The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.Mortgage debt? This seems a straight up political move designed to lift the stock market and prop up the housing market prior to the election. I summarized the futility of zero percent long term interest rates as explained by David Einhorn some time ago. The method by which the Fed pumps liquidity matter little. A quick recap:
- Low interest rates make it harder for retirement eligible to actually retire, they are getting little return for their money.
- Interest rates are a measure of the time value of money. By setting it at zero, there is no urgency about investment decisions.
- Because those who live on fixed savings, have less to spend, they spend less, harming the economic recovery.
- Investment isn't increasing at zero rates, because once rates fall below the rate of inflation, the only consideration is whether the principle can be paid back. If inflation is at 2.5%, then reducing interest rates from 2.5% to 1.5% or even zero percent will have no effect on investment, so there is no offset to the fact that savers have less to spend.
- Zero rates allow otherwise worthless loans to appear to be performing, as the borrower can make nominal payments. But it delays the necessary economic unwinding necessary for real economic recovery.
Even George Will got the memo. In today's WaPo he quotes Esther George of the Fed's regional bank in Kansas City:
Very low interest rates discourage saving, punish retirees living off interest-bearing assets and, George says, “incent people into riskier assets.” These include commodities, farm land (for the first time on record, prices of cropland in George’s district have risen more than 20 percent for two consecutive years) and equities. Fed Chairman Ben Bernanke evidently thinks that driving up the stock market will quicken the animal spirits of the affluent 20 percent who own 93 percent of equities, and this “wealth effect” will spur economic activity, eventually benefiting others. So, the interest rates Barack Obama favors are a form of the trickle-down economics he execrates.But of course real unemployment stays stuck at historic high levels. Consuming more and more jelly donuts isn't giving us more energy, its just making us sick. Of course, gold, oil and stocks all moved higher on the announcement. Those assets have in common that they are related to tangible goods whose value stays constant while the value of money falls.
Here is the price of gold as anticipation of the easing built:
The price of gold is the inversely proportional to the real value of money but prices in the expected future value of money as well. Gold is not bullish on the dollar. As the fed has performed other market interventions over the last five years, look what has happened to the price of gold.