Tag: interest rates

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Bernanke attempts to justify screwing savers

This extract from Joe Weisenthal lauds Ben Bernanke’s defense of monetary policy and its effect on savers.

I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

He [Bernanke] then goes onto note that saving isn’t just “having money in a bank” and that the main way to benefit everyone (including savers) is to induce growth:

A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and—through pension funds and 401(k) accounts—they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

In layman’s terms, Bernanke is saying that if the Fed didn’t act, everyone, including savers, would be in deep **** (trouble) …….so savers should be happy they are being screwed.

via Bernanke: Federal Reserve & Monetary Policy – Business Insider.

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Harry S Dent: Why the Fed will fail

Harry Dent is always entertaining to listen to, but is he right about the link between demographics and inflation?

There is simply no way the Fed can win the battle it’s currently waging against deflation, because there are 76 million Baby Boomers who increasingly want to save, not spend. Old people don’t buy houses! At the top of the housing boom in recent years, we had the typical upper-­‐middle-­‐class family living in a 4,000-­‐square-­‐foot McMansion. About ten years from now, what will they do? They’ll downsize to a 2,000-­‐ square-­‐foot townhouse. What do they need all those bedrooms for? The kids are gone. They don’t visit anymore. Ten years after that, where are they? They’re in 200-­‐square-­‐foot nursing home. Ten years later, where are they? They’re in a 20-­‐square-­‐foot grave plot. That’s the future of real estate. That’s why real estate has not bounced in Japan after 21 years. That’s why it won’t bounce here in the US either. For every young couple that gets married, has babies, and buys a house, there’s an older couple moving into a nursing home or dying.

In my opinion there is a clear link between credit growth and inflation: the faster credit grows, the faster the money supply grows, and the higher the rate of inflation. Demographics are one of the factors that drive credit growth, but they are not the only factor. Interest rates are just as important: when interest rates are low we tend to save less and borrow more. And jobs, as the Fed discovered, are also important: if you haven’t got a job, you can’t borrow from the bank even when interest rates are low.

At present I would guess that jobs are the biggest constraint on credit growth. Later, interest rates will rise when employment recovers — as the Fed attempts to take some of the heat out of the economy. Only then may demographics become the major restriction on credit growth, with older households down-sizing outnumbering younger households up-sizing. But that is by no means definite: solving the jobs crisis alone could take decades!

Harry dent quoted from John Mauldin | A Decade of Volatility: Demographics, Debt, and Deflation (application/pdf Object).

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Carmen Reinhart: Financial Repression – WSJ

Carmen Reinhart marks the rise of financial repression. “Faced with a private and public domestic debt overhang of historic proportions, policy makers will be preoccupied with debt reduction, debt management, and, in general, efforts to keep debt-servicing costs manageable. In this setting, financial repression in its many guises with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences will probably find renewed favor and will likely be with us for a long time.”

via Secondary Sources: Financial Repression, Jobs and Growth, Daylight Saving Scam – Real Time Economics – WSJ.

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Westpac Economic Update: RBA leaves rates unchanged

The Board of the Reserve Bank surprised us with a decision to hold the cash rate unchanged at 4.25%. Whilst this indicates that for the time being the Bank is assessing the risks somewhat differently to ourselves we are not inclined to change our core view that a further 50bps in easing can be expected over the course of the first half of this year.

Bill Evans
Chief Economist

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European Central Bank makes surprise rate cut – World – CBC News

The European Central Bank has cut interest rates by a quarter percentage point under new head Mario Draghi to boost weakening growth in a eurozone struggling with a crisis over too much government debt. The move, which comes earlier than expected by many economists, takes the bank’s benchmark rate to 1.25 per cent.

European growth is expected to slow to near or below zero in the last three months of the year.

via European Central Bank makes surprise rate cut – World – CBC News.

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Westpac: RBA cuts the overnight cash rate by 25bps

RBA cuts the overnight cash rate by 25bps – first rate cut since April 2009

As we predicted the Reserve Bank Board decided to lower the cash rate by 25bps to 4.5%…..

Undoubtedly the most important development in the Governor’s statement is his observation that “inflation is likely to be consistent with the 2-3 per cent target in 2012 and 2013.” …… The fact that there is now confidence that inflation will remain within the target band for an extended period allows the Bank to deal with the prospects of an economy which is only showing moderate growth.

via Bill Evans, Westpac Chief Economist

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BOE’s Monetary Gamble Nears Its Endgame – WSJ.com

So where once investors worried that it [the Bank of England] had got policy plain wrong, there’s now a chance they’ll start to fear that the bank has got things all too right, after all, and that the U.K. really does need policy settings appropriate for an economic ice age……

And a government focused on austerity measures is in no position to offer fiscal support even if it wanted to, and, according to the treasury’s pronouncements, it doesn’t. It’s sticking with the deficit-cutting plan A, come what may.

So this is clearly an economy with huge problems anywhere you might care to look. Its remaining cardinal virtue, perhaps, is that it isn’t in the euro zone, so the bloc’s more pressing concerns have shielded it from harsher scrutiny. It can’t rely on that shield for all time.

via BOE’s Monetary Gamble Nears Its Endgame – WSJ.com.

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CPI now moves balance of probabilities for next rate cut from December to November – Westpac

In the August Statement on Monetary Policy the Bank [RBA], relying on two recent prints of 0.9%qtr for underlying inflation, forecast that annual core inflation would print 3.25% in both 2011 and 2012. We are now confronted with the reality that annual core inflation for the year to September 2011 has printed 2.47% with a reasonable estimate that given the slowdown in the economy the fourth quarter will print around 0.5%qtr. That will allow the Bank to lower its inflation forecast for 2011 to 2½%yr with a similar outcome likely in 2012.

Given the Governor’s recent statement that an improving inflation environment allowed scope to ease policy it now seems almost certain that Westpac’s forecast which was made on July 15 — that we could expect a rate cut by the end of 2011 — will prove to be correct.

In fact given the Bank’s previous record of moving rates every November for the last five years and given that the case for a rate cut is indisputable the balance of probabilities has now moved to a November cut from our original call of December.

via Westpac Economics – first impressions

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Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge

The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed’s monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed’s actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market’s neck.

The Fed’s quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so.

via Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge.

I agree that the Fed should not interfere with interest rates. It causes market imbalances that later lead to recessions and bubbles in stocks and housing and threaten the very survival of the banking system the Fed is trying to protect.

QE achieved the opposite of its stated objectives, raising long-term interest rates with lowering unemployment, but did not really increase the national debt by a dollar. Sales of  bonds by the Federal Treasury to the Federal Reserve is like the US government selling to itself. The Fed is just an off-balance sheet, special-purpose entity (think Enron, bank CDOs and other bad smells) created by  the government and banks in 1913 to  bypass restrictions in the Constitution on the issue of bank notes. In all but name it is a division of the US Treasury. The majority of the “independent” board of directors are political appointments. Ever seen a dissenting vote coming from one of the political appointees? Regional board members, where most dissenting votes come from, are a minority appointed by regional banks. They can dissent, but when it comes to counting the votes they’re outnumbered.

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