Tuesday, September 29, 2020

The Fed Has Given Big Business A Huge Advantage

And Its Gone!
The last few months have been painful for small businesses across America. These businesses often have a difficult time getting a bank loan. Bubbling up to the surface is the recognition the Fed has played a major role in pushing inequality higher. This was highlighted when Federal Reserve chairman Jerome Powell admitted it's tough for the Fed to boost lending to smaller businesses. “Trying to underwrite the credit of hundreds of thousands of very small businesses would be very difficult,” Powell said. He acknowledged that many of these small loans are really nothing more than the personal promises of people struggling to keep the doors of their business open.

As the financial pain from the pandemic and government restrictions placed on businesses continue, much of the money thrown out to ease our pain has rapidly flowed into the hands of Wall Street and big business. The reality that most small businesses close in failure underlines the risk involved in loaning money to such concerns. Still, it is difficult to deny the importance of small business in the overall economy. It plays a major role in communities by both creating jobs and allowing individuals to better their lot in life. 

During a recent exchange between House Financial Services Committee Chairwoman Rep. Maxine Waters of California and Powell, it became evident that Powell was not rushing to implement changes in the way things are done in an effort to aid small businesses and level the playing field. Waters suggested the Fed and Treasury Department lower the minimum size of the loans under the Main Street Lending Program to $100,000 from the current $250,000 to help a larger number of small companies that have been hurt by the pandemic. Powell even went so far as to claim there was little demand for loans below $1 million.

A business owner struggling to pay his three workers would dispute Powell's statement about little demand for smaller loans. Both Powell and Treasury Secretary Steven Mnuchin have also voiced concern about the commercial real estate sector and how they both indicated it is not easy for the federal government to craft an aid program to blunt the damage growing in this part of the economy. Mnuchin said the PPP program has played a role in enabling firms to continue paying their rent so landlords can pay their mortgages. There is fear building in the area of commercial real estate that defaults will send property values into a downward spiral.   

Sadly, the same policies that dump huge money into larger businesses because it is an easier and faster way to bolster the economy give these concerns a huge advantage over their smaller competitors. A big problem is that this often is enough to put smaller companies out of business. The damage this is doing to society is something that will be difficult to remedy. Once businesses close a series of negative events generally unfold such as buildings going empty and debts not being paid. This tends to impact the economy and communities for years. 

On Thursday Powell and Mnuchin appeared before the Senate Banking Committee and answered even more questions about the hardship the coronavirus has brought upon the economy. While they see significant support for legislation that supports jobs and extending the PPP the recognized the gap between the House and Senate negotiations. Still, they gave little doubt more money and fiscal support will be needed and they are ready to act. This includes looking at ways to expand the Main Street lending facility and make the programs more flexible. This means we will probably see more money flowing into a forgivable loan or grant programs. Both indicated the need to get more PPP money to businesses with decreased revenue saying it would be very important in the effort to save jobs.

The recession this year due to covid-related shutdowns is bizarre in nature due to the extreme intervention of central banks and governments. We have seen many small businesses devastated at the same time personal incomes have soared. Usually, a recession is marked by a fall in incomes or consumers being tapped out and unable to spend. The massive fiscal stimulus that has been unleashed by the U.S. government has led to the biggest surge in personal income in history. In fact, government transfer payments have soared to where they constitute an unheard of 30% of all personal income.

Government Transfer Of Payments Has Soared
To put this into context, the  transfer of payments has been rising for decades but the covid-19 crisis has allowed it to explode. During the 50s and 60s, it was around 7%. for a short period in the mid70s and following the 2008 financial crisis it hit the high teens. as the chart on the left indicates this is far above any intervention we have experienced in the past. This is why in this bizarre economy nobody should consider the GDP as an indicator of our economic health.  

In short, the Fed has been subsidizing the 1% at a heightened pace for the past decade and this has both spurred inequality and given big business a huge advantage in the ability to fund its needs. It also means the government has been funding the lives of every American to a greater extent. From the talk now being bantered around, it sounds like all these people are talking about again releasing trillions of dollars into the economy. We should all be aware that the longer this goes on the more power is shifted away from the people and the small businesses that line Main Street.

A final thought, it is all very difficult to square this with what Richmond Fed President Tom Barkin said on Thursday, "The U.S. recession was severe but also short and is now over" Ironically, this is also the same day that St. Louis Fed President James Bullard claimed the economy could fully recovery on some metrics by the end of this year. In my opinion, more important than squaring such talk is the fact small business has taken the brunt of pain dished out while Wall Street and big business have eaten their lunch.

