The Curse Of Money
This from Tony Crescenzi contributor @ Real Money & Economist over @ Miller Tabak & Co., LLC.
"Having reached the lower bounds of what it can do with short-term interest rates, the Federal Reserve has essentially put a "curse on cash," in hopes that cash will ultimately be viewed as a weak alternative to other investment choices, from lending to investing.
Banks, for example, had been increasingly turning to securities to place their cash rather than use the money to lend. This is apparent in the Fed's weekly report on the assets and liabilities of commercial banks, which shows that banks increased their securities holdings by $338 billion to $2.804 trillion just over the past three months. Obviously the Fed would rather banks lend the money, where it would then multiply, expanding the money supply and supporting economic activity.
There is of course abundant evidence that institutional investors have also been shy about investing. One gauge is institutional money funds. Data from the Federal Reserve indicate that institutional money funds have grown by about $200 billion over just the past two months, to $2.278 trillion. The curse on cash could eventually push return-minded institutions to take more risk. Individual investors will lag, as usual.
The "curse on cash" theme is one that will likely increasingly affect the decisions investors make. The Fed is sure to reinforce the theme whenever it feels it is necessary, until people begin to take risks again. It would be risky to challenge this curse in light of the Fed's firepower. The downside of the Fed's actions -- inflation, potentially, and a free-market system that is not exactly working as well as a free-market system should -- are for another day, or year."
Banks, for example, had been increasingly turning to securities to place their cash rather than use the money to lend. This is apparent in the Fed's weekly report on the assets and liabilities of commercial banks, which shows that banks increased their securities holdings by $338 billion to $2.804 trillion just over the past three months. Obviously the Fed would rather banks lend the money, where it would then multiply, expanding the money supply and supporting economic activity.
There is of course abundant evidence that institutional investors have also been shy about investing. One gauge is institutional money funds. Data from the Federal Reserve indicate that institutional money funds have grown by about $200 billion over just the past two months, to $2.278 trillion. The curse on cash could eventually push return-minded institutions to take more risk. Individual investors will lag, as usual.
The "curse on cash" theme is one that will likely increasingly affect the decisions investors make. The Fed is sure to reinforce the theme whenever it feels it is necessary, until people begin to take risks again. It would be risky to challenge this curse in light of the Fed's firepower. The downside of the Fed's actions -- inflation, potentially, and a free-market system that is not exactly working as well as a free-market system should -- are for another day, or year."
http://www.thestreet.com/b/rmoney/tcrescenziblog/10453812.html (subscription required.)
posted by CR English at 2:07 PM
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