Rich Rezney makes some interesting points over at Seeking Alpha about Federal Reserve policy, and how it might actually be working to slow economic recovery in the US. My takeaway is that the government is doing what it always does, mortgage the future to pay for the sins of today. It is the younger generations and the elderly who end up suffering the most.
Mortgage the future. The government is solving our financial problems, in large measure, by a new round of artificial stimulus, pumping more money they just printed out of thin air into the economy by purchasing MORTGAGE-backed securities. They call it Quantitative Easing, or QE3 as this is the third iteration of this blatant manipulation of a free market for the benefit primarily of the wealthy.
This strategy of just printing more money to pay off debts, private and public, debases/devalues the currency. It’s inflationary. Your money buys less stuff. Purists will say it’s not really inflation in the classical sense of too much money chasing too few goods, as we have plenty of goods. There is no supply shortage. But look at the value of the dollar over the last 30 years and tell me there is no inflation in the system the government refuses to acknowledge.
Driving down interest rates by artificially inflating the money supply works for some, but the Fed never seems to care much or speak to the people who suffer economically under such a scenario.
The problem with the argument that low rates spurs growth is that it does not account for the second side of the coin — interest is income for some parties. These parties lose out when interest rates go down to 0%. Interest is income for banks, insurance companies, and many people near or in retirement.
Now before we get too teary-eyed for the poor banks and insurance companies whose license to print money is temporarily revoked, remember that they can always earn money like the rest of us — by working for it.
Insurance companies generate income by investing proceeds from policy premiums into interest-bearing investments. So the Fed policy of “free money for the rich for as long as we can get away with it” will force insurance companies to raise premiums to compensate for lost income. How did that little 9% increase in premiums feel in 2011?
Did the Fed forget to average that into their perennial ability to discover that inflation is always only running “at about 3%”? Higher premiums are bad for everyone, and is another one of those not-so-little hidden costs that get passed on to consumers from irresponsible government policy.
And the banks. Remember those rich guys who gambled with your money in order to get filthier rich and lost so much that the government had to bail them out with your money lest they go bankrupt and topple global world order? So the Fed announces QE3, which is where the government injects itself into the banking business by buying $40 billion dollars a month in bad debt from the banks who were corrupt enough to make those predatory loans in the first place.
QE3 is more taxpayer bailout of the wealthy. When will Americans have enough of getting ripped off by their government, the wealthy millionaires who have completely lost touch with the soul of America?
I don’t recall the section in the Constitution of the United States that said it was the proper role of government to meddle in the financial affairs of private business, in such a way that was not for the good of the commonwealth but rather the good of a few private banks.
So while banks are also hurt by low interest rates — earning money by borrowing cheap and lending dear — the government is more than willing to see them through these hard times of compressed profit margins by just giving them more money. Your money. Your children’s money.
Oh, and thank God for those little mystery $5 charges showing up on bank statements these past few years. If you can’t make an honest dollar, there is always fraud. It seems every time I log into my account the banks have created a new “fee” — never properly disclosed, of course — which allows them to dip their paws into my savings.
“I’m sorry, Mr. Tobias, that $5 charge on your bank statement is because you let your account dip below $500 for 30 seconds on February 5th.”
“But you never told me before about this “no-dip” policy. How was I supposed to know?”
“Please understand, Mr. Tobias, that this is a new policy . . . let’s see . . . well it seems we started that policy on February 5th, if I’m not mistaken. Did you read the new update to the updated prospectus we mailed out on . . . let’s see, that would be February 6th, if I’m not mistaken?”
“Is that what’s meant by “personal banking” — tailoring specific programs based on my individual needs?”
“I’m not sure I get your point, sir.”
“Well what about this $5 charge on march 21st?”
“Thank you for you patience, Mr. Tobias. I realize these little charges can be very frustrating. That charge is for people who don’t sign up for our “premium” account. The good news today is that you qualify for a premium account.”
“How do I qualify for a premium account?”
“You just need to ask about it and we can upgrade you.”
“So the people who ask to be upgraded will be upgraded and not have to pay the $5 fee, but anyone who doesn’t notice the extra “fee” on their statement will just continue to get charged?”
“Bingo, Mr. Tobias.”
“That seems unfair to the people who don’t notice the extra charge on their statement.”
