The Federal Reserve is, of course, a bank. So after it has a meeting, it issues a statement outlining the discussion – a “bank statement.” Hmm… Now that I think about it, that must be where the acronym “BS” comes from.
Notwithstanding what we read and hear, when Congress established the Federal Reserve as a central bank 100 years ago, its primary purpose was to protect the banking system. The Federal Reverse shifted risk from the private sector to the public, and through the slow devaluation of the dollar, the cost of this shift fell on the average Joe rather than on banking tycoons. Today, an entire generation is paying for this system with a good portion of their life’s savings.
I pride myself on explaining complex financial situations in everyday language. However, when it comes to the Federal Reserve, I readily admit that I am sometimes befuddled. I used to watch Alan Greenspan testify before Congress when he was Chairman of the Fed, and I often ended up asking myself, “What did he just say?” The Fed’s code and doublespeak is Greek to me, as it is to most folks.
But I do know this: The carefully crafted reports and publications are designed to send messages and move markets in the direction the Fed wants. After the minutes of a recent Fed meeting prompted the Bloomberg headline Fed Signals Possible Slowing of QE Amid Debate Over Risks, it should come as no surprise that the dollar strengthened and gold and silver tanked. The Fed’s message certainly had its desired effect!
Our colleague Vedran Vuk already decoded the message in a recent Casey Daily Dispatch, we know there may not be a reason to celebrate a return of the dollar’s strength quite yet. Basically, the Fed is going to continue on its current course despite what newspaper headlines may suggest. (In addition to helping the Money Forever portfolio make some double-digit gains, Vedran has an extraordinary gift for explaining all things technical. We’re lucky to have him as our resident message decoder.)
Let’s take a quick look at what Vedran had to say, and then consider what it means for seniors and savers.
Despite the fancy headlines and the market reaction, Vedran concluded: “There was a discussion of possible risks, but at the end of day, that’s all it was, a simple discussion. Although several members expressed concerns in the discussion, when it came down to voting on the actual policy, only a single member dissented.”
Despite the rhetoric, it’s clear that not much is going to change in the foreseeable future. Just more BS from the Fed, without much being done to reduce spending.
Vedran went on to directly quote the minutes of the Fed’s meeting:
“In 2014 and 2015, real GDP was projected to accelerate gradually, supported by an eventual lessening of fiscal policy restraint, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy.”
In his usual fashion, Vedran cuts through the BS: “Umm… wait; what ‘eventual lessening of fiscal policy restraint’? Essentially, the Fed is saying that as economic conditions improve, the American voter will stop complaining, and the government can finally get back to spending wheelbarrows of money. It’s scary to think that these additional government spending plans are already reflected in the Fed’s GDP projections…”
Now let’s get this straight: The government will continue to devalue the dollar, keep interest rates artificially low, spend at rate that would put Caligula to shame, and simply hope that U.S. citizens and the G20 nations don’t get angry about it. And in the meantime, the Russians and Chinese are taking their new high-value dollars and buying gold hand over fist. Great plan!
Let’s take another look at an excerpt on risk from the minutes:
“In general, after having been depressed for some time, investor appetite for risk had increased. A few participants commented that the Committee’s accommodative policies were intended in part to promote a more balanced approach to risk-taking, but several others expressed concern about the potential for excessive risk-taking and adverse consequences for financial stability. Some participants mentioned the potential for a sharp increase in longer-term interest rates to adversely affect financial stability and indicated their interest in further work on this topic.”
I’ll let Vedran tell us what in the heck that means:
“So what does ‘excessive risk-taking and adverse consequences for financial stability’ mean? The next sentence on long-term interest rates offers a clue. Participants warn of a ‘potential for a sharp increase in longer-term rates.’ Sure, a sharp upward turn in rates would hurt just about everything, including the stock market, but the sectors that will get hurt the most are real estate and bonds.”
Hang on a minute here. Back in 2007, we had nice, juicy 6% CD rates. My portfolio earned interest income equal to five times the amount of my Social Security check. Moreover, my money was at very little risk since CDs are FDIC insured. Today, if I were foolish enough to invest in CDs, my interest income would equal half of my Social Security check.
While I agree that a sharp increase in interest rates could be a problem, I sure wouldn’t mind seeing them go up slowly. It would be nice to have interest rates three times higher than the rate of inflation – like they used to be. Now, I know we older folks are told we have to make sacrifices, but this is ridiculous.
Didn’t this mess start with banks taking excessive risks by lending money to people who could not afford to pay it back? Isn’t that where the phrase “toxic loans” came from? I’d say the first Troubled Assets Relief Program (TARP) that bailed out these banks was an excessive risk. To top it off, the banks then called in CDs, wiping out a source of safe investment income many retirees had come to depend on.
The Fed followed that up with Quantitative Easing (QE) that flooded the banks with money at the expense of seniors and savers. Meanwhile, our taxes are going up because politicians keep babbling, “We must do something about the deficit.” Well, perhaps that’s because they used our tax dollars to bail out the banking system.
Retirees are being attacked on three fronts: higher inflation, higher taxes, and lower yields, and I’m fed up.