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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 is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

17 Comments

  1. The unspoken bank bailout……

  2. Anonymous says:

    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. 

  3. Dave Holden says:

    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..

    • Anonymous says:

      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. 

      • Dave Holden says:

        Your almost certainly correct, I just occasionally have periods of being optimist :)

        • Anonymous says:

          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. 

          • Dave Holden says:

            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.

  4. fresnodanathome says:

    Interesting article from BR (Barry Ritzholtz)
    http://www.bls.gov/data/inflation_calculator.htm 
    Whoa – wrong link.  I had that because I have a friend who becomes optimistic every time the stock market gos up – he must be the one person in the world that Bernanke positively affects.  I had to show him the market price in 2000 (about 11723), the current market price (about 12,422) and what the stock price would be, NO PROFIT, just keeping up with inflation (about 15,313) – so much for using the stock market to make people think they are wealthy…well, if they don’t consider inflation, maybe it will work.  Of course, my friend tells me his wife keeps b*tching about food prices and he complains to me about gas prices.  I just tell him his increasing stock valuations will bail him out.   

    Anyway, the real link:
    http://www.ritholtz.com/blog/2012/01/living-in-a-qe-world/
    Take away:
    Central Banks Equal To One-Third Of World Equity Values

    I remember a Merle Haggard song back in the late 70’s or so – “Rainbow stew”
    http://www.youtube.com/watch?v=Ez24yjqRGLs

    I’m thinking we’ll all be rich if only the central banks would raise their stakes in the world stock markets to 66%…..yup, that’s the number for prosperity….

  5. Ezra Abrams says:

    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

  6. Anonymous says:

    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.

    • Dave Holden says:

      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.

      • Joesmith25 says:

        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.

  7. Dave Holden says:

    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..

  8. Deschain says:

    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.

    • Anonymous says:

      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.