Me to Federal Reserve: "Higher interest rates, please"

The U.S. Federal Reserve is supposed to be an independent guardian of our banking system, immune from pleas to do this or that from either politicans or regular citizens.

But since Sarah Palin felt free to critique the Fed's recent monetary policy actions (though many, including me, were surprised she even knew what the Fed did), I figured I might as well throw in my own request:

Higher interest rates, please. Higher inflation also, if that goes along with higher interest.

I'll confess to being minimally economically literate. But I know how to balance my checkbook (except when I can't). Last month I dutifully added 26 cents of interest after seeing that West Coast Bank had credited this to our account, which averaged a balance of $3,000 or so.

Wow. In a year I'll almost be able to buy a single large non-fat vanilla latte, my favorite coffeehouse drink.

Recently, though, I've been saving money (and calories) by ordering a grande Pike Place, brewed coffee, at Starbucks. It costs $1.80 and I throw a quarter into the tip jar. Which is almost exactly what we earn each month from our interest-bearing checking account.

In my whole 62 years I can't recall a time when what you earned on savings accounts was throwaway money. As a child I was taught a lesson by my mother that was echoed by financial advice from experts: keep a good share of your assets in savings.

But now people who have been cautious with their money are being screwed by current interest rates. The Fed gives money to banks at essentially zero interest. That also is just about what seniors and other folks who used to rely on income from savings are getting: zero.

Our Schwab money market fund has a yield of .01%. That isn't 1% -- it's one-hundredth of a percent.

I don't want us to go back to the days of super-high inflation, but come on... how are retired people on fixed incomes who have been thrifty savers supposed to survive when interest rates are that low?

Currently the yield on 2-year Treasury notes is .51%, with 10-year bonds at 2.78%. And those yields are higher than they have been for quite a while. We own a 5-year government bond fund that's yielding 2.3% at the moment.

The Federal Reserve has said that it will buy $600 billion of Treasuries in an attempt to lower long-term interest rates and juice the economy. My reaction was "great" to juice the economy and "ugh!" to lower interest rates.

Scott Burns, a financial writer and advisor, calls what's happening "The Great American Bank Robbery." Federal Reserve actions have been a boon to banks, which get money to loan for almost free, and a disaster for seniors and others who have significant savings.

The largest bank robbery in history is in process, but no police cars have been dispatched to the scene of the crime.

That’s because no bank is being robbed. Instead, the banks are robbing their depositors. While all depositors are victims, some people are suffering greater losses than others. I call them “the Solvent Seniors.”

You are a Solvent Senior if you are old enough to be collecting Social Security, and your income on your savings is (or was) greater than your Social Security benefits. We’re talking about millions of people. According to the “Basic Facts of Social Security” 48 percent of married couples and 28 percent of single people have more income from savings and other sources than from Social Security. We’re not talking about rich people here, just people who saved to maintain their independence and dignity in their old age.

Television economist Lawrence Kudlow raves on CNBC about the opportunities in bank stocks and how much money banks can make with virtually no cost for deposits. What Mr. Kudlow and the other talking heads don’t mention is that the same conditions are a disaster for Solvent Seniors.

Worse, this can become a long-term disaster. As I pointed out in an earlier column, if you’re retired and get half your retirement income from interest on your savings, current interest rates translate into a whopping 23 percent drop in income from 2006, just a few years ago. What neither political party nor the Federal Reserve will admit is that every dime our banking system is making through low deposit costs is coming out of the pockets of savers. Some would call this theft, even though it isn’t being done with a gun. Others may say it’s a tax that doesn’t have to be called a tax. You decide.

OK, I will. It's a tax. It's robbery.

It's tilting economic policies in the favor of Wall Street vs. Main Street. I can see this happening every time I see that we've gotten a whole additional 25 cents in monthly interest on our savings of quite a few thousand dollars.

Let's get interest rates up, Federal Reserve -- at least beyond what I put into a Starbucks tip jar when I buy a cup of coffee.

