Tuesday, May 24, 2011

The 'Baseball' Economy: The Fed Strikes Out

The Fed's game plan is to pitch low-cost credit so borrowed money will flow into the productive economy. But the Fed's own policies insure that the borrowed money goes to speculative bets and unproductive reserves.

The Federal Reserve has been playing a perverse version of baseball, and unfortunately it has struck out. Here's the Fed's version of baseball: The Fed "wins" if it can get batters to "swing" at more debt and get a "hit" by spending that borrowed money in the real economy. If a job is created by that spending, then the "hit" becomes a "run" and a "runner" gets on base.

To entice players to borrow money, the Fed has been lobbing big fat slow pitches for the past three years: zero-interest rate policy (ZIRP), excess liquidity, quantitative easing, buying risky mortgages to take on bad debt from the banking system, etc., all designed to keep interest rates low and credit flowing.

The "too big to fail" banks and speculators have swung at the fat slow pitches, but no one's on base: few jobs have been created by the Fed-fueled rampant financial speculation. Speculating in financial games has added a few jobs to Wall Street, but it accomplishes precious little the real economy. the Fed's game plan boils down to funneling billions of dollars to the top 5% of the households who benefit from rampant speculation in stocks and financial instruments, and then hoping their purchases of Porsches, Coach handbags and $100 bottle of wine in high-end restaurants will "trickle down" to the real economy.

While Porsche dealerships, luxury retailers and elitist restaurants have prospered, their share of the real economy is too small to have much of an impact on jobs. Yes, a few more retail clerks, dishwashers and waiters have jobs, but these are ultimately temporary and often low-paying/marginal positions.

Banks have amassed "hits" by borrowing vast sums of the Fed's "free money," but since they have squirreled the money away at the Fed to earn no-risk interest, they don't get any "runs." The money sits there, earning easy profits for the banks, but it doesn't flow into the real economy. The banks' "hits" aren't leading to "runs."

Large enterprises are selling debt to amass "war chests" of cash they can use to snap up competitors. But corporate acquisitions don't create jobs, they destroy them as overlapping divisions are axed and consolidated.

The irony is painfully obvious: the more slow fat pitches the Fed throws, the more the banks and corporations borrow for speculation or no-risk interest paid by the Fed itself. As for investing in actual capital-intensive new plant--who would be insane enough to do that in the U.S., where regulations and taxes on productive profits are burdensome and profit margins are slim? It literally makes no sense.

What makes sense is to borrow the "free money" here and build the capital-intensive plants in countries with advantageous tax policies that are near the high-growth BRIC markets. As for the U.S.--the high-profit plays are all speculative financial gambits.

You have to feel sorry for the lame-brained Fed: all it knows how to do is toss fat, slow pitches of "free money," hoping someone will borrow the money and put it into the real economy. But the Fed's own policies insure that the money will either be hoarded by banks or "invested" in speculative gambles which are ultimately backstopped by the taxpayers--gambles with little to no payoff for the real economy.

As the Fed-engineered stock market rally rolls over, then perhaps the Mainstream Media sitting in the press box sucking corporate-sponsor provided beverages will awaken and look at the progress of the Fed's game: lots of corporate hits, but no runs, nobody on base and zero RBIs (runs batted in)--that is, no jobs created despite the trillions in treasure lavished in new credit.

It feels like we're entering the eighth or ninth inning of the Fed's perversely destructive game, and all we need is an umpire to call "STEE-RIKE!" and end the doomed-from-the-start "extend and pretend" game the Status Quo has been playing since 2008.

Readers forum: DailyJava.net.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Bryce W. ($50), for your wondrously generous contribution to this site -- I am greatly honored by your support and readership. Thank you, Stephan P. ($50), for your extraordinarily generous contribution to this site-- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:

Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Adsense and Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative)
If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.

Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted
on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP