The Giant Debt-for-Equity Swap – AIER

The Giant Debt-for-Equity Swap – AIER

At the risk of repetition, in the longer term the deleterious effect of artificially low interest rates discourages capital expenditure in favor of debt issuance to fund stock buybacks. It undermines productivity and reduces the long-run rate of economic growth.

The number of stock market listings will continue to decline while the sustainable level of price-to-earnings ratios will rise due to the diminishing supply. With interest rates near zero, stocks will be supported: there are few viable investment alternatives in public markets. Income inequality will rise in tandem with the stock market, as will the ratio of debt to equity.

If governments choose to adopt a fiscal rather than a monetary solution to the lack of economic growth (and I am not advocating negative interest rates), they will pile even more debt onto an already over-encumbered marketplace.

Artificially low interest rates are hollowing out the productive capacity of the economy. The price of stocks and bonds may remain exalted, but this is not a sign of economic health.

via The Giant Debt-for-Equity Swap – AIER