Monday, August 27, 2012

ZIRPing productivity

For those who can still obtain credit, today's almost nonexistent interest rates seem like unprecedented opportunity.  Finance a mortage for under 4%?  That's a long cry from the double-digit rates of the 1970s and early 1980s!

But there's a less examined dark side to all this easy monetary policy.  Not only does it encourage the expansion of debt (which, to be perfectly honest, is the whole point of the shell game).  More damning, this environment penalizes most those who have been prudent: the ones who saved money and set it aside to invest for their future.
The Federal Reserve's near zero interest-rate policy, aimed at stimulating the economy, has created bargains for borrowers refinancing a mortgage or buying a car. But the low rates are penalizing "savers" such as seniors and others on fixed incomes, forcing millions of middle-class Americans to reconsider how they will live when they retire, if they can retire at all.
"We're not really seeing the positive benefit of low rates, but we're seeing a huge negative hit," said Tim Gillaspy, who recently retired as Minnesota's demographer. "And that needs to be discussed as a national policy issue."  ...

As traditional pensions fade away, people approaching retirement typically shift their money into safer fixed-income investments, such as bonds, to generate income to carry them through their golden years. That leaves them more vulnerable when interest rates are low.
Combined with a volatile stock market, the rock bottom rates make you feel like "there's nowhere to go" with your savings, said Nancy Nonini, whose Apple Valley company Retirement Education PLUS counsels companies on aging issues.
The Fed essentially has the economic power of life and death over America, picking the winners and losers based on its policies rather than the workings of the market.  When enough Americans realize you can't "play by the rules" when said rules are subject to change by unelected financial moguls, perhaps the days of the Fed will finally be numbered...

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