Eating The Seed Corn—–The Fed’s Horrid Corruption Of Corporate Finance
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 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 exuberant.
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.
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