The Federal Reserve has now committed to keeping short-term interest rates near zero for almost three more years. They have also committed to a 2% inflation target. Some say QE3 is just around the corner, but that's not my subject today. Tim Iacono took note of Ben Bernanke's disingenuous answer to a question during his latest news conference (video below). Blue shading highlights Bernanke's answer.
Basically, his answer to Gregg Robb of Marketwatch about the difficulties being experienced by fixed-income investors makes no sense as he confuses conservative investments with riskier ones in the rather disingenuous answer excerpted below:
In the case of savers, we think about all these issues and we certainly recognize that the low interest rates we’re using to try to stimulate investment and expansion of the economy also pose a cost on savers who have a lower return. And we do hear about that obviously and we do think about that.
I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate returns, in particular, people who own stocks, corporate bonds, as well as Treasury securities. And if our economy is in really bad shape, then they’re not going to get good returns on those investments.
So, I think what we need to do is, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and increase growth and that, in turn, will lead ultimately to higher returns across all assets for savers and investors.
That’s little comfort for all the risk-averse savers out there just looking to get more than one percent on a certificate of deposit when the inflation rate is running at three or four times that amount (by government measure, your results may be much higher).
In another post, Tim quotes the Aleph Blog to further document the Central Bank's war against savers.
Bernanke Does Not Understand Savings
Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans. He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.
I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us. There are three problems with what you said:
- It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.
- Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets. Most people would like to do something to protect themselves from inflation, but lack the means to do so.
- Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers. Fed policy kills rates for savers. They will not become investors, because they lack the knowledge to do so.
I am again sorry, Ben, because your policies discriminate against the poor and the lower middle class. Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.
Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy. If there is no income, why not grab safety from inflation?
The ostensible purpose of Central Bank policy is to control the (core) inflation rate and promote full employment. Viewed from the perspective of working (and jobless) Americans, this policy has been a miserable failure. Viewed from the perspective of large investors, this policy has been "successful" in the sense that it has reflated some of the assets they typically hold (e.g. the S & P 500). Gregg Robb's question to Bernanke spoke of the criticism he is receiving from Republican candidates for president. (I assume he was referring to Ron Paul.) But this is not a partisan issue, as much as people want to make it one. The war on savers and those on fixed (or declining) incomes transcends political boundaries.
I'm going to take Ben Bernanke at his word. I will not posit yet another conspiracy on the part of the FOMC to make the rich richer and the poor poorer, although it is certainly tempting to do so because that's been the main effect of Central Bank policy. (There's nothing new in bankers helping bankers.) Barack Obama and Tim Geithner have been supportive of Federal Reserve policy, though the President does not comment on it. That's the Change You Can Believe In.
If we take Ben Bernanke at his word, then it is high time for him and many others to admit the complete failure of modern Keynesian theory and current monetary policy. As Bernanke says, this zero interest rate nonsense is meant to stimulate investment and expansion of the economy. Invest in ... what? Emerging markets? Crude oil and other commodities? The dollar and other currencies? Gold? Foreign debt? Because that's where the money has been flowing. The money always goes where the returns are highest. And what about here in the United States? Do we really need another Mall of America? More commercial real estate? Do we really need another fancy football stadium? Or more new houses in the boondocks? Of course not!
Americans need money in their pockets. Good paying jobs would be a good way to accomplish that, but the Fed's policies have created few jobs outside of Wall Street. And even there bank jobs are now disappearing. If the Fed can't create jobs, the least it can do is make it possible for ordinary Americans to get a decent return on what little money they've got instead of encouraging them to gamble it away. The least they can do is give in to the deflation (or disinflation) so inflation doesn't whittle away their savings. We've had quite enough of this paradox of thrift nonsense, thank you very much!
Official inflation, chart by Tim Iacono. As Tim says, your own inflation calculations may not jibe with this data.
And what is the Central Bank's record with respect to the moribund housing market? What have those low mortgage interest rates accomplished?
Single-family starts (data start in 1959) and permits (data start in 1960) set all-time lows in 2011, totaling 429,000 and 412,000, respectively.
Good job!
