The return on capital tends towards the cost of capital, and when interest rates are set at zero, it has disastrous consequences, not just for savers, but for the economy as a whole. From David Stockman at davidstockmanscontracorner.com:
Central bank financial repression results in the systematic and severe mispricing of financial assets. And that has sweeping consequences far beyond the munificent windfalls it bestows on the thin slice of mankind that frequents the casinos of Wall Street, London, Tokyo and Shanghai.
The fact is, the prices of money, debt, equity, traded commodities and all their derivatives comprise a vast and instantaneous signaling system that cascades through every nook and cranny of the real economy. When these signals are systematically falsified by a few dozen central bankers they cause hundreds of millions of ordinary businessmen, workers, investors and entrepreneurs to alter their economic calculus.
And not in a good way. False signals lead to mistakes, excesses, losses and waste. They ultimately reduce economic efficiency and productivity and lower the rate of economic growth and real wealth gains.
Since the Greenspan age of financial repression incepted in the late 1980s, for example, the returns to savings have been obliterated while the rewards for speculation have soared. That’s important because only savings from current production and income generate additional primary capital that can foster future wealth. By contrast, leveraged speculation merely causes existing financial assets to be re-priced and a temporary redistribution of paper wealth from the cautious to the gamblers.
In an honest free market, in fact, there is no excess return to leveraged speculation at all. Natural market makers arbitrage out the spread between the costs of carry and the returns to carried assets such as long-dated futures contracts, term debt and various and sundry forms of equity and other risk assets. A relative handful of market makers can make a decent living arbing an honest market, but the mass of investors can not speculate their way to wealth. The latter can happen only when the central bank has its big fat thumb on the financial scales, pressing the cost of carry—-that is, leveraged financial gambling—-toward the zero bound.
It is not surprising, therefore, that the household savings rate went into a secular free fall after 1987. But even the standard graph on the personal savings rate does not tell the full story—notwithstanding its decline from a 11% average between 1955 and 1987 to less than 5% during most of the post-2000 period.
The skunk in the woodpile is that the baby boom was reaching its peak earnings years after 1987, and its savings rate should have been going up in preparation for the long grey twilight of generational retirement. So the economic impact of the Fed’s war on savers reaches way beyond the GDP reckoning for the current quarter or year.
To continue reading: Eating The Seed Corn
