QE, or as it is more commonly known, MONEY PRINTING, is a financial tar baby that the Fed is going to have a terrible time putting down. Once this baby is picked up, it sticks to everything that it touches. This is why so many pundits, including Charles, recommended against this course of action in the first place. The Fed really has painted themselves into a corner on this one and is probably already ruing the day they started down this path to the financial Dark Side.
On a slightly different slant, I comment here today to take issue with the Fed’s basic premise that cutting rates to near zero is either necessary or desirable. Yes, reducing interest rates tends to spur economic activity but the effect is not linear. For example: cutting rates from 6% to 5% has an immediate and beneficial effect upon the US economy. So does reducing rates from 5% to 4%, although not as much. As the interest rate falls, it has less and less effect upon business decisions because the value of the change is diminishing rapidly. Once interest rates fall to around 3% or a bit less, the effect is virtually nil because the cost of borrowing money at the new and lower rate is insufficient reason to borrow the money, all other factors being equal. But did the Fed ever stop to consider this? They do not seem to have done that. Instead, they merrily kept cutting rates as if it was a straight-line panacea that would cure all economic and financial ills. It isn’t and it hasn’t.
On the flip side of all this support for borrowing and spending, often foolishly and only because they can, we have those who save and invest their savings in various asset classes. What happens to them as rates fall? This seems yet another question that has not overly troubled the Fed. Well, what happens is that a great many people who used to be rewarded with a decent interest payment but who no longer are, are either not bothering to save or are having to consume their savings to meet their cost of living. This is particularly hard on the elderly, many of whom survive on a combination of Social Security and regular interest earned on their CDs. When CDs routinely paid a decent 3-4%, this worked well for them. They got enough interest income to supplement their SS income and meet their living expenses. When rates dropped below about 2%, however, this situation changed dramatically. Under this scenario, the interest they earn is frequently now around 1%, if not less, and is not adequate to meet their needs. The only 2 choices they have are 1) continue to live at their current standard by consuming their principal, all the while hoping that their money lasts as long as they do; or 2) cutting back on their standard of living. Cutting back can be a viable option unless they are already living at a subsistence level. If so, then they may have to make some very hard choices, such as between food and heat or between either of these and medicine. This is not a choice that people who have worked for decades, paid their bills and taxes, and followed the rules should have to make because some bureaucrats in the Gov or at the Fed have decided to run a historic experiment on near zero interest rates, just to see what happens.
Given the news of the past 4-5 years, it is clear that ALL of the benefits for US citizens that could be wrung from very low interest rates have already been obtained. It is now time to reverse this course and get interest rates back up into the 3-4% range. This is not high enough to stifle business, as we have had MANY years of strong economic performance with rates at these levels, but it is high enough to reward the savers who create the real bedrock of our economy. Continuing to abuse them with super low rates is not beneficial but it is harmful and it needs to stop. Now.
The transfer of wealth from savers to speculators (BANKSTERS), the Fed paying them .25% on excess reserves, the Primary Dealer Cartel liquidity scheme, etc, is nothing short of a Crime vs Humanity and has been well-documented by Charles Hugh Smith and other blogs, as has the hundred of billions annually lost in interest, which a good part is spent by those who played by the rules. I’m sure Charles can tell us how much is lost in spending in one year at say, 4% lost interest, how much Charles?
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