Federal Reserve Policy IS Working … Just Not For America
by George Washington
Richard W. Fisher, president of the Fed bank of Dallas, said last month:
In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin.
“[I]f it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.
Shahien Nasiripour fills in some details today on why Fed policy is indeed helpful … just not to America:
“Firms continue to cut back on their capital expenditures and R&D outlays,” analysts at JPMorgan Chase said in a September report. Money spent on long-term investments and research and development represents less than 55 percent of operating cash flow at the non-financial companies that make up the Standard & Poor’s 500 index. It’s down from a high of more than 85 percent as recently as 2001, the analysts noted.
But money is flowing overseas.
The proportion of capital expenditures spent abroad has risen from 18 percent in 2001 to 27 percent in 2008, the JPMorgan analysts wrote. It’s likely higher today “thanks to growth opportunities prevalent in emerging markets.”
On Oct. 29, the Treasury Department reported that U.S. portfolios held some $6 trillion of foreign securities at the end of last year. At the end of 2008, U.S. portfolios held $4.3 trillion in foreign securities.
The trend continues this year. There’s been a net outflow of money from domestic equities every month since May, according to the Investment Company Institute. Foreign equities, on the other hand, have been growing.
In other words, the Fed’s next round of asset purchases may not help American families. Rather, it may benefit the citizens of other nations.