Sunday, September 20, 2020

America's Housing Future Remains A Mixed Bag At Best

Consumers Adding Debt - Not Buying Homes

The housing market in America is not one but many markets that generally share a few common threads. In America, the government, coupled with a slew of builder and Realtor associations control the housing narrative. Many of the messages being promoted as common knowledge do not pass serious scrutiny. As I wrote this post I tried to do a bit of additional research to supplement what I know as a contractor and apartment owner. What I found was more like a pack of lies and half-truths spun to fit an agenda. Those of us in the trenches and with our boots on the ground often see things from a different perspective than what is being presented by the media. 

In September, all three sub-indices of the National Association Of Home Builders hit record highs. The measurement of present single-family sales rose, future single-family sales gauge moved higher, and traffic of prospective buyers increased. Oddly enough, homebuyer sentiment fell. Only time will tell who is right. Another issue is that lumber prices are up more than 170% since April. This is currently adding more than $16,000 to the cost of an average home.

Homebuyer Sentiment Has Not Snapped Back

Home-ownership in America has been in decline and demographics are not supportive of higher prices. It is difficult to ignore the fact that when people "double-up" fewer homes are needed, this adds credence to the argument that if prices rise it most likely will be as a result of inflation. Today, huge discrepancies exist in the cost of housing in the various markets across America and while price variations are not uncommon they should be seen as a red flag and reason for caution.  

Currently, our government is busy encouraging people who have no business owning a house to buy one regardless if they have any idea of how to maintain it. Considering the way our government meddles in housing it is little wonder that roughly 80% of new apartment construction is for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the growing number of people that are irresponsible. Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments and dumps the rest on the private sector. This discourages landlords from wanting to service this challenging sector. The problem is exacerbated by a legal and political system that often favors tenants over landlords. 

Even with super low-interest-rate mortgages, it is difficult for me to get excited about the future of America's housing market. This topic has been subject to a great deal of debate and can be somewhat confusing. Part of the reason is that we constantly hear about the need for more "affordable housing" and are being told this means increasing the supply by building more units. Unfortunately, this is unlikely to make housing affordable. Ultimately the higher cost for taxes, local fees, utilities, insurance, maintenance cost, general labor, and just about everything flows into the housing market.  

While the market has responded to the housing needs of higher-income households, trends that suggest a growing inability or desire to supply housing that is affordable for middle and working-class people. It appears developers have little interest in, or they simply can't afford to add anything but luxury units. Simply put, there's a huge unhealthy disparity in high-end rents versus low-end rents across the country and with building cost being similar between constructing high-end versus low-income units why would anyone want to deal with the low end of the market and all the trash that comes with it.

Many economists use housing starts as an indicator of the health of the economy but such numbers are only a small part of a much larger picture. This number reflects many things other than just the number of new houses under construction or started in a given period. The data is generally divided into three categories: single-family houses, townhouses or small condos, and apartment buildings with five or more units. Still more important than just the number of units being built and the type is who is buying these units and why.

Housing - Is This As Good As It Gets?

While people talk about the cost of buying a home more attention should be directed towards the ability of the buyer to maintain the home after they purchase it. Another factor looming large in this sector of the economy centers on affordability. When it comes to affordability, much depends on which part of the country you live but in many coastal and popular areas prices remain high. Even with low-interest rates by the time you add in rising real estate taxes and other cost new homes are expensive. 

The reality is new home prices are on the rise and so are real estate taxes and other fees. There is nothing inexpensive about a new home. Sadly, even the construction is often suspect, while code enforcement has increased, many of the items used in new construction no longer outlive the mortgage a buyer takes on. Whether replacing a door after just a few years or windows, it seems everything is expensive and nothing matches the original design. My house is over a hundred years old and still has the same doors and windows. How many homes built thirty years ago support this claim, enough said. 

People sometimes get caught up in the idea that replacing homes lost in a natural disaster such as the wildfires in California will have a huge and instant impact on new home construction but this is often overblown. This construction is often stretched over years. The housing picture is also muddied because it is difficult to get real-time data. this means we often find we are looking back into the rear-view mirror. While the number of permits and building starts give some indication on the direction of housing, this is a complicated and this fickle market  which is subject to attitudes and economic factors which can change on a dime. Adding to the recent discussion are claims of people buying homes away from big cities in an effort to escape growing violence and the effects of covid-19, this is interlaced with stories about surging gun sales.

