Last week’s inflation figures showed that the Fed’s over-expansionary monetary policy wasn’t showing itself in inflation. But that doesn’t mean it’s doing no damage. Instead of in inflation numbers, the multiple years of ultra-low Fed interest rates are manifest in savings figures for both individuals and companies, with individual savings at half the long-term average and corporate stock buybacks, together with dividends, absorbing 91% of the S&P 500’s net income, according to the Financial Times.

Traditionally, fiat-money central banks were supposed to run the system with a view to keeping inflation as low as possible. In 1978, the Humphrey-Hawkins Act extended the Fed’s remit to the “dual mandate,” supposedly managing unemployment and inflation simultaneously. Hard-money types have criticized this as sloppiness incarnate, allowing the Fed to pursue soft money policies even when inflation is rising, as in 2005-06. However, the Fed’s period of extraordinary stimulus since 2009 has not been accompanied by an inflation upsurge, far from it.

There appear to be a number of reasons for this. The link between money supply growth and inflation is nothing like as tight as Milton Friedman claimed, and his parallel claim that inflation is “always and everywhere” a monetary phenomenon is nonsense. Actually, we could tell that Friedman himself was losing confidence in his own theory during his last years, when he gave encouragement to Alan Greenspan’s sloppy monetary policy, even when with M3 money supply rising at close to 10% per annum he should as a true monetarist have condemned it.

Since 2008, money supply growth has risen at 6-7% per annum, but that’s still a lot faster than nominal GDP growth, which has rarely touched 5%. Saying that monetary “velocity” has declined is in a sense tautological; if money supply consistently rises faster than GDP then monetary velocity must as an arithmetic necessity decline, but that says nothing about events in the real world, nor does it suggest that any real factor is causing monetary velocity to decline and GDP to increase more slowly than money supply.

Prices have become detached from money supply growth owing to a number of factors. The most prominent of these is modern telecoms, the communications revolution that has made it much easier and cheaper to construct global sourcing networks for goods and services. By these technologies, emerging markets labor has been put more directly in competition with Western labor, causing an arbitrage closing the differential between the two wage rates. That’s why median incomes in the U.S. have declined a further 5% in real terms since 2010, even as economic growth has continued at a moderate pace.

The downward pressure on prices, both directly through competition from emerging-markets-produced goods and services, and indirectly through lower domestic wages, has suppressed costs in the West in the 2010s, just as an equivalent process of market opening to the world suppressed costs in Japan in the 1990s. Demographics also haven’t helped as Western economies have aged, because the downward wage pressure from semi-retired workers finding they need to continue working has been accompanied by downward price pressure, as they and other disadvantaged consumers attempt to shop more cheaply.

If the Fed has no effect on inflation, then it is left simply with its unemployment mandate. That is completely unsatisfactory, because it causes the Fed to run policies of negative real interest rates long after there is any justification for them from the economic cycle. Normally, a burst of inflation would cut off this nonsense (as it did to some extent in 2004-06) but in this case, the inflation isn’t happening, and the Fed’s self-indulgence is thus uncontrolled.

Even though negative real interest rates aren’t producing a surge in inflation (at present) they are having a number of other adverse effects on the economy. The most serious of these is that they are discouraging saving, to the extent that the U.S. savings rate (savings as a percentage of disposable income) has declined from an average of over 10% in 1929-94 to an average of just 5% since 1995. Even if everyone worked till they dropped without retiring, if savings are inadequate the economy is de-capitalized, and living standards erode to poor-country levels.

The savings rate, measured by the Bureau of Economic Analysis since 1929, fluctuates considerably from year to year, and over the 84 years for which we have data, it has been at times very low, as in the early 1930s, when incomes fell more than consumers were anticipating, and very high during World War II, when the opposite process occurred, and production shortages restricted purchases of many goods. However if you divide the 1929-94 period into three roughly equal segments, 1929-45, 1946-71 and 1972-94 (the break between the second and third being the breakdown of the Bretton Woods monetary system) you see an average savings rate that would round to 10% in each of the sub-periods. In other words, at least in the twentieth century, 10% has been the natural savings rate, only extreme economic events caused it to vary, and it quickly reverted to its long-term average when it did so.

