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Sunday, November 07, 2010

Pumping Money into the Economy

... but whose economy?

We just decided to print $600B of paper money to buy Federal debt. Doing so lowers interest rates and the thought is that these low interest rates will tempt businesses to borrow and expand. But expand where? Richard W. Fisher, President and Chief Executive Officer of the Federal Reserve Bank of Dallas, gave a talk at the Economic Club of Minnesota with these tidbits included:
Yet, my soundings among those who actually do the work of creating sustainable jobs and making productive capital investments ― private businesses big and small ― indicate that few are willing to commit to expanding U.S. payrolls or to undertaking significant commitments to expand capital expenditures in the U.S. other than in areas that enhance productivity of the current workforce. Without exception, all the business leaders I interview cite nonmonetary factors ― fiscal policy and regulatory constraints or, worse, uncertainty going forward ― and better opportunities for earning a return on investment elsewhere as inhibiting their willingness to commit to expansion in the U.S. As the CEO of one medium-sized business put it to me shortly before the last FOMC, “Part of it is uncertainty: We just don’t know what the new regulations [sic] like health care are going to cost and what the new rules will be."
So investing in the US with its mountains of regulations that no one can decipher is a risky scheme. Why not invest outside of the US instead?
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.
And there you have it. We print gobs of money and where does it go? China, Brazil, India, anywhere but here. We've made it so painful to build businesses in the US that they're taking the money and going elsewhere.

Here, a member of Barack Obama's administration shows how piles of new regulations quickly and easily turn off the flow of investment in the US. No matter how much pressure Ben Bernanke puts into the system with his new money, it doesn't get through and it flows elsewhere.

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