I asked a colleague what he thought my subject for a post should be. He suggested the above title, or “Why We All Have Stockholm Syndrome Now” (thanks JK). From Wikipedia: Stockholm syndrome, or capture-bonding, is a psychological phenomenon described in 1973 in which hostages express empathy and sympathy and have positive feelings toward their captors, sometimes to the point of defending and identifying with the captors.
I saw a tweet today that said “Cheap Money talks…and what it says is to invest in the future.” This is a sign of Stockholm Syndrome. The tweet was apparently a paraphrase of Paul Krugman’s column of July 11, “They say that money talks; well cheap money is speaking very clearly right now, and it’s telling us to invest in our future.” Now that’s just, well, dumb.
Look, we’ve had low rates in the US now for years, and many developed countries now have negative sovereign rates. Why? Central banks push rates lower in order to spur investment, and to draw consumption forward, to kick start the economy. ‘Kick start’. Do you have a mental image of what that means? For example, you give your horse a little kick to encourage a gallop. Or you kick start a motorcycle to get it started. These central bankers are kicking a dead horse, and yet, because the hostage public sees higher equity prices, they perceive the captors as being the saviors.
The fact is, lower rates have not sparked capital expenditures, i.e. productive investment. What they have sparked is corporate stock buy backs and other corporate financial engineering, such as borrowing to pay higher dividends. Great, that pushes stock prices higher. The idea of lower rates putting a punch into consumption, which could perhaps result in ‘escape velocity’, didn’t occur. As many have already stated, we’ve pulled as much consumption forward as is possible.
The problems are well known: Over-indebted governments (high debt to gdp levels), high levels of corporate debt, entitlements, aging populations. The goal is to generate growth, which alleviates those issues and provides some breathing room. However, by keeping rates low, central bankers allowed companies which should have failed to continue hanging on. Low rates have had the further effect of making retirees and older workers save more and work longer, depressing consumption. They are, in effect, hostages. As central banks do everything they can to paper over any pain that might accrue to the economy, they stifle growth prospects. Low rates are a major warning sign for future investment at this point. Just because a Nobel winner tells you otherwise with a cute slogan, trust your own gut. Low rates aren’t helping the average household.
http://www.nytimes.com/2016/07/11/opinion/cheap-money-talks.html?_r=0
Alex Manzara
