John Rubino, author of DollarCollapse.com, is my favorite financial blogger. He did some excellent reporting for Virginia Business magazine back in the day before he went on to become a successful author and financial pundit. In a recent post, he drove home a theme commonly expressed on this blog: that the near zero-interest rate policy pursued by the Federal Reserve Bank (and below-zero policy in some other central banks) is hidden with hidden costs and is creating systemic risk.
As global interest-rate yields are driven down, writes Rubino in his fourth post developing the theme, “We’re All Hedge Funds Now,” insurance companies are especially hard hit. They’re finding it increasingly difficult to meet their obligations to policy holders without assuming greater risk.
Such companies have no choice but to roll the dice on “growth” assets like junk bonds and equities, which fundamentally changes the nature of their business model. Instead of steady, predictable income that guarantees the ability to pay off on policies when retired, they’ll have flush years and lean years which might or might not coincide with the needs of their clients. They’ll become hedge funds, in other words, high-risk investment vehicles that do well in good times and frequently fold up shop in bad.
Globally, more and more capital is flowing into riskier and riskier investments. Sooner or later, the deck of cards will collapse. This time, when it does, the calamity will be global in nature. One thing you can bet on: The architects of the super-easy money policies will find someone to blame other than themselves. Meanwhile, here in Virginia, taxpayers will be left holding the bag for the state’s under-funded state pension fund — along with much else.
The Fed’s super-easy monetary policy is designed to keep interest rates low for the world’s largest debtor, the United States government. In effect, the Fed transfers yearly hundreds of billions of dollars of wealth from individual and institutional investors to the U.S. Treasury — no taxes necessary — by means of a process so opaque that few understand what is happening. I remain convinced that the hidden effects of loose monetary policy comprise a major reason why members of the white working/middle class are out their minds with political frustration.
— JAB
