Above graphic, added from 3/02/2018
James Grant. Smart guy: ‘Markets Trust Too Much in the Presence of Central Banks‘, ref also by Zero Hedge:
Well said: ‘Interest rates are prices. In fact, they are the most consequential prices in a market economy because they discount future cash flows and they help us to set investment hurdles and to measure financial risks. In short, interest rates are prices and prices convey information and distorted prices convey misinformation. So if you want to build a factory or estimate the financial risk in a given security today’s interest rates are just the information you don’t need to make an informed decision.
What’s the fallout of distorted interest rates? The great Frédéric Bastiat, a French economist, statesman, and author during the 19th century, published a famous essay called »That Which is Seen, and That Which is Not Seen».
In essence, he writes that when you do something there are to be two outcomes: First, the one which you intend and second, the one you didn’t actually intend but then nonetheless occurs.
So when we judge the effect of these unconventional monetary policies it’s important to take into account not just what the policy makers intended but also what they brought about, although not intending it.
It seems to me that the unintended consequences are very much adverse of these policies. Namely, the world-wide distortion of interest rates because markets are connected by arbitrage.’
‘Why is that so concerning? One of the unintended consequences – and this is truly unseen or at least is rather subtle – is that these policies tend to prolong the lives of marginal businesses. That’s because they can be sustained through the issuance of very cheap debt. Certainly, in the case of Japan it’s clear that one of the consequences of this great post boom hangover that’s now a generation long is to perpetuate the lives of zombie companies.
Capital is like a forest: It needs death as well as life. It reduces the dynamism to an economy if unsuccessful businesses don’t make way for new ones: new ideas, new people and new capital. So these very low interest rates act as a kind of a drug. They perpetuate the status quo, as unprofitable that status quo might be.’