New Construction Is Still Below 2008 Levels

The chart to the right shows that new construction is still far below 2008 levels. Much of the new construction has been in apartments and not single-family dwellings. In much of the country, housing units are being built using cheap money flowing from the Fed and Wall Street under the idea that if it is built "they will come." 

While many people claim the formation of new households and pent-up demand drives this construction I beg to differ. I contend it is a combination of too much money looking for a safe place to hide. Unnoticed by many Americans is how money from Wall Street has entered this arena and is pushing out the average American. One thing is certain that when inflation raises its ugly head and interest rates increase, housing construction will suffer. The intention of this post is to dispel and explore some of the myths and trends surrounding the future of housing while causing people to think about this subject. Hopefully, it has added some clarity to the discussion.

Tuesday, September 8, 2020

Weirdos Constitute A Class And Sub-group Of Their Own

When Does A Person Become A Weirdo?
Variety is the spice of life but when does it go too far? When does a person move from being a nonconformist to where they are just plain weird? This is not a question that is easily answered. A sub-group of our population that is difficult to define is that of "weirdos." Even in our politically correct society, this is a subject that merits more than a quick once over. The dictionary defines a weirdo as a person who is extraordinarily strange or eccentric. With that in mind, it is important to ponder the effect these individuals have upon society and our culture.

After a news piece about a "swingers club" quietly operating in my city, I found myself pondering the implication of its existence. In many ways, the members of such clubs fall into the category of sexual deviants in that many sport values far from society's norm. Back in college I took a course that explored social deviants, how they were, shall we say, trained and recruited. This is a very interesting subject. While some people move off mainstream values for attention, to emphasize their individuality, or during self-exploration, it does have implications for the overall culture. The growing number of people seeking tattoos is evidence of this trend.

The topic of weirdos is complex because it can also extend into the area of dysfunctional individuals from which society suffers no shortage. Whether crazy, stupid, or simply marching to the beat of a different drummer it seems the number of these people is on the rise. In many parts of the western world, society has been on a mission that encourages people to embrace their individuality and this is apparent by the growing number of eccentric people. What is leading to this explosion of "I am Me" and often self-centered behavior? One thing is clear, more people are being allowed to express their individuality and this can be seen in the way many people claim gender is no longer carved in stone at birth.

Is This Weird Or Very Cool?
Interestingly the effect on society of allowing this sub-group to expand has yet to be determined. I'm not advocating doing anything about controlling social deviants but merely pondering their existence and growing influence. In China conformity is highly valued and fostered by its government that seeks control over all facets of a person's life. A balance between conformity and over the top diversity is most likely a place where society finds its happy place. Conformity can crush the human soul while the lack of it is often difficult for society to address. because it tends to bring up the issue of where one person's rights end and another persons begin.

Feeding into this subject is the concern that by adopting a hands-off approach to halting the expansion of this trend we institutionalize or make it a normal and acceptable part of our culture. It could be argued that self-expression is a human right and I'm not advocating denying anyone that right. As an example to highlight the fact this is an issue, the following was lifted from the comment section of a recent online publication where many of those weighing in voiced concern or noted what they saw as a troubling trend.

We need a new demographic category: WALMARTIANS.
They are almost always overweight, usually functionally illiterate, often incapable of all but the most basic personal hygiene, not merely unemployed but also unemployable, addicted to corn syrup junk food and TV they were force-fed as children, convinced that nothing is their fault because they've never heard otherwise and physically aggressive whenever there is no prospect of immediate punishment. 
Such types were rare when I was a lad but now they are 10 to 20 percent of the population and increasing.
It's not their fault but it's time to cull the herd.

Morbidly Obese People Are Often Seen As Impaired
It should be noted that I started witting this article in December of 2019 but dropped it onto the back burner because of its questionable nature. At times, it seems deviant and dysfunctional behavior overlap. On occasion I have found myself, surprised, shocked, amazed, and even appalled at just how much the shape of the human body can be distorted by obesity or a lack of exercise. Widening the scope to people "deviating from the norm," at times it appears these often atypical humans are in a race to present us with the most bizarre. Some of these folks are not just offbeat or unusual but seem to be making an over the top effort to give new meaning to the term freaky.

An article by Ralph Nader that appeared on Common Dreams explored the idea that if you want to see where a country’s priorities lie you should look at the direction its culture is moving. The article which is linked above exhibits a very strong bit of a "leftist tinge," however, some of the points he makes seem valid. Nader writes, Plutocrats like to control the range of permissible public dialogue. Plutocrats also like to shape what society values. If you want to see where a country’s priorities lie, look at how it allocates its money. He contends that while teachers and nurses earn comparatively little for performing critical jobs, corporate bosses including those who pollute our planet and bankrupt defenseless families, make millions.

