The insubstantial impact of low interest rates

I've often wondered over the past 5-7 years who exactly is benefiting from historically low interest rates? The simple answers that come to mind:

1. Individuals with superior credit characteristics who can access this cheap money

2. Corporations able to float new debt to yield-starved investors

Absent, or course, is the average consumer, leading market pundits like Bill Gross to comment, ""in today’s modern day economy, central banks are really the “community chest”, not the banker. They have lots and lots of money available but only if the private system – the economy’s real bankers – decide to use it and expand “credit”. If banks don’t lend, either because of risk to them or an unwillingness of corporations and individuals to borrow money, then credit growth doesn’t increase."

So what does the overall credit picture look like right now, following seven years of rates progressively inching towards the floorboard? Some data:

• According to the NY Fed, total outstanding household debt is -3.3% versus its Q3 2008 peak ($12.25 trillion vs $12.68t). Looking at this in another way, the ratio of household debt service payments to disposable income has declined from a peak of 13.20% to 10.02% currently

• A sharp decline in mortgage debt accounts for the majority of this differential: outstanding mortgage debt topped out at roughly $10 trillion and has declined to $8.85t (7.19% of disposable income vs 4.51% currently). This despite a primary 30yr-fixed mortgage rate that has plummeted from 6% to 3.75% over this time period.

• Non-Mortgage debt has actually risen over this period - $3.4 trillion vs $2.69t. And a decline in the cost of auto loans (7% vs 4%) has boosted auto debt by over $300 billion. However, the vast majority of this increase in non-mortgage debt has come from the explosion in student loan debt - up an incredible $600 billion. Credit card debt is moderately lower (the APRs on this debt are largely unchanged over the period).

On the corporate side of the economy:

• Corporate bond issuance has topped $1 trillion each year for the past six years straight, making consecutive record highs over the past 4 years.

• The St. Louis Fed reports commercial and industrial (C&I) loans outstanding have increased from around $1.6 trillion in late 2008 to ~ $2.1t today.

• The Small Business Administration points to an overall decline in small business lending.

So aside from the boost to auto purchases (which are often necessary rather than discretional spending), lower interest rates have not spurred consumers to consume more. And since consumer spending comprises 70% of GDP, analysts use this data to question the efficacy of the Central Bank's monetary policy and wonder where growth will come from.

But perhaps this isn't the right question. Perhaps the concept of quantitative easing was doomed before it ever started. And the reason why, is that a monetary approach to growing GDP was always going to be constrained by consumers who were simply tapped out on taking on new credit in the absence of higher wage increases and overall economic confidence.

Taking a benevolent view of Bernanke and the Fed, slashing rates to zero and QE were both a direct mechanism by which to rescue the banking system from collapse, as well as an experiment in creating economic growth. The thought being a classic "rising tide lifts all boats" wealth effect which would result in lower unemployment, higher wages, increased consumer spending and a robust GDP growth rate.

But the fact remains that this was an unprecedented experiment, and the current scorecard indicates that low interest rates have not had the desired direct effect on the economy. Rather, low interest rates have created substantially more financial wealth, which has had a profound affect on financial assets but little impact on economic growth. An obvious example of this reality: corporations have spent much of the new capital raised through bond sales to yield hungry investors on share buybacks (a financial asset) rather than on investments into their businesses.

What could have been done differently? Would fiscal spending have had a more direct impact on GDP? Perhaps, though the sharp political schism that impedes even debating this idea seems insurmountable at the moment. But the reality is that as real median household income in the US increased from $55K/yr to $58k/yr between 2005 and 2008, revolving credit card debt expanded by roughly 7% a year, and mortgage debt grew by $3 trillion. Expecting policy to meaningfully impact consumer spending without addressing wage growth has proven to be wishful thinking.