Central bank money waterfall misses mark


At this point in the economic cycle, the zero interest rate policies (ZIRP) are arguably doing more harm than good.

Global central banks, by pushing interest rates to artificially low levels around the world, are inadvertently causing deflation in my opinion.

That’s exactly the situation that central banks have been trying to avoid.

 

money flows

 

Low Returns

The torrent of low interest rate capital is flooding markets with liquidity and the money is being put to work at ever lower rates of return.  

Specifically, corporations invest in projects with lower internal rates of return and banks and other asset managers make investments in assets with lower expected rates of return.

The result has been higher asset prices and lower rates of expected future returns.

 

Tumbling Prices 

In the manufacturing sector, more and more goods are being produced with low interest capital. As a result, prices of manufactured goods continue to deflate.

The effects of ZIRP are apparent in commodities where the low cost of capital lead to massive overproduction and price deflation.

There are many more examples, however, the key point is that low interest rates distort world markets.

In my opinion, interest rate normalization is critical to the long term realization of global central banks’ inflation goals and investors expected returns.

 
 
Photo Credit: Stacey Gitto via Flickr Creative Commons

Author profile

Big River Capital
Big River Capital
Prior to launching Big River Capital Corporation in 2012, Bill Robertson founded Robertson Financial Services LLC, a hedge fund consulting and marketing business in 2001. During the first five years in operation, Robertson Financial raised nearly $200 million of assets allocated to hedge funds.
Bill was registered with the Financial Industry Regulatory Authority (FINRA) and held his Series 7, Series 24, Series 27 and Series 66 licenses.
Bill Robertson is part of a multi-generational family business with roots in agriculture and banking. Bill worked summer jobs on the family farm in Mississippi and used his paycheck to buy his first shares of stock in 1983.
Robertson began trading a personal equities account fulltime in 1998 and used trading profits to make his first real estate investment in an office building. The building was sold for a profit in 2003. In 2005, he established Robertson Development of MS, LLC and built a shopping center, which was sold for a profit in 2014.
In 2009 Bill established Big River Real-Estate Partners Fund, LP which began acquiring Florida tax liens and then purchased and renovated residential rental houses during the Great Recession.
Earlier in his career, Bill worked on the floor of the Chicago Board of Trade and was a member of the CBOT.
Bill earned an MBA from DePaul University. He obtained a Bachelor of Business Administration from Mississippi State University, where he was inducted into Phi Eta Sigma honor society, received the Bing Scholarship and was presented with a Certificate of Award for Academic Achievement from Sigma Alpha Epsilon.
Bill is a member of the Rotary Club and Christ United Methodist Church. He is an Eagle Scout, marathon runner and licensed pilot. He has a passion for the markets, sports and the outdoors.