Chart of the Day: Permanent Zero and Personal Interest Income
If you are an American retiree or near-retiree, you’re not happy these days. Five years ago, you were getting a decent return on your fixed income investments. But since then, the Fed has trashed the fixed income market by reducing interest rates to zero percent for "an extended period". The thinking is that this will get people to take on more credit. But the reality is that a lot of people are stuffed to the gills with existing credit and are not creditworthy. The Fed is pushing on a string.
Meanwhile, it is sucking money out of the economy. Ross Perot would tell you that giant sucking sound is the fed reaching into your pocket and giving your interest income to the Treasury by buying up government debt and keeping interest rates at zero. Hat tip to Stephanie Kelton for the chart
Prediction: The next recession will see significant deleveraging and financial distress. The Fed will then move to purchasing municipal bonds, stocks and real assets for fear of a deflationary spiral.
P.S. – If you’re close to retirement, you are going to have to postpone that retirement for "an extended period".
Source: St. Louis Fed
About Edward Harrison
- Chart of the Day: Personal Income and Outlays 2 Feb 2010
- How Quantitative Easing and Permanent Zero are Toxic To Bank Net Interest Margins 3 Nov 2010
- Do the personal income data demonstrate unbalanced reflation? 4 Aug 2009
- US personal income data for September shows pullback 30 Oct 2009
- January personal income data best macro news in a while 28 Feb 2011
The unspoken bank bailout……
P.S. – If you’re close to retirement, you are going to have to postpone that retirement for “an extended period”.
Bernanke has already made it clear that you can forget about retiring till 2014 at the earliest. Treasury bonds are used to pay for long term pension entitlements. With rates so low pensions are being vapourised by Fed policy. So you can forget about retiring.
So we have students starting out their working life with large debts and no job to go to, while at the other end we have older people who can’t stop working because their pension plans have been trashed. What a mess.
It leaves me wondering whether at some point this is going to become politically untenable or are we just in for several years of grinding repression.
If it’s the former, I hope these guys http://www.positivemoney.org.uk/ get a shout. I suspect it’s the latter..
I suspect that we will be trying to fix the current system right up until we have a revolution. Yes there is too much debt but the banks will lobby intensely to maintain that power, and only once the system has done an Ireland to us and bankrupted the nation and transferred all the wealth to the bankers will anything be done about it. So twenty years of financial repression are coming.
Your almost certainly correct, I just occasionally have periods of being optimist :)
Sometimes I feel that I am too pessimistic, but if I am wrong things will definitely be better than I expected. If I am right then I will be prepared for the worst. I do think that the optimism in the stock markets is waning. That does not bode well for the markets. It sucks out wealth from the optimistic to the realists, in suckers rallies.
The last thing I want is revolutions or civil wars. That route is unpredictable and dangerous. We need to do everything to avoid that.
One of the things I like about the positive money proposal is they’ve thought out an orderly transition to a more stable system. It’s not perfect but I’d encourage you to take a look.
Ezra’s first law of economic blogs: don’t bother if the headline chart is no good
No indication if it is current or inflation adjusted dollars
No indication if adjusted for population growth (per capita)
Ezra’s second law of economic blogs: if they are to lazy to reformat the FRED chart into a clean web readable version, don’t bother to read the story
Oh no, not more wailing for poor retirees. I had a very different take on the same topic here:
http://ow.ly/8HmRr The gist: Interest income goes overwhelmingly to people who don’t need or spend it. Wage income is a much bigger piece of the pie and does get spent, though.
Interesting piece, but if wage income is the goal are they going to achieve it? So far haven’t they just propped up stocks (I think as pie portions go that’s mainly the top 1-5 percent) and spiked commodity prices. This to me seems detrimental to wages in that it can lead to margin compression, reduced profits and ultimately job losses.
Dave,
I am not sure why the Fed refuses to see their effect on commodity prices (spike higher) and hit the very people whom they purport to help.
And low rates are just moving the interest income from the private sector to the public sector.
And then Bernanke wonders why the private sector is not consuming more.
Hello Joe, I tend to agree. I particularly have in mind a piece Karl Denninger did (it’s old now but it was relevent when QE2 was happening) http://www.youtube.com/watch?v=IsMyWjtLtkI. Obviously, correlation is not causation but I found it pretty convincing at the time.
Interesting link http://www.bankofengland.co.uk/education/inflation/qe/video.htm therein to an BOE video on QE – the ending is pretty funny given recent inflation history..
The low interest rates are what is making it possible for our government to continue deficit spending without the interest burden swamping the system. Deficit spending is getting channeled directly into consumption.
Yes there is some net offset as retiree income is less. However the vast majority of savings reside among the truly wealthy, and a few hundered bp of lower interest income is not going to impact their consumption.Again, this is just a tax on wealth, of a different flavor than inflation. It’s a symptom of a sick economy, where the underlying disease is wage suppression.
Yes but the problem is excessive debt levels. The fact that excessive private debt will take decades for households to reduce to sustainable levels. Wage suppression will simply extend this problem.