The QE Quagmire

I started writing this article without knowing whether I would have the conclusion at the end. The quantitative easing (QE) dumped money into the market and, in effect, generated the artificially low rates, intended to spur the economy. But it seems like low rates, on the other hand, have greatly benefited the corporate sectors more than regular Joes like you and me?

The conventional wisdom is that low rates will encourage companies (and individual) to borrow and invest more. Yes that wisdom is still true. But wait a second, a company objective is to maximize shareholders’ wealth, isn’t it, according to my as well as your MBA classes.

So if there is no investment opportunity or the economic backdrop is less than certain, would you invest to create jobs, if you were the management? Companies have amassed lots of cash since the 2008 crisis. Some use that cash to buy back stocks or pay dividends. Some keep liquidity in investment portfolio. Some use that cash to acquire another company and, instead, cut jobs! Now the corporate world gets richer, you may think they could pay higher taxes and the government could use that taxes to help the people? It is not that straight forward, my friends. Corporate world always has all the leeway to pay less taxes. Government spending is good for jobs but government is inefficient and the job creation from government spending is not immediate. So…perhaps, there is a disconnect there between corporate world borrowing on a lower rate and job creation…

Now let’s talk individuals… Retirees are caught on the short end when rates drop. Insurers that promised returns to their policyholders are in the same boat. Lower rates, on one hand, put more money in individuals’ pockets through mortgage refinancing at a lower rate and capital gains in their bond mutual funds. That increases consumer spending and money flows to the retail sector.

Let’s raise the US as an example. We are thinking that the extra money that consumers have will somehow be sufficient to create jobs through a retail sector? What if I am telling you that there is not exactly a correlation between rising retail sales and rising employment? What if rising retail sales goes directly to rising top-line revenue growth of a factory in China? All I am saying is that just because you spend more does not mean the money will come back to you as a consumer. Money will get channeled to wherever Corporate America thinks it is money well-spent and that is not necessarily employment.

Lower rates also discourage individuals to put too much money back in the bank. So what can they do? They helped inflate stock and real estate bubbles. They reinvested in bond funds that help finance the corporate sector to maximize their shareholders’ wealth. And you know what..The rich again gets richer… Anyone who can own a company that can issue bonds is usually not that poor, if you ask me…

Now you see who wins and loses in this QE wishful thinking game.

Individuals (and Insurers) have no choice but to help finance (and subsidize) the corporate world with rock-bottom interest rates. In return, we simply don’t know if the corporate world will or will not reward the very same individuals or insurers. When rates rise, you can see that those bondholders will take losses while the corporate world have already locked in their low funding cost. I could be wrong but it does seem like this QE game potentially will make the rich super richer and the middle class and the poor pay for the so-called economic recovery.

Yes, without the QE, it could have been worse and individuals would have suffered too but it seems like capitalism really takes care of the rich first. Yes, we will make sure you will have money in your pockets first and it is up to you to help the very people who help finance you. This is simply good ole “trickle-down” economics…Just my thought…