... what sort of decision does the Fed's policy of suppressing interest rates encourage? Only those where the cost of funds is the primary cost of doing business: financial transactions. A few years ago, housing could be included as a major beneficiary of Fed-induced speculation not only among financial institutions but among ordinary investors. But that ship has sailed, crashed into the glacier, and sunk to the bottom of the deep blue sea. So what we now have is a financial sector amped up on more than four trillion tablets of amphetamine, and a real economic sector that remains at year-to-year growth rates that have historically marked the border between expansion and recession.

... Several factors contribute to the broad sense that something in the economy is not right despite exuberant financial markets and a lower rate of unemployment. In our view, the primary factor is two decades of Fed-encouraged misallocation of capital to speculative uses, coupled with the crash of two bubbles (and we suspect a third on the way)


The Federal Reserve's prevailing view of the world seems to be that a) QE lowers interest rates, b) lower interest rates stimulate jobs and economic activity, c) the only risk from QE will be at the point when unemployment is low enough to trigger inflation, and d) the Fed can safely encourage years of yield-seeking speculation -- of the same sort that produced the worst economic collapse since the Depression -- on the belief that this time is different. From the foregoing discussion, it should be clear that this chain of cause and effect is a very mixed bag of fact and fiction.

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