The savings rate’s descent to the 5% range after 1995 is thus highly significant. This is not solely a function of negative real interest rates. Real interest rates during the Greenspan bubble of the late 1990s were generally positive, yet the money supply was expanding much faster than the economy, and the savings rate correspondingly fell (with the impetus for the decline being the extraordinary rise in asset prices rather than ultra-low rates themselves.) Then after 2002 the savings rate fell further, bottoming out at below 3% in the housing bubble in 2005-07. Its rebound in 2008-09, prompted by the collapse of housing and portfolio values in 2007-08, proved short-lived, and since 2010 it has once again languished around 5%.

The same dynamic has played out in the corporate sector. Here profits in recent years have been running close to record levels in terms of GDP, but companies have not been using the extra money for long-term investment. Instead they have been conducting stock buybacks, running at a record level of $338 billion in the first six months of 2014. Needless to say, since the U.S. stock market is at record levels, this is unlikely to be an efficient use of shareholder capital. Indeed, given that buybacks dropped off sharply in the bear market of 2008-09 and in several cases were replaced with emergency rights issues at low prices, shareholders have generally been penalized by management buying stock at high prices and selling at low prices (or at the very least, ceasing purchases when prices were low) thus producing almost perfect destruction of shareholder value.

Some of the largest companies have spent far more on buybacks and dividends (the great preponderance on buybacks) with Hewlett-Packard spending almost double its profits in 2003-12 and Microsoft, Cisco and Intel all spending more than 100% of profits, according to the FT. Since all four companies are trading below their 2000 peaks, even though the Standard and Poor’s 500 index is about 30% above its 2000 peak, the buybacks can be regarded as singularly inept investments, in the cases of H-P, Cisco and Intel almost certainly carrying a negative return even in nominal terms. It must be remembered that normal investors normally get no benefit whatever from buybacks, because they are not the ones tendering stock to the company. Management, which gooses the value of its stock options, is the only true beneficiary.

With the major tech companies of 2000 investing all their profits in share repurchases, it’s not surprising that economic growth since 2000 has been anemic at best. The Fed, by encouraging cheap leverage and narrowing the capital cost differential between the U.S. and emerging markets, is largely responsible for this failure. It has left the behemoths of U.S. industry with huge domestic leverage, while they sit on pools of overseas cash that cannot for tax reasons be deployed in investment within the United States.

When you look at corporate behavior, individual savings behavior and monetary policy, it becomes clear that the economy-wide dearth of savings is very largely the Fed’s fault. Far from providing “stimulus” to U.S. economic growth its over-expansionary policies have driven growth offshore while stunting the creation of domestic capital, essential to provide adequate living standards for the American people. The Fed’s artificial stimulus has been anything but stimulating, except in the shortest term.

The solution is simple; rather than targeting inflation or unemployment directly, the Fed should target the savings rate, which it has a much better chance of affecting through its interest rate policies. By running the financial system with a high risk-free real rate of interest, it will quickly pull the savings rate back to 10%, while ensuring that corporations cease taking on unnecessary borrowing and instead focus on reducing their leverage and repatriating foreign cash pools. Initially this might cause deflation, as a 3% federal funds rate was accompanied by minus 2% inflation, but high real rates would soon create more capital in the economy, tending to increase genuine capital investment and pushing inflation back to positive territory.

Rather than praying for Keynes’ “euthanasia of the rentier” the Fed should instead run its interest rate policy in the interest of rentiers, until savings have recovered to their long-term average level. Not only will it be good for the economy’s heath, it will be good for its moral probity, as speculation and leverage games disappear and long-term, steady wealth accumulation comes back into fashion. Who knows, we may even get the bankers back into wing collars!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)