Stop Blaming Central Banks: Yields are Low Because Growth is Low
I am SO fucking tired of this tinfoil hat nonsense. As always, it's the economy, stupid. Just like how you can't blame a president for a recession or credit a president for a recovery, central banks only have so much power.
Just like how we think that the exhaust from your Chevy Suburban has an affect on the temperature of the planet. It doesn't; the forces at work are far more powerful than you can even imagine. Think about the sun alone: you could fit over 1 million earths in the sun.
"Oh my god, money is so cheap because of central banking!" No. The Global Capital Markets are far, far more powerful than that. Yields are low and returns are low because of the global economy:
1. decline in population growth
2. the reduced capital intensity of our leading industries (think Facebook versus steel-making), and
3. the falling relative prices of capital goods
etc.
This has been happening for DECADES. It's been a GRADUAL and MASSIVE change. None of this is hidden or secret. My God, what the fuck is wrong with people? Ask the average CNBC viewer and they think that the Fed can raise the discount rate and effect change. That is so fucking wrong; banks don't even rely on the Fed for money anymore! It takes two god damn seconds to pull up BofA's balance sheet. Look at their sources of capital. This outdated silliness we were taught in high school about how banks borrow money from the Fed and then lend it to the people of America is so far out of touch with reality it's not even funny.
This was not news 5 years ago, it's not news today, and won't be news in 5 years. Just sit the fuck down, relax, and let the robots do your job while people have fewer kids and Amazon delivers groceries to your door for free. Accept that money will be cheap, yields will be low, and returns will be low for at least another decade or two or three. There is nothing any of us can do about it.
I 100% agree with everything you have said. I am not an expert by any means, but it makes sense that the cost of capital would fall. Not only is there more money in the world than ever before, but money seems less important in the new economy where the main inputs are cheap capital like a personal computer and human capital. I would go as far to say we will never return to the rates there used to be, forget the 20/30 year timeline. Am I missing something here?
Completely agree, but I suspect that policymaking has an impact. The U.S. dollar's role as the global reserve currency draws savings to the U.S. depressing rates and economic growth. In Europe, the single currency has allowed Germany to export savings to the periphery. Obviously Chimerica and the Eurozone have run their course, and a new paradigm has to follow, but there are enormous entrenched interests and structural barriers standing in the way.
China can't continue to save ~50% of GDP, which it has for years on end. Their financial system has been set up to channel credit to the SOEs at rates well below where a free market would clear allowing them to invest in projects that return next to nothing. Eventually the bill comes due and you write off the NPLs and have slow growth as they run out of debt capacity (delimited, I suppose, by their sovereign creditworthiness and public tolerance for this nonsense). You can't keep pouring good money after bad because you run out of good money. Global growth and rates could rise meaningfully when all this starts to reverse.
Other factors I would point to in order to explain low rates include the liberalization of economic policy in much of the developing world, increased income inequality (higher propensity to save among rich folks), and the self-fulfilling expectations brought on by 20-30 years of falling rates and inflation.
I agree in part.
I would say that global economy/change of market during the years is responsible for about 60% of the general situation.
Other 20% I would left for the politics implemented by central banks and other 20% for how important companies / entrepreneurs are relating with central ban/government politics being implemented.
In some situations the Central Bank is doing whatever possible, the global economy is favorable but the interaction with business community is just not working well.
https://en.wikipedia.org/wiki/Federal_funds_rate
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