The Fed was careful not to spook markets this week, providing guidance that another round of tapering didn’t mean the end of accommodative monetary policy anytime soon. This kept investors happy, but it might not be good news for the economy. Former Federal Reserve governor Kevin Warsh and Duquesne Capital founder Stanley Druckenmiller argue that balance-sheet solution to our balance sheet recovery isn’t creating sustainable wealth because it isn’t directing investment to where it can benefit the broader environment.

Druckenmiller: Financial engineering is taking priority over capex

“Corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment,” they write in a Wall Street Journal op-ed.

The problem is that half of American households don’t any stock (and the holdings of those who do are anything but uniform), and almost as many don’t own a home. Warsh and Druckenmiller aren’t trying to demonize people who have done well in the last few years, but that’s not enough to have a healthy, stable economy.

“Wealth creation comes from strong, sustainable growth that turns a proper mix of labor, capital and know-how into productivity, productivity into labor income, income into savings, savings into capital, capital into investment, and investment into asset appreciation,” they write.

But the velocity of money (a measure of how often money is changing hands relative to the size of the economy) has fallen to the lowest point in more than fifty years.

Druckenmiller velocity of money 0614

You can’t push on a string

Some of the immediate pushback against Warsh and Druckenmiller’s op-ed is that it’s asking too much of monetary policy – the Fed can’t push on a string, as people like to say. The unstated assumption in the essay is that if money were more expensive it would be invested differently and more productively, but they don’t make any effort to prove the point. If wages are struggling and employment low because the economy has unaddressed structural problems, the Federal Reserve doesn’t have the policy tools to fix it.

If the economy continues to recover, we’re probably looking at another year of really extraordinary accommodation and then a few more years before the fed funds rate is close to 4% in line with the Taylor Rule. But if everything doesn’t go as planned the Fed could be under pressure to extend accommodation, even restart QE, and Warsh and Druckenmiller are worried that we have gotten into a ‘2% growth trap’ that the current Fed mindset what be able to get out of.