Monday, August 15, 2016

Central Banks Are Choking Productivity
"If the Economy were a car, productivity would be the engine. Heated seats, on-demand 4-wheel drive and light-sensitive tinted windshields, are all very nice. But they mean little if the engine doesn’t turn and the car just sits in the driveway. The latest productivity data from the Commerce Department confirms that our economic engine is sputtering .. Ultra low interest rates have encouraged businesses to borrow money to spend on share buybacks, debt refinancing, and dividends. They have also encouraged financial speculation in the stock market, the bond market, and in real estate. Investors may believe that central bankers will not allow any of those markets to fall, as such declines could tip the already teetering global economies into recession. The Fed, the Bank of England, the Bank of Japan, and the European Central Bank have already telegraphed that they will be the lenders and buyers of last resort. These commitments have turned many investments into “no lose” propositions. Why take a chance on R&D when you can buy a risk free bond?
Many economists are now saying that the Fed won’t be able to raise rates until productivity improves. But productivity will never improve as long as rates stay this low. This is the paradox of the of the new economy. When will central bankers conclude that it’s their own medicine that is making the economy sick?
They will not make that connection until they succeed in killing the patient…and even then they may continue to administer the same toxic medicine to a corpse. The political pressure is just too great to ever admit their mistakes, so they repeat them indefinitely."
- Peter Schiff*
LINK HERE to the essay

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