03/26/2015 - Financial Repression Depresses The Economy
“ZIRP (zero interest rate policy) and QE (quantitative easing) as practiced by the Fed and ECB are not boosting, but instead depressing, private sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world. ZIRP has reduced the cost of funds for the U.S. banking system from roughly half a trillion dollars annually to less than $50 billion in 2014.This decrease in the interest expense for banks comes directly out of the pockets of savers & financial institutions. While the Fed pays banks 25bp for their reserve deposits, the remaining spread earned on the Fed’smassive securities portfolio is transferred to the U.S. Treasury – a policy that does nothing to support credit creation or growth. The income taken from bond investors due to ZIRP and QE is far larger. No matter how low interest rates go and how much debt central banks buy, the fact of financial repression where savers are penalized to advantage debtors has an overall deflationary impact on the global economy. Without a commensurate increase in national income, the elevated asset prices resulting from ZIRP and QE cannot be validated and sustained. Thus with the end of QE in the U.S. and the possibility of higher interest rates, global investors face the decline of valuations for both debt and equity securities.”
– Chris Whalen
