Dallas Fed President Richard Fisher made a speech today where he gave a great example of why QE failed. Unfortunately, Fisher is not a voting member of the FOMC but he really nails it. Corporations are using cheap QE money to increase capital spending in emerging markets to the detriment of the US. They are investing abroad where there are lower taxes and better economic fundamentals. More from Fisher's speech to the New York Association for Business Economics:
So in essence, QE has done nothing but provide cheap financing for corporations to invest abroad. Companies borrow at extremely low rates and use the proceeds to build manufacturing plants in Brazil, China, and other emerging markets. The bottom line is that capital is fleeing the US and flowing to other countries. No wonder US unemployment is currently at 9.5%.
Black Swan Insights
In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. The Treasury International Capital, or TIC, data released yesterday morning show that foreign interest in buying Treasuries remains robust. Yet, far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as they unfold to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to “Open (the) Spigot,” as proclaimed on the front page of the Oct. 6 Wall Street Journal, might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rulemaking excesses about which businesses now complain?
So in essence, QE has done nothing but provide cheap financing for corporations to invest abroad. Companies borrow at extremely low rates and use the proceeds to build manufacturing plants in Brazil, China, and other emerging markets. The bottom line is that capital is fleeing the US and flowing to other countries. No wonder US unemployment is currently at 9.5%.
Black Swan Insights
Great post on QE.
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