America's Caste System (click to enlarge)
It may be simplistic to label this or that, good or bad but it could be argued our culture and society is geared much like the caste system. Today we are seeing inequality soar and it can be argued this tends to reduce the ability of individuals to move up the social ladder. The question is just how much of this is by design and due to the culturally elite putting their foot on the head of those below them.

Circling back to the subjects of weirdos, diversity, and individuality could it be this is all being encouraged to weaken and divide the power of the masses? For years Japan has been pointed to as a society that functions with little friction. Much of the credit is attributed to their culture and its homogeneous nature. Japan has a strong sense of group and national identity and little or no ethnic or racial diversity. Another unique aspect of Japanese society has a highly structured approach to managing and resolving these differences.

Footnote: This article should be viewed in its entirety as a cultural "observation and nothing more." The fact is our culture is always changing. Please consider it "food for thought." Also, please note, a big problem we face today is society's inability to get people to obey its rules and laws. Long-term this has dire consequences. The article below explores this trend and its ramifications.

Sunday, September 6, 2020

France Again Being Forced To Stimulate Is Bad News

France Holds Title Of World's Most Visited Nation
On Thursday the French government rolled out a new stimulus plan The fact France is again forced to stimulate its economy should be viewed as bad news. The move reflects the reality that all is not well and things are getting worse. France is facing one of Europe's worst recessions and its deepest since World War Two. France is looking at posting an 11% drop in GDP 2020. This follows a 13.8% second-quarter contraction that coincided with the covid-19 lock-down. This is seen as an attempt to bolster French President Emmanuel Macron's re-election prospects. Macron is not loved by many of the French people and the "Yellow Vest" protesters that have marched against his policies are proof of this. If France moves back to the right support for a stronger Euro-zone government body will take a big hit. 

The stimulus scheme designed to lift the country out of the recent slump aggravated by covid-19 will cost 100 billion euros or about 120 billion dollars. As with most government stimulus plans, it is aimed at reducing unemployment which French officials concede is slated to top 10% next year. The amount of this particular package is equal to roughly 4.5% of the GDP and brings this year's total stimulus to around 10% of France's GDP. The French government is betting that by supporting jobs they will give consumers the confidence to start spending the 100 billion euros they stashed away during the lock-down. 

Stash Learn shows France as being the second-largest economy in Europe, and the sixth-largest in the world. As the world’s most visited nation, France’s tourism industry is a major component of the country’s economy. This means that France's economy being in the muck is a big deal. As for Macron's stimulus plan, The French plan includes tax cuts and incentives for businesses (€30 billion), heavy investment in the green transition and areas such as transport, better insulating public buildings and homes, even the hydrogen industry which is seen as a way to store and transport energy created by wind turbines and solar panels (€35 billion), and “social cohesion” measures (€35 billion) such as part-time work programs, training for young workers and health care.

Just as problematic as the fact this stimulus is badly needed is how it will be funded. Almost half of the money is slated to flow from a new "European Union joint recovery fund" which is seen as paving the way for significant fiscal transfers in the future. This new plan is moving the once-taboo subject of debt mutualization to a new level. This opens wide the possibility for European governments to engage for the first time in massive joint borrowing and would sanction significant fiscal transfers between its member states. Whether this scheme goes through or is even legal has yet to be determined. It was only recently that  German Chancellor Angela Merkel and Macron proposed in a joint press conference the creation of the EU recovery fund. It must be noted that just 10 days after Macron and Merkel let the cat out of the bag, the European Commission announced its own plan. It was even more generous,

The Merkel-Macron plan would offer 500 billion euros or roughly 569 billion dollars in grants as an economic lifeline to pandemic-stricken members of the union. Financing the fund with joint EU bonds marks a big step towards mutualizing member states’ debt. This is a game-changer that will shake up the EU bond market. With only around 54 billion euros in outstanding debt, the EU has yet to leap big time into the bond fray but that is about to change. The EU borrowed nothing in 2018 and only 5 billion euros in 2018 but the picture is about to change. If the entire 750 billion euros needed to fund this program are raised in the bond market they will be doing 262.5 billion euros in both2021 and 2022, the remaining 225 would come in 2023.

