The Fed Is Bedeviled by Keynes’s Paradox

The economist John Maynard Keynes warned that ultra-low interest rates would backfire on central banks seeking to spur borrowing and spending, yet they seemed surprised that the current recovery is the weakest in postwar history after cutting rates to near zero, or even below in some cases.
Keynes is credited with popularizing the ‘paradox of thrift,’ which is the economic theory that posits people tend to save more during recessions as rates fall to offset the income their savings is not generating. Of course it is the case that when you save more, you spend less. Since the U.S. economy is fueled by consumption, it also stands to reason that growth suffers as a result.
It’s been two years since Swiss Re produced a report that calculated U.S. savers had foregone some $470 billion in interest income. The analysis was based on what rates would have been had the Federal Reserve followed the Taylor Rule, which would have put rates, then at zero, at 1.7 percent.
Even as the Fed has begun to raise rates, it is clear that hundreds of billions of dollars have been squirreled away as savers play defense to counteract the Fed’s ultra-loose monetary policy. Some $11.7 trillion is sitting in bank deposits, up from $7.23 trillion at the start of 2009 shortly after the Fed cut rates to near zero, central bank data show.

This post was published at bloomberg

Record margin debt may be a red flag, but analysts say don’t worry

The U.S. stock market keeps finding reasons to be cautious, and it keeps finding reasons to ignore them.
The latest warning sign – following underperformance by small-cap stocks, record inflows into exchange-traded funds and high levels of political uncertainty – is margin debt, which is seen as a measure of speculation and just broke a record that has stood for nearly two years.
Don’t worry.
According to the most recent data available from NYSE, margin debt hit a record of $513.28 billion at the end of January, topping a previous record of $507.15 billion that had held since April 2015. Margin debt refers to the money that investors borrow to buy stocks, and high levels of it, in periods of market volatility, and can lead to sharper declines. Records preceded both the dot-com market crash and the financial crisis.
However, expecting a similar correction because debt is at a record now would be ‘nave,’ said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management.
‘This isn’t a signal to me that markets are reaching an exuberant level like they did in the 1920s or 1990s, when speculation was rampant,’ he said. ‘What our clients are doing is borrowing against the portfolios because interest rates are so low. They’re not leveraging up because they see the market exploding to the upside; they’re using leverage because they can pay it off at any time.’

This post was published at Market Watch