Spitznagel - Fed creates an economic illusion: Opposing view

Mark Spitznagel
USA Today
March 9, 2014

What a waste of a crash.

After enduring all that pain from the financial crisis and the Great Recession, five years from its depths we have little to show for it. It's true that certain asset prices have surged, but a chart of the S&P 500 looks disturbingly similar to the timing of the Fed's various rounds of "quantitative easing," suggesting an artificial bubble built on printing money. Have we learned nothing?

Before the fall of 2008, Ben Bernanke misdiagnosed the coming financial storm. His medicine was just as bad. Thanks to his playing Dr. Frankenstein, pumping life into failing banks that should have been allowed to die, we have created an economic illusion.

Interest rates are signals that provide important information to everyone in the economy. The Fed's artificially low interest rates induce investors to chase yield in risky projects that they normally would shun. Here's the paradox: Artificially low rates actually discourage patient investment, and create yield-crazed zombies that are only interested in what they can devour now.

A lack of capital expenditure growth shows the Fed's folly. Although corporations are sitting on record cash levels, their net debt levels are back to their 2008 highs. This debt has not been spent on organic growth, but rather on stock buybacks and dividends.

It's true that had the Fed not intervened, the crash of 2008 would have been even more painful and the recession more prolonged. But the bottom would have been a real foundation, solid as bedrock, from which meaningful, sustainable growth could occur.

In short, we would have a natural, well-orchestrated dance of great patience, from which the economy would progress. Even more important, we would be on solid footing now, instead of teetering atop a bubble of inflated assets.

Instead of toasting the success of the Fed, we would be better off recognizing the disconnect between reality and illusion. The illusion will shatter when the monster returns to its home, and asset markets return to reality. If we want a repeat performance of the last boom-and-bust cycle, current Fed policy is just the thing.

Mark Spitznagel is the founder of the hedge fund Universa Investments L.P. and author of The Dao of Capital: Austrian Investing in a Distorted World.