According to billionaire hedge fund manager David Einhorn, the problem with the U.S. economy is too many jelly donuts. Well, ok, not really, but Einhorn uses jelly donuts as an analogy for the Fed’s actions in maintaining an extremely low interest rate environment since the financial crisis.
Einhorn argues that the Fed fundamentally misunderstands the psyche of the American consumer in making assumptions about why 0% interest rates will eventually energize the U.S. economy.
Einhorn’s jelly donut analogy
Greenlight Capital’s Einhorn makes his point by discussing the pros and cons of jelly donuts. “My point is that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn’t giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. Last year, when asked why his measures weren’t working, he suggested it was “bad luck.”
I don’t think luck has anything to do with it. The blame lies in his misunderstanding of human nature.”
Fear and greed
According to Einhorn, it’s all about greed and fear. He argues the Fed’s basic philosophy is “Just set interest rates to zero indefinitely. Then no one can afford not to invest in the market.”
He says this kind of misguided thinking unfortunately continues to persist in Bernanke, at the Fed and among “other government ivory tower thinkers.” Einhorn argues their policies do not take into account the key component of capitalism and free markets, that is, greed. He takes it farther in arguing that since these policy makers “do not understand greed, they also do not understand fear, which presents a double whammy for making bad policy decisions.”
The problem with the Fed’s theory is that people don’t make risky investments when they are afraid. Many people are afraid of the stock market, and they will remain afraid no matter how low rates go or how long the Fed keeps them down. That means only the rich are getting richer on the Fed-induced booming stock market, and the average Joe and grandma and grandpa getting ready to retire are getting less than 1% interest on their “safe investments”, meaning they have less to spend now and in the future.
