Citi: Central banks are only helping the rich and 'the damage caused to the system isn't worth the benefit'
"The damage caused to the system isn't worth the benefit," he wrote in a recent note to investors.
It's obvious that central banks' near-zero interest rates have distorted markets globally.With bonds paying little or no interest, investment money has flowed into equities. But it is less obvious that this is making society more economically unequal.
The argument works like this:
- Central banks pumped a huge amount of cheap cash into the global economy.
- That cash has inflated valuations of stocks.
- The rich were the primary beneficiaries, but they saved rather than spent so it had little effect on wages.
- Low interest rates have hurt pensions, making them more expensive for corporations to fund.
- That, in turn, has reduced corporate cap-ex investment.
- Investment is also unattractive because the deflationary environment features low returns and low productivity.
- So instead of borrowing to invest, European companies have focused on cutting costs.
- And US companies have used the money to buy back their own shares, mostly helping the rich.
- None of the above has created jobs or boosted wages.
Lorenzen has several charts that make the case. Central banks have pumped nearly $20 trillion into the economy, most of that coming after the great financial crisis of 2008. The size of their balance sheets have ballooned to 37% of global GDP in the process (see first chart).
That excess flow of cheap money has "distorted asset allocation" and "distorted incentives," Lorenzen says. So much of it has gone into stocks that central bank policy is now the major driver of equities, not corporate fundamentals, he says:
Changes in central bank policy now directly drive changes in the S&P 500. "Every twist and turn now hangs on a central banker's words," Lorenzen says.
But most of the growth in equities has ended up - predictably - in the hands of the rich. But it did nothing for wages. "QE gains end up in hands with lowest propensity to spend," Lorenzen says:
In fact, Lorenzen argues, low interest rates hurt pensions, forcing companies to reduce their capital expenditure investment and divert more money into plans:
But if debt is so cheap why aren't companies borrowing, spending and investing?
The answer is deflation. When prices are falling and productivity is low there is no point in investing if you can't make a decent return.
So companies in Europe are focusing on cutting costs (which doesn't create jobs or drive wages):
And companies in the US are focusing on share buybacks (which helps the rich):
It is "unlikely QE by itself will ever rekindle investment appetite," Lorenzen concludes. "The damage caused to the system isn't worth the benefit of incremental QE"