Only fiscal stimulus (additional government spending) can build public transportation systems, high-speed rail, fix sewers and water lines, repair bridges and all the rest of stuff which has been totally neglected for over 30 years now. Private investors will not touch this stuff. It is outside their purview. There's no short-term return. But the government is broke. And the government has wasted trillions of dollars over the last few decades on foreign wars and other military "expenses" while encouraging private health providers to rip-off Medicare and Medicaid. It's high time economists like Bernanke and other FOMC board members started taking a long, hard look at these realities, too.
Whether it was intended this way or not, modern Keynesian theory and current monetary policy have morphed into ... Trickle-Down Economics! But with a twist. In Trickle-Down, money predominantly flows only one way—up! But with what we've got now, money not only flows up, it also flows away from savers and those on fixed incomes while "official" inflation runs at 3% or more. That's the Giant Sucking Sound you hear when you get less than a 1% return on your savings account, or your money market account or your Treasury Bills if you've got any.
Welcome to the "Best" of Both Worlds.
In short, one of the major economic battles of our time pits The Central Bank against the American People. It's easy to see who's winning. And it's even easier to see who's losing.
Full Disclosure: I am one of the screwed people I wrote about today.
The chief central bankster's job is to serve the owners of the largest Fed member banks and their creditors, the top 0.1-04% of households, and to pretend to give a crap about the so-called Fed mandate of "stable inflation" (LOL!!!) and "full employment". Were the prole masses to understand actually how the Fed operates and for whom and at the expense of whom, there would be open insurrection, the guillotine blades would be dropping, and the White House, Capitol, and Fed would be ablaze.
The rentier-oligarchs have effectively captured a generation's worth of after-tax, real labor product and production via compounding interest and capital gains in perpetuity. The compounding interest obligation to avg. term of US total credit market debt owed is larger than the money supply and approaching the level of US GDP. There can be no growth of economic activity hereafter under such conditions.
Total gov't spending, including personal transfers, now totals an equivalent of private wages. Private wages cannot support a gov't that is larger than wages needed for labor to subsist.
So-called "health care" spending (public and private) is equivalent to ~45% of private wages and ~38% of all wages (the cost to households, firms, and gov't for "health care"). "Health care" is totally financialized by way of the insurance industry. "Health care" exists not to prevent illness and ensure health but to promote unsustainable financial profits for insurers, Wall St., and the ancillary sectors. The so-called "health care reform" and Medicare drug supplemental benefit was nothing more than mandated profits for insurers, hospitals, physicians, and drug and biomedical companies which the society cannot afford.
At the trend rates of GDP and "health care" spending since the late '90s, public and private "health care" spending will be equivalent to 100% of GDP by the mid- to late '30s.
Based on historical valuation metrics, including avg. P/E and peak earnings trend, Aaa and Baa yields, the dividend yield, Q ratio, market cap/GDP, and the implied equity risk premium, the US stock market is at a level of overvaluation surpassed only three times in history: 1929, 2000, and 2007. Yet, it is now the explicit objective of the Bernanke Fed to keep equity prices in a perpetually overvalued state to forestall or prevent the repricing (deflation) of the corporate debt dependent upon the overvalued equities.
Wages to GDP per capita are at the lowest on record going back to 1939.
Corporate profits after tax to GDP are at or near record highs going back to 1929.
Private full-time employment per capita is back to the level of the late '80s and early '90s.
Male full-time private employment per capita is back to the levels of the 1940s-50s.
The top 1-10% of US household receive nearly half of all US income and own 85% of all financial wealth. The top 10% own more than $41 trillion in financial assets (nearly 3 times GDP), an amount that is more than 6 times US public and private wages and almost 40 times the annual payout of Social Security and Medicare (funded by a 15% tax on labor).
Wealth and income concentration rivals that of the Gilded Age of the late 19th century. The US Gini Index (measure of inequality) is right up there with Russia, China, and African and South American dictatorships of the present and past.
No one cares about any of this while we are still conditioned to care more about Lindsay's alcohol habit, the size and contour of Kim's derriere this week, and where to line up with our credit cards to buy the next new, newer, newest i-thingy soon to be released in a new, newer, newest version every 91 picoseconds.
There can be no mistaking: we as a species (or the particular western sub-species) are collectively insane. To be sane amongst the insane is to be perceived as delusional, dysfunctional, and needing to be "cured" of one's sanity (as Jung proposed).
Now it's just a matter of time to know what it is we have in store for each other that we deserve.
Posted by: Homo_Misanthropy | 01/30/2012 at 04:28 PM