The ambitious French-German proposal couldn’t have come at a more crucial time for European unity, which is being challenged by two parallel crises: the pandemic, and the heated debate over how to respond to the economic tsunami caused by strict lock-downs. Also at the center of this is the ECB and Christian Lagarde which has been hellbent on preventing a "doom loop" of rising sovereign credit risk. To support the weakest members of the Euro-zone the ECB has vastly expanded its balance sheet as it propped up the continent’s financial system through quantitative easing and bond-buying programs.

In March, the ECB launched a new 750 billion euro ($853.6bn) pandemic emergency purchase program (PEPP) to support pandemic-hit countries and companies. This is in addition to its public sector purchase program (PSPP) which continued serving as a backstop for sovereign debt. As for this new fund, from my understanding, this latest "rabbit out of the hat" effort to clean up Europe's economy "is not a done deal." A big sticking point is repaying the debt issued to create this fund would place a heavy burden on the EU budget from 2028 onward. EU taxes proposed by the commission to finance the fund are unlikely to find much support among member states. To move forward, the commission will have to convince "all member states" this plan has merit.

Persuading Austria, Denmark, the Netherlands, and Sweden will not be an easy task and may include a number of concessions. Also, not all Euro-zone countries use the euro as their chief currency which lessens its importance to them. All this comes at a crucial time for European unity which is under assault from the pandemic and the additional economic stress caused by strict lock-downs. Of course, this push for debt mutualization has been led by Spain and Italy which took the biggest hit during the early stages of the pandemic, they have been backed by Portugal, France, Ireland, and Greece. This again highlights the question of, if Europe is doing as well as many people claim, why more stimulus? As in the past, I continue to contend the Euro-zone is simply uncompetitive and will remain so. 

Saturday, September 5, 2020

China's Rapidly Expanding Credit Affects Global Markets

We again are seeing how rapidly expanding credit in China is spilling over into the global market. In reaction to its economy being slammed by covid-19, China like many countries has unleashed several massive stimulus programs to start things moving. Unfortunately for the Chinese people, they have also been dealing with other issues putting their system under stress. Not only is the trade war and a high level of political stress putting China to the test but it is in the midst of the worst flooding in decades and this is also adding to the pressure.

Since the outbreak of the pandemic, Chinese authorities have issued 4.75 trillion yuan ($683 billion) in local and national debt with most of that earmarked for infrastructure projects to boost construction. China is far from transparent and making it difficult to know what exactly is happening. This is also true when it comes to imports which are sometimes stored away rather than used. Speculation and projections of future use all play into this. Whether we are talking about grain prices, oil, or metal, China is a bigger user of commodities and the demand flowing from China affects prices. Factor into this the notion that China is big in projecting a positive narrative of economic growth and the spillover becomes clear.

An example of this can be seen as iron ore prices hit a six and a half year high on Thursday as the Chinese construction and manufacturing sector claims to be experienced levels of activity not seen for almost a decade. Fastmarkets MB reported that benchmark 62% Fe fines imported into Northern China were changing hands for $129.92 a tonne on Tuesday, up 2.1% on the day. That would be the highest level for the steel-making raw material since mid-January 2014 and put gains for 2020 to over 40%. China is responsible for more than half the world’s steel output and 70% of seaborne iron ore imports. This makes such numbers a key gauge of  economic activity in the country.
Source: Capital Economics (click to enlarge)

If accurate, the numbers released this week indicate a rapid  expansion of China's manufacturing and construction sector in August. The question remains as to whether this is a dead cat bounce from the diabolical covid-19 pandemic or a recovery with real legs. The chart on the right shows the Caixin manufacturing PMI index rose from 52.8 in July to 53.1 in August, well above analysts’ expectations. The official PMIs released by the Chinese government showed a slight drop in activity but the Caixin index is often seen as a more reliable gauge of activity.

The export orders component of the manufacturing PMI rose above 50 for the first time this year on the back of recovering foreign demand. This could indicate that foreign demand is now beginning to again increase. It could be argued that China’s factories are again humming at the same time spending on infrastructure is soaring, however, as a China skeptic, I view much of this a temporary. It could be many stores across the world now simply need to refill their shelves after months of economies being locked-down. If this is true prices and demand may soon begin to fade.
Click On Image To Enlarge

As mentioned earlier in this article, China is suffering from massive flooding. It has been estimated the loss so far exceeds 50 billion dollars and is adding to supply chain disruptions across the world. Currently, the weather in China merits our attention because months ago word began leaking out that China's massive Three Gorges Dam was in peril. Reports coming out of the area indicate the situation remains dire.

