It is a fact of experience that when the interest of money is two per cent, capital habitually emigrates, or what is here the same thing, is wasted on foolish speculations, which never yield any adequate return.
- Walter Bagehot 1848
We faced the John Bull period of lower interest rates and the chase or reach for yield. That period ended with the rise in interest rates from the Fed. The impact on many financial sectors was severe, yet the pain was not as widespread as expected.
Now we are again headed to lower rates. The Fed solution to balance sheet risks is to lower rates so leverage can remain high and balance sheet can be repaired through lowering the cost of capital, yet the quality of cash flows from these projects has not been discussed.
This cash flow shortfall is the problem in China. It has been an ongoing problem in Europe. It is a problem in emerging markets. Slower growth has meant that the expected cash flows have not been forthcoming. It has been less of a problem in the US because of aggressive fiscal policy, yet the underlying issue still exists. Lowering rates will solve the problems of the past but it may create new problems in the future
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