One of the major victims of the Federal Reserve's low-interest rate policies are those Americans who rely on savings. Last October, John Mauldin explained how the Fed has adversely impacted savers:
Here’s the federal funds rate from 2007 to 2016. The shaded area is what we now call the Great Recession.
The Federal Open Market Committee entered 2007 with the rate target at 5.25%. They started lowering it in August of that year—months before the economy went into recession. Why was that? Recession or not, many folks weren’t doing well. Even then, there was talk of banks having difficulty… though the worst was yet to come.
Look how fast rates fell. In July 2007, savers could buy Treasury bills, certificates of deposit, or other principal-protected savings instruments and enjoy a 5% or better risk-free yield. Longer-term fixed-income products offered even higher yields.A year and a half later, the fed funds rate was bumping the zero bound, and savers could make nothing without taking on market risk. Very few wanted to do that at the time because iconic brands were blowing up everywhere.
The Fed ignored demographics
Here is the great irony and possibly the most harmful part of the Fed's monetary policy initiative. They wanted investors to move out on the risk curve. But did they bother to look at the demographics of this country?
We have a huge bulge of Boomers—retirees and near-retirees—who do not need to be moving out on the risk curve at this time in their lives. They need Steady-Eddie returns, and they need to be reducing their risk, not increasing it.
A sober look at the current economic environment reveals overvalued, overbought, and illiquid markets everywhere. Ultra-low and negative interest rates have created an environment of risk that is looking more and more like a bubble in search of a pin.
By reducing the incomes of retirees and terrifying near-retirees, the Fed successfully reduced economic activity. Hopefully, that was not their intent, but that is what happened.
If and when the economy bursts, it will take the retirement dreams of millions of Americans with it.
Read the whole thing here.
In 2003, Campaign for Liberty Chairman Ron Paul explained how the Fed's polices hurt senior citizens who rely on income from savings:
Greenspan Punishes Savers
During testimony before the House Financial Services committee last week, Federal Reserve Chairman Alan Greenspan indicated that he is prepared to maintain low interest rates for “as long as it takes” to energize the listless economy. Unfortunately, this will only prolong the painful economic consequences of his own easy money, easy credit policies.
Throughout Greenspan’s tenure, we’ve been told that inflation is either nonexistent or very much in check. The Treasury department assures us that consumer prices, measured by the consumer price index (CPI), are under control. But inflation is much greater than the government admits. The CPI excludes housing prices, among other things. Everyone knows that housing prices have risen dramatically over the last decade in most parts of the country, with rents following closely behind. So the single biggest expense for most Americans — their mortgage or rent payment — certainly has inflated! The price of many other goods and services, including medical care and energy, also has risen substantially.
The real measure of inflation is the increase in the money supply. Chairman Greenspan, through his relentless cutting of interest rates, has made it possible for banks to flood the worldwide economy with dollars. In fact the money supply, as measured by a figure economists call M3, has nearly doubled since 1996.
This increase in the money supply ultimately causes price inflation, despite the government’s claims. When the money supply rises quickly relative to a fixed amount of goods and services, prices always go up. In other words, more dollars chasing the same number of consumables results in higher prices.
The Fed’s inflationary policies hurt older people the most. Older people generally rely on fixed incomes from pensions and Social Security, along with their savings. Inflation destroys the buying power of their fixed income and savings, while low interest rates reduce any income from savings. So while Fed policies encourage younger people to overborrow because interest rates are so low, they also punish thrifty older people who saved for retirement but find their dollars eroded by inflation.
Mr. Greenspan once again discussed his concerns about deflation during the hearing. This is ironic not only because he has caused so much inflation, but also because deflation used to be viewed as mostly a good thing. In most cases, falling prices result from better technology, increased productivity, and price competition. I doubt many older people would complain about a drop in the price of groceries, gas, or utilities!
Yet even as the Chairman warned about the supposed danger of deflation, he also discussed his view that rising natural gas prices pose a serious threat to the U.S. economy. There seems to be no coherent message coming from Mr. Greenspan: we’re warned about “irrational exuberance” even as the Fed cuts interest rates and wildly inflates the money supply; we’re told there is no inflation, yet housing prices skyrocket; we’re told that only our central bank planners have the wisdom to determine proper monetary policies, yet the Chairman himself seems to equivocate constantly and provide only the fuzziest answers to straightforward questions.
Centralized planning is as disastrous in monetary affairs as in economic affairs. Just as Russian commissars could not determine prices or production levels in the absence of a free market, the Federal Reserve Board cannot determine the “proper” level for interest rates or the money supply. Our fiat currency and artificially low interest rates can only result in the deterioration of the U.S. dollar through inflation, which in the end will cause interest rates to rise no matter what the Fed says or does. Older Americans especially stand to suffer most from Mr. Greenspan’s easy money policies.
Campaign for Liberty is working to let the American people know the truth about America's monetary policy by passing the Audit the Fed bill. If you have not yet done so, please call your Representatives and Senators and ask them to cosponsor the Audit the Fed bill.
Tags: Ron Paul, Audit the Fed