Economist blames low capital spending on low interest rates.

In today's WSJ, we learn that economist Jason Thomas of Carlyle Group says that low interest rates are stimulating dividend increases and share buybacks at the expense of capital spending, which is expected to be negative in real terms in 2016. If he is right, then the Fed is preventing the very thing it seeks to achieve.

Here's how the article by Greg IP begins:

"One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment.

"After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead?

"That’s the theory advanced by economist Jason Thomas of private-equity giant Carlyle Group. It is at odds with conventional economics but has some intuitively appealing logic and supportive data.

"He calculates that since 2009, just after the Federal Reserve took interest rates to near zero, U.S. companies have boosted stock buybacks by 194% and dividends by 66.5%, but investment by 43%. Big energy companies have been slashing capital expenditures while boosting payouts. Even companies without the headwind of lower commodity prices are holding the line: McDonald’s Corp. and Eli Lilly & Co. are maintaining flat capital expenditures while raising dividends; Verizon Communications Inc. said it plans to trim its capital budget and has raised its dividend."

There's a great quote in the article:

Since 1976, higher-yielding stocks systematically outperform the overall market by 0.76 percentage point when inflation-adjusted interest rates fall 1 percentage point, Mr. Thomas finds. Moreover, the relationship becomes more extreme the lower rates go and the longer they stay low.

“John Bull can stand many things but he cannot stand two per cent,” Walter Bagehot, a 19th century editor of the Economist, once said, describing investors’ need for some minimum level of income.

It make sense to me.