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.

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