Feeling good about the new year? Global economist David Malpass offers an antidote in his latest Forbes magazine column.
Central banks have become the world’s biggest speculators. The Fed in 2012 earned $91 billion in profit on its $55 billion in equity capital. That’s more than ten times the normal private-sector profit rate and was achieved by leveraging its liabilities up to nearly $3 trillion, a 50-to-1 debt-to-equity ratio.
The Fed’s interest rate bets are a zero-sum game–the Fed wins, while the losses are borne by underpaid private-sector savers. Worse, the policy of manipulating interest rates to artificially low levels has interrupted the vital market-based connection between interest rates and investment decisions. This creates economic distortions that slow growth and will take years to unwind.
The result hits U.S. living standards. Despite gigantic debt-fueled government transfer payments, Americans are suffering from a five-year stagnation in inflation-adjusted disposable income, which is expected to continue into 2014. The deterioration is due to weak labor markets, bigger government, artificially low interest rates and the policy of weakening the dollar in the hope that it will become so cheap it becomes attractive.
Instead, one industry after another has shifted new investment to non-Japan Asia, where currencies are more dependable, the legacy burden of retirees is lighter and national debts are not at a crisis stage.
Our daily newspapers are filled with the struggle over the debt limit, but it’s written to harm fiscal conservatives, not cut spending. This leaves us with a grim prognosis and no treatment plan.
Otherwise, Mrs. Lincoln, how did you like the play?
