Tuesday, February 8, 2011

Robbing Savers To Pay Goldman, Chase and Citi et al?

Over the last several years I have watched the Federal Reserve attempt to repair and reinvigorate the economy.  However, as in almost all policy decisions, it is a zero sum game in most respects.  You hope that the overall policy benefits the country in the long term.  However, there are winners...and losers in the short term. 

The Fed's efforts to drive down interest rates over the last several years is a case in point.  The policymakers are so driven to prime the pump in an attempt to save Wall Street and the banks who made the bad loans and investments they have purposely forced savers to get almost nothing for their efforts.  Why?  Quite simply they want to make it so unattractive to save that these savers will finally give up and take a flyer on the stock market or buy a new house.  At a minimum, they would like them to go to the bank and pull the money out and spend it on something! 

Of course, the savers they are targeting are your grandparents or your parents or some other responsible soul who played by the rules their whole life.  They saved liked they should to build a nest egg for retirement or their child's college eduation.  Now the Fed policymakers come along and they want to "smoke them out of the foxhole" by fixing it so they get no interest on their savings.  If they can't get them to trade their savings for stocks or some other investment they have a second approach lined up.  INFLATION!  What do people do when they see their money being eaten up by inflation?  They quickly decide they would rather spend it on something today rather than get a lot less than something tomorrow

This chart shows the massive increase in the money supply that has been engineered by the Federal Reserve. The green line is the total supply.  The red line is the annual change.  As you can see, the total money supply has doubled since 2009.

Bill Gross of Pacific Investment Management (PIMCO) is considered by many to be the best fixed income investor (bonds) in the world.  He manages PIMCO's Total Return Fund which has more assets than any other mutual fund.  It is currently approaching almost $250 billion under management.

He has been watching the Fed very closely and he does not like what he sees. In fact, he describes what is occurring as both "devilish" and robbery.  The full commentary is here.
To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects”, is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets. It is anyone who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that don’t earn a real rate of interest. This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation. [emphasis in original text]
I am not one who has normally been a Fed critic or one who says that it needs to be disbanded as Ron Paul (R-TX) has suggested.  However, I think much more needs to be known about what they have done and what they are doing.   There are just too many unanswered questions and too much money has been "created" and spread around with little transparency.

This is evident when you view this exchange between former Rep. Alan Grayson (D-FL) and the Inspector General of the Federal Reserve.  I was certainly no fan of the ultra-liberal Grayson when he was in Congress but after listening to this exchange you have to wonder what the Inspector General of the Federal Reserve is inspecting?  This was in a Congressional hearing almost 2 years ago.  If there have been answers to these questions, I would like to know.  I still don't think we no much more than we did then.

In the meantime, keep a close eye on your money.  It is hard enough to save it.  It is even harder when you are not sure if you are being swindled while it is sitting in a savings account, money market fund or government bond. 

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