Central Banks around the world have got it wrong. During near-normal economic cycles, lowering interest rates altered (through signaling) how businesses funded planned investments. But those investments are driven by business strategy, not market economics. Firms are not sitting there saying, “Well, with near zero interest rates- what innovations shall we come up with today?” Just ask business leaders!
Lowering interest rates just signals a different potential pattern of sourcing of funds, if investments are ready to be funded. But in this high-regulatory and low-inflation economy, with cheap money funding easy stock buy-backs and a stock market rally, there is no need to innovate as much or make the big or medium size bets that such capital investments need. Firms are achieving their EPS goals without them. Just look at the data.
The central bank’s have got it wrong. Just look at the data. Capital investment is flat when, according to central bank thinking, it should be ballooning. Has any central banker actually spoken to any number of business leaders? Or if so, are they confusing political sycophants for real leaders?
The only way to encourage investment in capital programs for innovation is to return the market dynamics to near-normal settings. That means that counter intuitively central banks now need to raise rates and curtail quantitative easing. And quickly.
Why can’t central banks see the obvious?
The problem now is that central banks are looking for even more fuel for the fire. The Bank of Japan is now reportedly looking at even more extreme measures of the same medicine. The bond market is about to go the same way as the stock market as in massively distorted. If we are not careful we will enter the twilight zone and no one will be able to control a thing.