Welcome to the Wealthfare State: Welfare for the Wealthy

I hate to break it to you…

But in today’s world you’re either robbing someone or being robbed.

What side of the fence you’re on depends largely on your current status. And in turn how you benefit from government and central bank largesse.

From Bloomberg on Friday:

The Federal Reserve said it will begin buying $60 billion of Treasury bills per month to improve its control over the benchmark interest rate it uses to guide monetary policy after turmoil rocked money markets in September.

Make no mistake about this — despite the fancy economic language — a world of quantitative easing (QE) and negative interest rates is nothing more than welfare for the wealthy.

An attempt to fight the ups and downs of the business cycle by propping up asset prices.

And, yeah sure, it works for a time.

It’s like an afternoon coffee to get you through the mid-day slump.

The hope is that a rise in asset prices will encourage economic activity. The so-called wealth effect. Or trickle-down economics as it’s sometimes called these days.

And yet, there’s certainly no guarantee that this will happen.

As any coffee addict will tell you, the effects of the afternoon pick me up tend to wear off after a while.

What’s more, a world of weird economics can naturally make investors and consumers more cautious when it comes to spending.

Meaning all this economic experimentation might have the reverse effect than intended.

In the meanwhile, people at both ends of the spectrum get robbed.

Young people saving for a house are stuck in the unenviable position of having to decide to buy into a ludicrously overpriced housing market.

And retirees are faced with the tough choice of accepting little to no money on a lifetime of savings — or taking a chance on much riskier assets.

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So who’s winning out of all this?

Propping up asset prices through government control of the money supply is a different kind of socialism.

And while we try to avoid politics here at Money Morning (they’re all as bad as each other in our opinion), we’re not scared to point out the hypocrisy of right-leaning governments right now.

There’s barely a murmur in the US from House Republicans as President Trump ratchets up US debt in an attempt to prop up the economy.

The national debt in the US just passed $22 trillion, doubling from a mere decade ago.

Here in Australia, our own central bankers are keen to dive into the monetary madness too. As well as cutting interest rates, they’ve now said that our own form of QE is on the table.

From the AFR:

The record-low 1 per cent cash rate is forecast by financial markets to drop near the RBA’s estimated “zero lower bound” of 0.25-0.50 per cent by mid-2020, meaning QE could be plausible beyond that point if the economy is weak.

Globally, if all central banks go to zero, then we’d have to consider that as well.

— Philip Lowe, RBA governor

“While unlikely at the current juncture, if circumstances were to warrant it, the board would consider unconventional monetary policy options,” the RBA noted on Wednesday in a written response to a question on notice last month from Liberal MP Tim Wilson.

For capitalism to work, risk takers should bear the costs of their risks. As well as generate the returns for success.

The current state of global economics seeks to take away investment risks through government intervention.

And in turn rewards many bad decisions through dumb luck.

The consequences of this will be bad for the future economy

Cheap money = zombie companies

As reported in the AFR:

One downside of cheap money is the emergence of “zombie” companies.


Money Morning

Source: Coolabah Capital Investments

[Click to open in a new window]

A zombie if it is listed, has been in existence for more than 10 years, and if its interest coverage ratio (ICR) has been less than one for at least three consecutive years.

In other words, companies that should fail, don’t.

Property investors that should be burned, aren’t.

Then the FOMO effect kicks in…

And more suckers are sucked into a system that punishes thriftiness, economic smarts, and innovation.

How can that be a good thing?

I certainly can’t work it out…

Good investing,

Ryan Dinse,
Editor, Money Morning

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Ryan Dinse is an Editor at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.  


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