Moving to morphine and other less potent pain-killers had to be done while a soldier was still in great pain, and was insisting that the doctor maintain the heroin “just a little longer.”
Zero interest rates are mortal enemies for what Albert Einstein called “The greatest force in the universe” –compound interest rates.
Lowering compound interest rates to record-low levels, attacked two core concepts of capitalism: the pricing of risk across the spectrum and the compounding of returns.
Capitalism is the first economic system to be based on the pricing of risk and the compounding effects on economic growth through saved investment returns–and therefore has the most to lose from the prevention of its operation.
That process of compounding is the basic formula for funding pension plans–and it provides the fuel for a growing economy.
The biggest winners from nearly-free money have not been the free market production and capital investment that together drive economic growth. Once borrowing costs became negligible, speculators took over from long-term investors. As a renowned Wall Street veteran told me. “The hedgies’ time horizon is lunch.”
This etiolation of the life force of capitalism works in other unproductive ways: Once highly-taxed investors came to believe that zero rates were going to be around for many years, they began switching from bonds into stocks with high, reliable – and lower-taxed – dividends. The balance between dividends and growth in equity valuations which had shaped capital markets and economies for many decades shifted from growth to income.
Consider the impact on the financial strategies of some of the major technology companies that have shaped our economy: IBM, Microsoft, Apple and their brethren have been borrowing big at surreally-low rates to pay dividends and, in some cases, to buy back their stocks. Not a dime went into capex. The biggest IPO sensation of the year, Apple’s first bond issue, was oversubscribed many times in an orgy of demand – recalling the dot.com IPOs at the peak of what would soon become tech’s Triple Waterfall collapse. In retrospect, Apple’s first was the heroin addicts’ last, maniacal gasp for gains in bonds.
As the sardonic song of the Nazification of Germany (in Caberet, the musical of 30’s Berlin) advised, “Money makes the world go round.”
Money going into stocks for their 3 per cent dividends is hardly stimulating economic growth. It responds to investors’ desire for secure money NOW, not potential growth later. That is a potentially lethal lust for the continuance of capitalism.
In that environment, the best-performing bonds have been junk bonds, a group heavily dominated by LBO securities whose issuance enriched so many private equity magnates. Once again, the huge growth in junk bonds has not been a sign of burgeoning economic growth, but of shrewd cashouts by wealthy elitists in the shadow market.
Grand scale short-term gain with no risk of short-term pain is no recipe for long-term capitalist growth. The longer the financial heroin flows, the more the capitalist forces of risk and reward will be skewed away from economically productive growth through long-term investing.
Caught in the fallout from the sudden switch in speculators’ liquidity situations have been shares and bonds in emerging markets, including so many economies that were moving up the learning curve of capitalist economic and fiscal strategies. Those nations as a group have collectively managed positive growth since the industrial world plunged into Depression conditions. Again, it was levered speculators who have panicked, as the margin clerks sharpened their pencils, and emerging markets became submerging markets for the first time in 15 years.
Result: growth forecasts for the emerging economies are already being marked down. The explanation for shell-shocked finance ministers in those countries as they ask, “Why us?” is that no good deed goes unpunished when virtue’s values are being systematically downgraded.
So what is a true investor with a time horizon longer than days, weeks or even months to think about the turmoil attending the promise of staged heroin withdrawal?
We believe that the phase-out of the heroin is an occasion for rejoicing. Let the tapering begin!
1. The Fed – and the Bank of China – are displaying some confidence that the worst of the recession is over and growth, albeit modest growth, is about to resume.