Money Won't Fix It

Carrie Schwab-Pomerantz and Terry Savage
Mon, 08 Sep 2014 21:00:00 -0700
Lifestyle

More money won't fix economies around the world. But the central banks will keep on trying — because they have no better ideas. There is now a global competition among central banks to try to create more growth by creating more money.

China is doing it. Japan is doing it, big time. And now the European Central Bank is doing it, just announcing a huge plan to create euros and drive interest rates down. In fact, interest rates on 10-year government bonds in Greece — which only a year or so ago were 25 percen, are now down to just 5.5 percent! Spain just sold 50-year (that is not a typo: 50 years) bonds, yielding just 4 percent.

Have things changed so much for the better in just a few years in Spain and Greece? Or are people and insurance companies just so hungry for higher yields that they will throw caution to the wind and lend money to these countries because their rates are still higher than U.S. government bonds? Will Spain be around in 50 years to repay these bonds? Better yet, will the euro be around in 50 years?
Updated: Tue Sep 09, 2014

More money won't fix economies around the world. But the central banks will keep on trying — because they have no better ideas. There is now a global competition among central banks to try to create more growth by creating more money.

China is doing it. Japan is doing it, big time. And now the European Central Bank is doing it, just announcing a huge plan to create euros and drive interest rates down. In fact, interest rates on 10-year government bonds in Greece — which only a year or so ago were 25 percen, are now down to just 5.5 percent! Spain just sold 50-year (that is not a typo: 50 years) bonds, yielding just 4 percent.

Have things changed so much for the better in just a few years in Spain and Greece? Or are people and insurance companies just so hungry for higher yields that they will throw caution to the wind and lend money to these countries because their rates are still higher than U.S. government bonds? Will Spain be around in 50 years to repay these bonds? Better yet, will the euro be around in 50 years?

All common sense seems to be lost — because just like you, investors around the world are hunting for "yield" — for a higher rate of return. And even the most sophisticated players in this drama — the pension funds, the insurance companies and the hedge funds — think they can take the risk of investing in these bonds, figuring they will get out before rates rise (making the bonds worth less) or before these governments default.

And the central banks figure they can create enough economic growth by creating money to keep the game going. They figure that as long as their currency is relatively cheaper, they will be the winners.

Did it Work in America?

Foreign central banks are looking at the United States and the trillions of dollars of new money created by our central bank — the Federal Reserve Bank — since 2008. In fact, only now is the Fed stopping its money creation binge. The foreign bankers see that our economy is relatively strong compared to theirs — far stronger than in Europe and Japan.

What they don't realize is that the United States is inherently stronger than those two regions of the world. And they don't realize how much better our economic recovery might have been if we hadn't been imposing regulations and court decisions and tax policies that are making the United States look more like Europe every day! The United States is growing not because of all the new money, but despite the money and the regulations.

In fact, much of the money created by the Fed moved into the stock market — instead of the U.S. economy. Or it is sitting on the sidelines in the banks, which are fearful of lending at low rates. Or it's sitting in corporations, too worried about the future to hire new workers.

So we have slow growth in jobs, slow growth in the economy, low consumer confidence — despite the creation of nearly $4 trillion in new money by the Fed!

The world's central bankers just figure that it worked for us (money creation), so they will try it! And it's likely that they'll get the same results: much of that money flowing into global stock markets instead of productive business growth.

But in the end, when the music stops, just like in a giant game of musical chairs, someone will be left holding the debt — the bonds that were sold by weak countries and paid for with newly created money (credit) by the central banks of the world.

Every central bank is counting on bond buyers to play the "greater fool game" — believing that they can sell their bonds before they become worthless. Don't end up being that fool in your investments, hunting for risky higher yields. The odds are against you. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, "The New Savage Number: How Much Money Do You Really Need to Retire?" "Terry answers readers' personal finance questions on her blog at www.TerrySavage.com. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com