Dan Spillane: Way-low US Interest Rates Backfired

(SEATTLE) 02/01/05 - The recent flurry of US acquisitions and mergers is being attributed to several factors. First, record low US interest rates for an extended period have led to bubbly stock prices, providing the capital and confidence permitting corporate CEOs to reel in whatever small fry they desire.

Next, record low interest rates have driven up a wide range of material prices, leading to so-called “entrenched” price rises to producers, often at double and triple-digit rates. These rises are not only expected to continue, but of late, are contractually bound to lofty levels, as corporate supply agreements expire and are renewed.

So for example, it makes a lot of sense for Procter and Gamble to buy Gillette--offsetting inflation by gaining market share. Indeed, since the US Federal Reserve failed to act to contain inflation, the Gillette board has compensated on its own. Yet, the effect of pricy imported materials on the trade deficit has become increasingly “locked in” when supply inflation is accommodated in this fashion.

Sadly, that’s not all, the so-called “Jobs Creation Act of 2004” passed last October in US Congress provides further incentive, by allowing preferential tax treatment of certain funds to be used as capital for acquisitions.

But as everyone knows, mergers lead to job losses, often in the tens of thousands--such is the estimate for the AT&T/SBC merger. It follows then, that this provision of the “Jobs Creation Act’ is an utter legislative abomination, having the opposite effect of what its title suggests.

A “Jobs Creation Act” which leads to mergers and massive job loss? Why--that would be like passing a "Clean Air Act" which has a loophole that allows SUVs! Or, like attacking a country to displace a tyrant who tortures--but doing so yourself when you got there!

So utterly contradictory too, have been interest rate moves of the US Federal Reserve, if you consider their “dual mandate” of full employment and stable prices--they’ve missed on both counts.

To wit, extended low interest rates and a “measured” pace haven’t worked--in fact, low rates backfired because they were both too severe and lengthy, as evidenced by a host of recent market indicators and actions.

Consequently, the US is left with ever fewer jobs, entrenched inflation, and a yawning trade deficit. But wait--don't worry, there is no housing bubble...because house prices are justified by strong job prospects.

Whoops.

ENDS

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