Posted by: SWL | October 1, 2012

Fed’s QE3 Plan Helps Corporate Stocks, Hurts Savings Accounts & Fixed-Income Investments

If blogging could be my full-time job, I might keep up with all the news. I did not get to finish commenting on all the speakers at the political conventions because of the outbreak of protests in the Middle East on 9-11. Some of those topics will have to be ignored, but I would like to comment on the actions taken by the Federal Reserve board a few days after the attack on the Benghazi consulate.

The Fed directors are supposed to have some of the best economic minds in the US. But their decision to buy up to $40 TRILLION worth of mortgage-backed securities each MONTH until the economy improves makes them look insane. Most of you have heard the saying, “The definition of insanity is doing the same thing over and over, expecting different results.” Since 2008 the Fed has printed and spent $1.8 trillion in Quantitative Easing 1 and Quantitative Easing 2 with little long-term improvement in the US economy. During that time the unemployment rate has remained 8% or more and the median household income has fallen each year. If $1.8 trillion in new money could not change those statistics, $480 billion a year with no end date is not likely to improve the economy either.

I do not see how a QE3 will help. The Fed prints new money (making each dollar you have worth less) and buys US Treasury bonds (in QE1 and QE2) or (in QE3) mortgage-backed securities. Extra available money in the economy is supposed to force interest rates lower. That, in theory, should increase home sales. It is also designed to “encourage” people to move their money out of investments that pay interest and into the stock market, where the returns might be higher. More investment in stocks makes stock prices rise. Corporations should then hire more employees and investors should feel richer, hopefully spending more.

But many analysts say home sales are unlikely to increase since mortgage rates are so low already. Credit is also tight and it is more difficult for buyers to qualify for loans. QE1 and QE2 brought short-term growth in the stock market and little else. There was no major increase in hiring in QE1 and QE2, so why should QE3 be different? I have to wonder if the Fed directors just wants to help their Wall Street friends make money.

I also find it interesting that printing money to make stock prices rise and hoping for more hiring and spending is a “top down, trickle down” way of improving the economy. President Obama continually criticizes the “top down” approach, yet he does not denounce the recurring rounds of quantitative easing by the Fed. Is it possible that while he wants to give more assistance to the growing ranks of poor and unemployed, Mr. Obama realizes that he needs wealthier Americans to continue to make money so he can take a larger percentage of their earnings through taxes?

Federal Reserve head Ben Bernanke also announced the Fed would keep interest at the current low rates until at least mid-2015, even if the economy begins to improve. (I need to do more research to find out how/why a non-governmental group like the Fed has the ability/authority to decide interest rates.)

In general, low interest rates are a disaster for the average American. Rising stock prices will increase the value of 401Ks and other retirement funds invested in stocks. But those gains should be short-lived if QE3 follows the pattern of previous rounds of easing. And for older Americans who have more of their money in fixed income vehicles such as bonds, this is critical, as interest rates on bonds remain very low. For those of us with smaller amounts to save, savings account interest rates are almost zero. My family’s savings was growing nicely each month until late 2008, when interest dropped 1.5% in just a few months. Since then, our balance has barely inched upward. (While my family has not suffered too much from the recession, I can say with certainty that we are not better off than four years ago. This is the first time in my life that I haven’t been able to count on an improvement in my financial bottom line.)

I do not totally understand the relationship between continued low interest rates and inflation, but experts say the Fed’s decision to keep interest low could lead to inflation. And I do understand the basics of inflation. The government wants us to think inflation is very low; the number was 0.1% for August. But the most commonly cited statistic is calculated without food and energy! That is ridiculous since those are the items that take the biggest chunk of our paychecks after rent or mortgage payments. When food and energy are included, inflation is 0.6%. (Energy drove the overall rate in August, rising 5.6%.)

But you do not need to hear the numbers to know that we have some inflation. Prices in the grocery store have been creeping up noticeably for about a year. And the price of gasoline has more than doubled in the past three years. Someone seems to think that if they tell us often enough that inflation is low, we will believe them even though we can see prices rising (and wages remaining mostly stagnant). I am sorry, but just saying the words does not make it so.

The President has said he wants to implement another stimulus plan if he is re-elected – more government debt and/or higher taxes. Even if Mitt Romney wins in November, I do not see how the US can avoid some fiscal pain. Unemployment will remain high for a minimum of several months. Actions by the Federal Reserve hurt small investors far more than large investors. Many new taxes in the Affordable Care Act (“Obamacare”) take affect in 2013. Congress must still deal with cutting the budget or trying to ease the pain of the sequester. Can the two parties and the two chambers possibly agree on any plan – good or bad – for the expiring “Bush tax cuts” before December 31? And do not forget that the nation will hit the debt ceiling (borrowing limit) again early next year.

So many policies, some contradictory, have already been set in motion that it will be hard to reverse them all or mitigate the effects before they do great harm. Looking at the statistics and trends, even an optimist is likely to wonder if they should pay attention to doomsday theories and stock up on essential household supplies. I predict that 2013 will be difficult; the degree of difficulty will be determined by the November election.

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