Here’s Who You Should Really Blame For Low Interest Rates

Here’s Who You Should Really Blame For Low Interest Rates:

The Congress

Yes, The Congress. Why not Bernanke and the $FED? Isn’t the $FED keeping interest rates low? The technical answer is yes, but if you dig deeper, you see it’s not really their fault. Bernanke’s job is to keep unemployment low and inflation stable. This is not something the FED manufcatured by itself. The Congress specifically requires this.

“The Congress established two key objectives for monetary policy–maximum employment and stable prices–in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve’s dual mandate. “

So as you can see, it is not Bernanke’s job to provide interest income to Americans. The Fed Doesnt “Owe You a Living“. In fact, the FED policy is probably helping you, you just dont know/feel it. And as Joe Wiesenthal of Business Insider writes: It’s a lousy environment, so “stop whining about those lousy rates.”

Now don’t get me wrong. I feel for savers. My Mom’s a major savor who only has a small percent of her net worth in non-fixed assets (meaning she’s getting a lousy return). It’s frustrating knowing that inflation is slowly eating away at your savings. But there is two things that most savers don’t realize.

  1. Your standard of living is going up. You might not feel it, but it is. Rick Santelli of CNBC was complaining the other day on how food prices have gone up. Not only has he been wrong on inflation over the past 3-4 years, but he is missing the bigger picture. Our standard of living has been increasing, and has not collapsed. Just check this graphic on food prices over the past 75+ years. Yes, food nominaly has been going up. But you need to have some perspective. Back in 1950, you would be paying more than 20% of your Disposable Personal Income on Food! Today you are paying around 9% (chart stops at 2008, which commodity prices were at their peak). This is progress people! Production increases our standard of living and quality of life. And its not only food, its everything, (read this for more “The End of America, Not Quite“). And if you think you can have both no inflation and a growing economy, think again. Inflation and growth are interconnected naturally (don’t want to delve too deep into this topic on this post). And Yes, I realize wages have slowed over the past decade compared to inflation, but I believe this is partially due to the fact of rising oil prices, which I believe we will find an alternative to sooner or later.
        2.  So why blame congress? Simple. They have not taken the correct steps in getting us out of this balance sheet recession. They try, but since they do not understand the basic monetary system, they do not pass the required bills needed to quicken and strengthen the recovery.
We need some strong fiscal stimulus in order to get us out of the worst economic downturn since the Great depression. Traditional Monetary policies won’t work (like lowering rates). Fiscal policy is the only way out. Personally, I like a mix of Tax Cuts and Stimulus Spending (via local, targeted infrastructure–more on that in the future). Both policies will get money into the private sector (who is hurting and needs it). As Japan has shown, cutting any deficits (too early) during a balance-sheet recession will hurt the private sector and lengthen & weaken the recovery.
It’s no coincidence a recession has followed almost all decreases in the private sector surplus.
And if you are worried about the debt because we have to pay it off, don’t be. Debt matters, but not in the context most understand (Click here to see what high debt really means). Budget Deficits are not unsustainable. And the dollar is not going to collapse (Debunked!). If the valueless dollar was going to collapse from “printing”, it would have done so already. I mean, have you seen the Money supply lately? Its up 228% since 2005!
Do you really think those ‘dollars’ are in the system? They are not.  The dollar in the same time is down only a whopping ~2% (we wer’e positive a few weeks ago!). Oh yeah, I forgot, hyperinflation is right around the corner right? Right… (Don’t get me wrong, hyperinflation is possible, but again, not in the traditional way people think).

So Whats My Point?

I know I’ve ranted a bit here but my point is that Bernanke & The FED is not responsible for the low rates. The congress is. If demand actually returned to the economy and pushed us out the the balance-sheet recession, Bernanke would be forced to raise rates (and Sell Bonds) as inflation went up. And don’t listen to his mumbo-jumbo about keeping rates low until 2014 (The FED is trying to trick the markets). The second he sees demand-driven inflation & growth, rates are going up faster thank you can blink. That would be great as not only would savers finally get some yield, but also their standard of living would start to increase too (double whammy! Right?). But if congress does not act soon (The president can only do so much), this recovery will only be mediocre as consumers continue the deleveraging process. Tell Congress not to prolong this Balance-Sheet Recession.

 

Here are two charts showing the interconnectedness between Inflation, Growth, And Rates.

10 Year vs CPI less Food/Energy

(I’m not cutting out Food/energy because I dont eat or drive, but because they are volatile and the bond market responds way better to CPI Less food/Energy).

 

 

CPI vs GDP Growth (YoY change)

 

 

(Note: Sorry for the massive linkage to other posts, I just did not want to write an essay here.)

 

Tags: $MACRO, $FED

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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