“Thank you for doing business with ConAmerica Bank, Mr Tobias. Is there anything else I can help you with today?”
The third group of people Mr. Rezney discusses as negatively impacted by low interest rates are those who are almost or already retired. “This large saver group is not earning any significant interest income on their nest eggs, particularly at a time when their equity in their home has been hit.”
So we had the crisis in housing, with home values for many people dropping by something like 30%. By keeping interest rates artificially low, the Fed is trying to re-inflate asset prices in the stock and property markets so we can all feel rich again, until the next bubble bursts. If we feel rich, maybe we’ll go out and spend more money on things we don’t really need, which is good for the economy.
But what about granny? Granny’s trying to live on social security, which loses ground every year to real inflation as the government lies about what the real inflation rate is. The government has to lie about inflation because they have to make a cost of living adjustment to social security based on their deflated numbers.
If the government told the truth and said inflation was really running at, say, 6%, they would have to spend a lot more of the money they don’t have anyway on the people who really deserve it, like retirees, and not their banker and war industry friends. Wouldn’t that suck?
Those who rely on fixed-income assets to fund their retirement are losing big. “Personal interest income” is down some $400 billion dollars since 2008. That’s money that should be going to people who save and invest, and instead is being funneled off into the pockets of too-big-to-fail-banks, and the God bless those patriotic souls making the military machinery to fight a fantastic war on terror that is largely the figment of neo-con imagination.
So why did Obama go out of his way to warn those who are “55 or 56” in his first presidential debate of 2012? Because they are the ones who not only have the most to lose as Romney tinkers with Medicare and pushes them into a “voucher” system beholden to insurance companies, but it is the 55+ group that earns 72% of all personal interest income.
The problem is that these people are feeling the pressure, not only from recent declines in real estate, but also a nest egg that is earning paltry returns as they prepare for retirement. As a result, many older workers are staying in the workforce and clogging up the labor markets for younger workers.
Older workers are forced to keep working long after they want to retire, and many already retired folks are forced back into the workforce to make ends meet. But the important thing is to debate how many trillions of dollars more we should spend in Afghanistan and Iraq and what’s next — Iran? — and justify multi-million dollar compensation packages for bankers whose companies have lost billions. So there is a negative ripple effect through the strategy of solving our monetary problems with more unproductive fiat currency. And,
young workers can’t save for a down payment if they don’t have a job. They can’t obtain jobs if older workers choose to stay in the workforce and clog the natural employment flow. Older workers have chosen to do this, in part, because their nest eggs won’t earn them enough money in retirement. . . young people are hurting and becoming homeowners at lower rates than before the crisis. Further, as a result, they are making up a lesser share of total owned dwelling expenses. They are more unemployed than the other age groups and have been hit most by this crisis. This is the reason that the real estate industry is in a slump. . . Manipulating prices in any market is dangerous because there are a variety of unintended consequences . . . Lower bound interest rates have already demonstrated themselves to be ineffective in stimulating the economy [emphasis mine].
Chis Whalen quotes Jeff Zervos that all the Fed manipulation may be good for at least keeping us out of another great depression (which the Bush administration pushed us towards in the first place).
The FOMC is fighting deflation. Credit continues to contract globally as much of the western world goes on a pure cash budget. So while I would like to see the Fed raise short term rates, the fact is that the central bank has little choice but to support the markets. But buying RMBS will neither help housing nor reverse the current deflationary spiral on which we all ride. . .
The second reason to be circumspect is the fact that the Fed’s leaders continue to pretend that driving down yields in the RMBS markets will have any impact on the housing sector or the economy. The two thirds of the mortgage market that cannot refinance their homes will be unaffected by QE3. In fact, the latest Fed purchases are a gift to Fannie Mae and Freddie Mac, the TBTF banks and the hedge fund community. . .
Instead of looking for ways to stoke consumer demand by restoring income and consumer demand, the Fed is simply feeding subsidies to Wall Street. . .
the US economy is destined for years of stagnation and eventual hyperinflation. . .
Jeff Zervos of Jeffries is one of the key Fed cheerleaders. He writes in a research comment: “The bottom line is that the Fed is printing money, debasing the currency and devaluing debt. The policy is redistributive, regressive and reflationary. It’s a nasty business for sure, and the truth must be obfuscated from the public. But if we want to avoid a second great depression, it is the right thing to do.
God Bless America.