Comments

[tucson]

The US debt is continuing to accelerate to unimaginable heights, way ahead of GDP so that it is effectively unserviceable already. Any significant increase in interest rates would make it blatantly obvious that it is unserviceable and lead to default - this is why interest rates have been held at such an artificially low level for so long, but this itself is creating massive problems.

For a start it is undermining the dollar which is threatened with collapse, and extremely low rates and inflation of the money supply are encouraging a boom in commodities and other assets.

Another big danger is that the US can no longer count on dimwitted foreigners to keep buying Treasuries to keep the party going. Foreigners are slowly wising up and refusing to fall for it, which means that in order to meet its funding requirements the US Fed and government are having to buy their own garbage.

Hence, what Blogger Brian noted: "The Federal Reserve has said that it will buy $600 billion of Treasuries in an attempt to lower long-term interest rates and juice the economy".

This is of course hugely inflationary. So, what we have is a bizarre situation where an attempt is being made to beat back massive deflationary forces by means of further money and credit creation. This continues to ramp up the national debt to astronomic levels requiring a continuance of near zero interest rates to avoid default.

The near (and effectively) zero interest rates and continued expansion of the money supply threaten to destroy the dollar, but if rates are raised significantly default will rapidly ensue. This is a classic Catch 22 situation and it is quite clear that the United States is on its way to becoming a third world country.

If default occurs and the banks in the US close their doors things could get ugly really fast, with the prospect of millions of people with guns going on the rampage looking for food and essentials - and someone to blame. Martial Law and a curfew with a “shoot to kill” policy would have to be declared.

There is however one escape route that might enable the US to avoid the indignity of ending up like Zimbabwe, and that is for it to “surrender” to its creditors and submit to being economically carved up by them. In effect sovereignty would be lost, but face-saving measures might be permitted such as allowing the inhabitants to continue to celebrate Independence Day, and to fantasize that the Constitution of the US still applies and to plaster flags everywhere, provided that the "Made in China" reference in the corner of the flag is clear to see.

On the plus side the paranoid nonsense at airports will probably be curbed and meals may even be reintroduced on flights, with curries and egg foo yung as an option. The creditors will call the shots and the US military machine will be neutered, so that there will be no more military adventures on the other side of the planet to secure geopolitical objectives. US military bases will all be closed down or maybe refurbished as schools.

Israel could find itself with a sudden severe funding crisis. Major US corporations will effectively be run by foreigners who will restructure them as they see fit - which could be good news for US health as workers start their day with Tai Chi (Blogger Brian would have a jump start on this).

Large tracts of Real Estate and other assets will be taken over in lieu of debt repayment. The Hamptons may be largely peopled by Asian entrepreneurs. There will be work for Americans in their own country, however, with plenty of vacancies bagging groceries and stacking shelves in supermarkets at decidedly modest rates of pay and plenty of other service opportunities for their new masters such as gardening and window cleaning. “Green cards” may even be permitted for the lucky few - not to enter the country but to leave.

Since those in control of the US have demonstrated their unwillingness to allow recessionary forces to do their necessary work of correcting the extreme imbalances within the economy, there are only three options left: default, deflationary implosion and ruin, or a comprehensive takeover of the country by its creditors, both of which options probably occurring after a period of runaway inflation as the Fed and government desperately try to stop the inevitable.

Until that happens it will be case of inflate and inflate, to forestall rising rates and liquidity problems, which will make gold and silver probably the best investments around (have you seen gold and silver prices lately? You ain't seen nothin' yet)

You sure don’t want to be around once the music stops. It is therefore to be hoped for the common good that the US authorities make the right decision and surrender to the mercy of their creditors before it’s too late. Either way America, as we have known it, is finished. "Change you can believe in."

George Soros' dream fullfilled. He's 80 years old though. Maybe America can hang on just a bit longer so the 'new world order' scumbag won't live to have the satisfaction of seeing it.

Unfortunately, 2012 looks like when the caca hits the fan. That's pretty soon. Better get ready with gold, beans and bullets on hand.

You can't eat gold, but it has always been real money and when the new economic system is created and the dust clears, you may have something of value to trade for what you need. Your dollar bills?...toilet paper or kindling for the fire in your survival camp.

[Randy]

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