"The-Policy-That-Must-Not-Be-Named" is finally unmasked.

It's "Monetization."  Japan has finally abandoned the pretense that central bank's printing of money to fund the government is a temporary measure designed to control the level of interest rates.  Will the markets find this candor "refreshing?"

from A6 in today's Wall Street Journal:

Shakespeare's take on the Fed's failure to raise rates

Thus conscience does make cowards of us all,

And thus the native hue of resolution

Is sicklied o'er with the pale cast of thought,

And enterprise of great pith and moment

With this regard their currents turn awry

And lose the name of action.




(Hamlet, Act III, Scene 1)

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.

"All power to the Soviets!" Central bank overreach in Sweden and elsewhere

I remembered Lenin's phrase "All power to the Soviets!" when I read this morning that Stefan Ingves, head of Sweden's central bank, thinks that the bank should have more power over the economy. Specifically, the Financial Supervisory Authority (FSA) is standing in the way of the central bank's direct regulation of the housing market. Ingves proposes that the FSA be merged into the central bank. (i.e. eliminated and its authority given to the CB)

Sweden's economy grew 4.5% last year and is expected to grow 3.5% this year. The central bank lending rate is -0.5%. (I believe that Sweden was the first to go negative.) The bank has also done the requisite quantitative easing. The fly in the ointment is that inflation is only 0.4% whilst the target is 2.0%.

Personally, I don't see why stable prices and a booming economy is not considered a good enough result. The Central bank, which seems quite pleased with itself, says, however, that it needs more power so that things will be even better.

It's human nature: everyone thinks he ought to have more power.