Thought for the Day - 12 October 2018 [update]

The Fed is playing with fire, i.e. disaster. For the first time, The Manchurian President may be right in his yelling at The Fed. I doubt his yelling is motivated by anything more than self interest. He has a lot of debt in his Failing New York Businesses.

As has been posited in these missives since the Great Recession, economic health, i.e. widespread growth, is driven by increasing demand for the stuff (tangible and intangible) that we make. It's a long establish fact that the marginal propensity to consume goes down as income goes up. There're only so many bananas that one person will buy in a given time period. Giving Mo Money to those with lots o Money doesn't do the job. It makes them happier, naturally, but does nothing to promote growth. Business doesn't make Mo Stuff in the face of static demand. Much less falling demand.

Which brings us to this line from briefing.com today - 8:06AM:

Starbucks says executing a $5 bln accelerated share repurchase program as part of previously announced plan to return $25 bln to shareholders (54.86 )

What do you think will happen to that $5 billion?? Will it be spent buying a new car?? A new house?? Nah. It will be plowed back into the market, in some form. It might go directly to Treasuries, and push up prices and down yields. It might go (indirectly pushing up Treasuries) into some other share, pushing up its price and down its return. Some might end up in the hands of Joe Sixpack Retail Plunger who might buy an extra case of Bud each week, but that'd be the shrinking minority.

No matter how you spin it, liquidity is being pushed into the hands of, mostly, folks with more money than they know how to spend on consumer product already. So, they'll try to spend it on assets. And so goes up the price of assets, and down the various types of interest rate. Most of the recovery from the Great Recession has been driven by unwarranted increases in asset prices. This should be no surprise, as most of the recovery effort, intentional or accidental, has been directed at the 1%. Joe Sixpack hasn't seen much benefit. The financial pundits, and the elites who make the decisions, won't tell us the truth. It might just make enough folks mad enough to see that The Manchurian President has been scamming the Populist President label from the beginning.

By pushing short term rates higher, in the face of stagnant returns on long term real capital in the private sector, the Fed is shooting us all in the foot. Rate inversion, here we come. You won't enjoy the ride.

[update]
Here's some more reporting I just finished reading with my morning greasy spoon java:

When companies have more cash than they believe they can use productively, they typically return it to shareholders either with cash payments - known as dividends - or by repurchasing shares in the market. Buybacks raise demand, putting upward pressure on share prices.

And, as before, rising share prices drives percent return, aka interest rate, down. The Fed can do nothing to make the CxO class smarter at finding new, profitable, ways to build physical capital. Monetarism can go only so far.