In a sweeping piece in The Wall Street Journal, Jim Grant likens the actions of Fed Chairman Jerome Powell to those of a drug dealer, feeding highly addictive monetary drugs to the market, with no regard for the side effects.
In the piece, Grant notes that like the portfolio managers of CalPERS who are California Dreamin’, Powell explains his actions as necessary. But is that really true? Grant writes:
If Federal Reserve Chairman Jerome Powell were selling a prescription drug instead of a monetary policy, the Food and Drug Administration would likely want a word with him. “What we’re thinking about now is providing the accommodation that this economy needs for as long as it needs it. That’s all we’re thinking about,” the central banker told the Senate Banking Committee on June 16.
To listen to Mr. Powell, the Fed’s monetary medicine isn’t even a drug, let alone one so freighted with side effects that you may wonder if the cure is worse than the disease. I believe he is wrong about that.
Ultralow interest rates are a financial psychotropic. They induce feelings of neediness (on the parts of savers to reach for yield), grandiosity (by corporate deal-doers to reach for the moon) or fantasy (for any who would try to rationalize otherwise insupportably high stock prices with reference to the tiny cost of a loan).
Ground-scraping interest rates turn savers into speculators and quarantined millennials into day traders. They facilitate overborrowing, suppress market signals, misdirect investment dollars, and promote the dubious business of turning well-financed public companies into heavily indebted private ones.
Last week, California’s Public Employees Retirement System announced it will take on debt in an attempt to generate higher returns, because low interest rates leave it no alternative. Mr. Powell, too, pleads necessity—he had to do something to lower the towering unemployment rate. Nobody doubts his humane intentions, but history will judge by results.
With opioids, the habituated patient needs ever higher doses to achieve a constant effect, and so it is with dollars. Massive credit creation (which the Fed achieves by buying bonds and mortgages with money it materializes with a tap on a computer keypad) is a kind of financial painkiller. The record of the crises of the past 20 years, beginning with the post-millennium dot-com crash, is one of lower and lower interest rates, and of greater and more aggressive bond-buying.
No such admission of potential risk fell from the lips of Mr. Powell or from the pages of the Fed’s new semiannual Monetary Policy Report to Congress. The official message is rather that today’s unprecedented monetary-policy offensive holds no potential for anything but a wholesome reduction in the damage of the lockdown-induced recession.
The actions of the Federal Reserve, the stock market, big pension funds, and the massive money managers like BlackRock, can make any investor wonder what crisis they’re living in.
You and I know there’s a crisis. Go downtown and look around. How many businesses are struggling or will never be the same? Who do we have to thank for this? China.
The China virus traveled to the U.S. via Europe, and now Europe wants to keep us out—yet is opening flights from China. You really can’t make this stuff up. No one has a clue.
There has never been more money created out of thin air by a clueless Federal Reserve—one that refuses to stand up for free-market principles. In other words, the idea that nothing is free.
Silly me, of course money is free.
How is it free? Well, let’s travel back in time to January, and read BlackRock CEO Larry Fink’s letter to shareholders. Here’s the meat of it (bold emphasis is his).
Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.
And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.
OK, and here’s the announcement back in March by the N.Y. Fed of its selection of BlackRock to allocate free-money:
On March 24, 2020, the New York Fed retained BlackRock Financial Markets Advisory as a third-party vendor to serve as the investment manager for this facility. BlackRock was selected for this role after considering its expertise with purchasing large amounts of all relevant types of corporate debt issuance and corporate bonds in the secondary market, deep knowledge and substantial experience in the corporate debt markets, and robust operational and technological capabilities. Additional information regarding the terms of this relationship is available here.
Guess the pet projects will get their money after all, while Main Street struggles to survive. Your tax dollars hard at work for Mr. Fink. Clueless.
