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Bernanke Says Interest Rates Are Low Because Industrial Economies Can’t Pay

2:22 pm in Economy by masaccio

We let you vote, leave us alone.


Fed Chair Ben Bernanke gave a speech recently in which he explained why long-term interest rates are so low. He started by saying that certainly central banks play a role in determining long-term rates, which seems right because the Fed is buying up long term securities Treasuries and mortgage backed securities issued by Fannie, Freddie and Ginnie Mae at a current rate of about $85 billion a month, for a total of about $2.8 trillion. First, he explains basic economic theory on setting rates, then moves to a recap.

Long-term interest rates are the sum of expected inflation, expected real short-term interest rates, and a term premium. Expected inflation has been low and stable, reflecting central bank mandates and credibility as well as considerable resource slack in the major industrial economies. Real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies (and possibly some downgrading of longer-term growth prospects as well). This weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks. Put another way, at the present time the major industrial economies apparently cannot sustain significantly higher real rates of return; in that respect, central banks–so long as they are meeting their price stability mandates–have little choice but to take actions that keep nominal long-term rates relatively low, as suggested by the similarity in the levels of the rates shown in chart 1. Finally, term premiums are low or negative, reflecting a host of factors, including central bank actions in support of economic recovery.

So that’s the reason savers are getting screwed: our fabulous economic system can’t pay decent interest, just like it can’t pay decent wages. The giant corporations that dominate our system, that are sitting on trillions of dollars, that don’t pay taxes, that hide money overseas, that cheat us at every step, that cut the pay of the average worker, that own the media and control public discourse, the poor babies just can’t afford to pay a decent interest rate to the dummies who scrimped and saved for a lifetime so they would be able to retire comfortably.

And there is nothing that the Fed, or any central bank, can do to help. They just sat there and watched the financial sector destroy the real economy. Housing Bubble? No such thing. Stock market froth? No, the market allocates capital wisely and generously. In the wake of the financial crisis, Bernanke has a simple suggestion: Screw you if you don’t want to put your money into the Wall Street casino; no returns for you. And @FixTheDebt adds to that: let’s cut Social Security, Medicare and Medicaid.

Now it’s only fair to point out that this means that those rancid corporations don’t get much in the way of a real return on their Treasuries. In fact, after inflation, they may be losing money. Maybe the point of low interest is to encourage them to invest. But that’s pushing on a string: with widespread underutilization of existing capital stock, why buy more capacity? And with the ability to screw workers, why pay more? It isn’t like the shareholders need the money; most of the stock is owned by the rich. It’s no different from blind support of banks in the hope they will increase lending.

Savers are toast in this brutal version of capitalism, but savers, like the unemployed, the foreclosed upon, people with underwater homes, government employees, corporate workers and just about everyone, except the feral rich, aren’t ever going to be helped by the captured Obama Administration, the vicious Republicans or the spineless Democrats. We’re all on our own. Read the rest of this entry →

A Vicious Assault on Retirees

2:46 pm in Failed government by masaccio

There is no other way to describe the machinations in DC today. The median Social Security benefit is $1229. The median net worth of retirees is about $160K, including home equity according to the 2010 Survey of Consumer Finances.

Chart from 2012 Annual Report of the Pension Benefit Guaranty Corporation

Any cut to the Social Security benefit is going to damage these average people seriously, and it’s worse for the people below the medians. But that isn’t the whole picture. The original idea behind Social Security was that it would be just of part of retirement, along with employer pensions and personal savings. As the graphic shows, the pension plan has gone the way of the Dodo.

Now think for a moment about the people above that median. These are the people who saved money to fund their retirement, and have some assets. They get no interest income, thanks the to the Fed and its zero interest rate policy (ZIRP). There has been precious little income from savings for the last few years, and the Fed promises that there won’t be any in the foreseeable future. That means that people are being forced to eat up their savings, or to put it with the wolves of Wall Street.

We aren’t talking about pocket change, either. For people in the 75-90 percentile range, the mean net worth in 2010 was $525K, down from $616K in 2007. The mean value of financial assets held by this group was $233K, down from $254K in 2007. That isn’t all that much money to last 20 or thirty years. ZIRP means that savers get screwed. Bloomberg reports that ZIRP is helping the rich and screwing everyone else, quoting Joseph Stiglitz: “Monetary policy has been indirectly, surreptitiously helping the top and hurting the bottom.” It describes a semi-retired college librarian:

…when he first started an annuity in 2005, his interest rate was 5.25 percent. Now it’s 2 percent, he said. That means that instead of getting a monthly payout of $700, he gets $413.

In the face of the horrible damage inflicted on all segments of the population by the richest Americans, aided by an ideologically insane party and a spineless party, President Obama and the rest of the Washington Elite insist on slapping retirees with Social Security cuts via the Chained CPI, and cuts to Medicare and Medicaid, to go with the demand that they eat up their savings or reduce their standard of living.

There is no excuse for this vicious assault on the retirement plans of millions of Americans. And there is no other way to describe it. It is a horrible and mean-spirited attack on every American except a few hyper-rich people.