fiscal policy

Too Close to the Sun

© Can Stock Photo / Paha_L

In Greek mythology, Daedalus constructs wings of feathers and wax so he and his son Icarus may escape from the island of Crete. Although warned against flying too close to the sun, Icarus becomes giddy with the sensation of flight. His wings melt when he gets too close to the sun, and he crashes into the sea and drowns.

This tale of hubris is perhaps mimicked in our time by central bankers around the world. Central banks including our Federal Reserve Bank are charged with conducting monetary policy to achieve stability of prices and favorable economic results. The stresses of the last global recession induced some of these authorities to adopt unprecedented policies.

Among these ideas, the most unusual might be negative interest rates. If we think of the rate of interest as a price – the price of money – then the concept of negative rates seems insane. If bananas had negative prices, producers would have to pay you to take them.

There are practical problems, too, for savers and investors. Imagine having $100,000 in the bank today. After a year of -1% interest, you would have, say, $99,000. “Money in the bank” would no longer be like money in the bank.

Why would central bankers consider such a policy? Like Icarus with his wings, they seem intoxicated by their apparent power to manipulate the economy. Negative interest rates would be a strong incentive to reduce savings and increase spending. This could theoretically boost the economy.

The unintended consequences of their actions could create real problems. Average folks trying to save for the future were severely disadvantaged by the zero interest policy of the last decade. Negative rates would make that even worse.
The Federal Reserve has not yet gone below zero. But a research paper published by a Fed official earlier this year concluded that “negative interest rates might be a useful tool…”1

Clients, our concern over this trend in Fed thinking bolsters our conviction about the investments we hold that would potentially benefit from the unintended consequences. No guarantees: we wish central bankers would simply avoid flying too close to the sun, so to speak.

Clients, if you would like to talk about this or anything else, please email us or call.

Notes & References

1. “How Much Could Negative Rates Have Helped the Recovery?”, Federal Reserve Bank of San Francisco. https://www.frbsf.org/economic-research/publications/economic-letter/2019/february/how-much-could-negative-rates-have-helped-recovery/. Accessed June 25th, 2019.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Easy Money, Hard Truths

© Can Stock Photo / alexskopje

If you follow market commentary, you may have noticed a lot of attention being placed on Federal Reserve Chairman Jerome Powell. After a series of interest rate hikes, the Fed has started pumping the brakes and some market watchers—the President among them—are hoping for interest rates to go back down, or even a return to the Fed’s “quantitative easing” policy.

It is easy to understand the appeal of easy monetary policy. Being able to borrow money cheaply helps fuel economic growth. Corporations, individuals, and governments all benefit from being able to take out lower interest loans.

That growth comes with strings attached. The cheaper it is to borrow money, the more borrowed money accumulates on balance sheets. In moderation, borrowing money allows people and companies to accomplish things their own money could not. But those debts eventually come due, and not all of them always pay off. Too much debt can have catastrophic results.

We do not need to look far into the past to get a glimpse of the consequences that overly easy monetary policy can have. Not even 10 years ago there was widespread panic about the possibility of Greece’s national debt dragging the whole Eurozone down with it.

How did this happen? Greece was a developing country with a growing economy, but Euro monetary policy was dominated by larger countries with slower economies that wanted looser money to fuel their own growth. For Greece, that loose money just wound up inflating their debts into an unsustainable bubble.

We have been concerned for some time about signs that corporate and government debt in the U.S. may be growing into a massive debt bubble, and we are not alone. In our opinion, the last thing that the economy needs is even more debt. We hope that cooler heads prevail and the Fed agrees with us.

Clients, if you have any questions or concerns, please give us a call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.