Larry Summers Quits; Side Effects of QE Forever

Larry Summers bowed out of the Fed Chair race.  That means Janet Yellen will get the post.  The upshot is the US will have its first Fed Chair that is female.  The downside is the US will be on QE forever.

I am a person that thinks Keynes/Tobin framing of viewing the economy is incorrect.  The classical way works better.  While not a direct competitive comparison, Raghu Rajan is heading India’s Fed.  He is a Chicago School economist and it will be interesting to compare and contrast policy decisions between him and the future US Fed chair.  Again, the underlying economies are so different it’s just a parlor game to watch.  No hard conclusions will be made.

English: Official picture of Janet Yellen from...
(Photo credit: Wikipedia)

There are big time consequences for everyone when interest rates are 0% for extended periods of time.

Retirees have difficulty.  Their savings don’t generate enough income, or at least the income they calculated when they were saving it.  Some people might delay retirement to earn income until rates rise again.

Pension funds have difficulty.  Pensions are limited, or at least should be limited, to the types of investments they can make.  They tend to be conservative, and buy corporate bonds or US Treasuries.  QE cuts into their return.  Today I read that in the state of Illinois, if you calculated the real return on pension obligations the actual amount of money Illinois is in the hole is $210 billion.  Illinois imputes an 8% rate of return on the money it invests, and a realistic rate is closer to 4%.

The real estate market is totally out of whack.  The stock market is rising, but the economy isn’t expanding.  People can’t afford to buy new homes, or can’t get qualified to get them.  As a result, they stay in homes that they have, and new supply doesn’t hit the market.  This is not like the rally from 1983-1999 where actual wealth was being built.

Ms. Yellen will inherit quite a mess.  The Fed has created a massive money supply that will be extremely difficult to reign in.  There are Keynesians out there that say all this money creation doesn’t matter.  However, I lived through the 1970’s.

Enjoy it now, because when the free lunch ends I don’t think it ends well.


Enhanced by Zemanta