While this is the largest dam in the world, most people know little about it or the implications if it fails. About 400 million people live downstream of the dam and its failure would have catastrophic consequences. It is said the flooding might kill as many as half a million people. Because of its size, the failure of the Three Gorges Dam would have broad ramifications for China's Communist Party and its reputation. Ironically, if the dam does fail the province's capital Wuhan the epicenter of China's coronavirus outbreak would be hard hit.

For more about the Three Gorges Dam see the link below. If this dam does break it will become a major news story.

Tuesday, September 1, 2020

The Link Between Low Rates And A Vibrant Economy

While many investors talk about the link between low-interest rates driving the economy and markets ever higher they seem to forget this correlation is very weak. We only need to look at Japan to understand low-interest rates do not guarantee a booming economy. While there is a big difference between 10% and 5% interest the difference a quarter of a percent drop when you get down near zero should have little bearing on the overall economy unless you are talking about huge sums of "speculative" money. At some point, it becomes clear this is more about liquidity and the availability of money than simply interest rates. In theory, if the interest rate is low because growth is low, then the valuations should reflect this reality.

Debt Has Grown Faster Than The GDP
Low-interest rates tend to pull spending forward but there is a limit as to how far this can go. All this of course has extended into increasing inequality. Because it is clear that all people and businesses do not benefit equally from these policies, the case can be made the Fed is fueling inequality. The Fed is throwing free money at the big boys but small businesses are seeing lending standards rising, this is making getting a loan almost impossible. This will not only lead to more inequality but more zombie companies at the same time many productive small companies are forced to close their doors forever.

For years many economists claimed that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead, the Government of Japan ran huge deficits and ran up massive debt. The country languished in what has become known as "the lost decades" during which it avoided disaster only by the fact that it enjoyed a large trade surplus. While they claim otherwise, in many ways the Fed has put America and the world on a path that mirrors the same unsuccessful path taken by Japan. A path that avoids real reform and bails out the very people that caused many of our problems.

This also adds a great deal of risk to the financial sector. Low rates are also supposed to encourage business borrowing and boost employment, but often it also encourages savers to take on more risk than they should when they search for higher yields. History shows that when rates are held at an artificially low level for too long capital is often misallocated and flows into speculative investments. I agree with those that think inflation will spike at some point and interest rates will do the same to reflect the reality of the "risk of loaning" money. When rates do eventually rise we will most likely see a painful unwinding of these investments.

Many trading houses are busy raising price targets across the board and in a big way. After a huge spring sell-off due to covid-19, we have witnessed a massive move upward based on central bank intervention and a "the trend is your friend" attitude. Those long in this market have been overtaken with greed and seem unable to think in terms of taking a profit. Currently, the fear of missing out has created a full "risk-on" mentality that has washed away common sense.

Another factor playing into the idea of never raising interest rates is the issue of inflation, while central bankers claim inflation appears tame and is not showing up in a big way the seeds have been planted, and the number of them is somewhat shocking. Inflation lurks beneath the surface and is hidden away in the dark corners of our future. The current low-rates combined with our massive government deficit is creating a false economy that is also baking in a higher overall cost structure. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters.

The policy of rapid credit expansion while an interesting concept often brings with it negative consequences. Currently, it is being put to the test as new problems emerge in China where we saw the amount of GDP growth generated by each infusion of money decrease over the last four years. Currently, both Japan and Europe both have exceptionally low-interest rates, mirroring the U.S., but neither are witnessing stock market valuations at nosebleed-inducing levels. In fact, it is only the buying of ETFs by the BOJ that has helped move the Japanese market higher.

It is difficult to deny that savers are suffering from these low-interest rates. The leading edge of the massive Boomer generation knows that every dollar spent is a dollar it cannot re-earn or replenish. Lower rates in effect have caused many older Americans to hoard their wealth. When people cannot fund their own retirement we all suffer. Not long ago the relationship between savings and how you would live after you retired mattered. By working hard and saving a person could look forward to living well on the interest their saving earned but not today. Interestingly, on the flip-side, many people with little savings have rushed out to buy cars and expensive items they really can't afford and pulled consumption forward.

The legacy of Central Banks pursuing this "low rate" solution will be more problems down the road. By not demanding the right kind of growth and simply throwing money at problems we have delayed and are adding to a much larger crisis lurking in the future. Many of those already concerned about the strength of the economy find little comfort in the argument that conditions remain too fragile to begin a return to historic norms. It is difficult to envision how the world will handle the additional debt of governments when rates begin to rise. Over time the policy of ZIRP or NIRP is likely to prove a big mistake.