In their official statement Wednesday, U.S. Federal Reserve policymakers said they “continue to anticipate that economic conditions are likely to warrant exceptionally low levels of the Federal Funds Rate for an extended period.”
That means interest rates will remain at artificially low levels for some time to come.
And it also means the central bank’s policymaking arm, the Federal Open Market Committee (FOMC), has finally and firmly cemented its role as the Keynesian death panel for the savers of America.
The malign influence of the late economist John Maynard Keynes is nowhere more destructive than it is in the area of saving. After all, it was Keynes who proclaimed that his ideal economy would see “the euthanasia of the rentier” – an abolishment of the class of people who live off of income from savings.
We know that Keynes’ theories are still rampant in choosing U.S. fiscal policy, which has given us the largest peacetime budget deficit in history. Wednesday’s statement by the central bank’s policymaking Federal Open Market Committee (FOMC) shows that the monetary sector is enthralled by Keynes’ destructive views. As savers and investors, it’s about time we got a voice in this. After all, it’s entirely possible that we don’t want to be killed – not even mercifully – by the FOMC’s zero interest-rate policy and its erosion of our savings.
The current economic situation has the United States in an embryonic – but unmistakeable – recovery. Commodities prices are soaring and the U.S. stocks, as measured by the Standard & Poor’s 500 Index, are up 55% from their March 9 low.
If you were setting monetary policy for such a country, you’d surely make it only moderately stimulative, because the dangers of soaring commodities prices and what looks very much like a stock market bubble are considerable. With the “core” consumer price index (CPI) having risen 1.4% in the last 12 months, that would suggest a Federal Funds target of somewhere in the 2%-3% range. That would constitute a “real” short-term interest rate of 0.6%-1.6%, just below the neutral level of about 2%.
Needless to say, the Fed has a problem.
A No-Win Proposition for Savers
If it moved interest rates back to the appropriate rate quickly, it would cause a huge market panic: A move of 2% or more in the Federal Funds target would hit hard at the market’s confidence.
However, it could begin moving in that direction, perhaps by raising the target by a quarter percentage point – which would take it to a range of 0.25%-0.50%. That would not tighten policy much, but would indicate the Fed’s intention to tighten it in the future.
The market reaction would be considerable; if it knew higher interest rates were coming, the stock market would slow its ascent and commodity prices would stop soaring. The latter would be very good news, indeed, for the U.S. economy and for U.S. consumers generally.
By taking the opposite view, and nailing itself to the zero interest rate policy, the Fed has made it very difficult to raise interest rates when it needs to, which will be pretty soon. However, there’s another effect – this one affecting savers – which will do even more long-term damage.
Commentators have for years been bemoaning the low U.S. savings rate, pointing out that it causes the U.S. balance-of-payments deficits, making us beholden to China, the Middle East and other places that may or may not be our friends. However, my question is, why the hell should anybody save if they don’t get paid to do so?
In this environment, savers get ripped off in three ways:
- First, they get almost nothing on their savings, except by taking lots of risk.
- Second, the value of their savings gets eaten away by inflation. That’s only 1.4% currently at the “core” level, which purposely excludes more-volatile food-and-energy prices (more on that in a moment). And that’s only if you believe the “official” figures, which I don’t entirely – they’ve been tweaked much too often. However, the rise in commodity prices, the weakness in the U.S. dollar and the beginnings of economic recovery suggest that inflation will be considerably higher in the months ahead. And that’s even if you don’t include the “volatile” food-and-energy prices, as the government doesn’t (Though it should: Real people can’t live their lives without consuming food and energy, and thusly suffer from “real” – and not “core” – inflation).
- Third, after they’re received very little on their money and had their money eaten away by inflation at rate that exceeds their savings return, those savers still have to pay income tax on interest and dividends, even when those returns don’t make up for the inflationary erosion of capital.
The Fed has been running a monetary policy that rips off savers since 1995. That means that the central bank has spent the last 14 years pushing up the money supply at a rate that greatly exceeds nominal gross domestic product (GDP).
So it’s not at all surprising that people don’t save much; they’re being paid not to do so. The Fed’s policy is very convenient for all those who borrow money – from the big banks and investment banks to the homeowners who took out too large a mortgage and can’t service it.
In other words, it’s become a very one-sided game.
Three Strategies for Savers
As savers, we can take several steps. We can agitate, like the “” protesters. It’s about time U.S. Federal Reserve Chairman Ben S. Bernanke stopped basking in his approval by all the Keynesians and felt the anger of real people, whose savings he is destroying.
Apart from that, we can invest in a way that gets around Bernanke’s machinations. Three moves in particular make a lot of sense:
- First, we should save as much as possible tax-free, since the tax system discriminates against us. So max out IRA contributions, education funds, and any other investments that shield part of your holdings from the taxman’s bite.
- Second, we can put our money outside Bernanke’s reach – in foreign markets. The European Central Bank (ECB) at least mildly cares about savers, and has pursued a more careful policy than the Fed. Within the EU, Germany is recovering nicely, partly because it had very little fiscal stimulus, and has almost no inflation. Outside the EU, Japan and Korea are both recovering nicely, and so are worth looking at, as their policies are at least independent. (Japan, under the previous government, had a Bernanke-like determination to ignore the needs of its savers. But that may have changed under the new government).
- Finally, we savers can engage in the ultimate Bernanke protest, and buy gold, silver or the shares of mining companies. Once the Fed reverses its policy, these will be rotten investments. But it’s pretty clear that the Fed is not going to give savers an even deal soon. In that case, if the Fed doesn’t reward us, gold and silver will. The dollar will decline, and gold and silver prices will rise, until eventually the Fed is forced to act. But my bet is the Fed will move very slowly, so we’ll get plenty of warning.
We savers have rights, too. And we also have money.
It’s about time we invested it where its enemies can’t erode it.
[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best. And for good reason - he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson is now bringing his creative insights to the readers of his trading service, The Permanent Wealth Investor.
The Permanent Wealth Investor assembles high-yielding dividend stocks, profit plays on gold, and specially designated "Alpha-Bulldog" stocks into high-income/high-return portfolios for savvy investors. Hutchinson's strategy is tailor-made for periods of market uncertainty. But the real beauty of this approach is that it can work in any kind of market – even those dominated by the bulls, or the bears.
News and Related Story Links:
- Money Morning Market Analysis:
Landslide Election Victory in Japan Will Lead to an Avalanche of Future Profits For Global Investors.
- Money Morning:
Germany: Emerging Market Profit Potential, With (Only) Developed Market Risk.
John Maynard Keynes.
- U.S. Federal Reserve:
Federal Funds Rate.
Consumer Price Index.
Balance of Payments Deficit.
- Dallas Morning News:
- Money Morning News Analysis:
With Reappointment in the Bag, Fed Chairman Ben Bernanke Turns to Face Troublesome New Challenges.
- Money Morning Special Investment Report:
The “Golden Staircase” Points to Record Prices for Gold.
- Money Morning Special Report:
Why Dividends and Gold Are the Keys to Permanent Wealth.