjoy your trip and profit from the experience in terms of happiness.

Moving ahead ...