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Friday, April 19, 2013

Jim Rickards: At No Time Were Savers Rewarded For Prudence



Jim Rickards is probably one of the most knowledgeable and layman-friendly investors popular in media circles today.

His statement indicated in the title is from his 2012 Senate testimony to the Subcommittee on Economic Policy:

The principal victims of the Fed’s policies are those at or near retirement who face a Hobson’s Choice of gambling in the stock market or getting nothing at all. A summary of these deleterious effects on retirement income security, explained in more detail below, includes the following:

  • Increasing income inequality. Zero rate policy represents a wealth transfer from prudent retirees and savers to banks and leveraged investors. It penalizes everyday Americans and rewards bankers, hedge funds and high-net worth investors.
  • Lost purchasing power. Zero rate policy deprives retirees and those nearing retirement of income and depletes their net worth through inflation. This lost purchasing power exceeds $400 billion per year and cumulatively exceeds $1 trillion since 2007.
  • Sending the wrong signal. Zero rate policy is designed to inject inflation into the U.S. economy. However, it signals the opposite – Fed fear of deflation. Americans understand this signal and hoard savings even at painfully low rates.
  • A hidden tax. The Fed’s zero rate policy is designed to keep nominal interest rates below inflation, a condition called “negative real rates”. This is intended to cause lending and spending as the real cost of borrowing is negative. For savers the opposite is true. When real returns are negative the value of savings erodes – a non-legislated tax on savers.
  • Creating new bubbles. The Fed’s policy says to savers, in effect, “if you want a positive return invest in stocks.” This gun to the head of savers ignores the relative riskiness of stocks versus bank accounts. Stocks are volatile, subject to crashes, and not right for many retirees. To the extent many are forced to invest in stocks, a new stock bubble is being created which will eventually burst leaving many retirees not just short on income but possibly destitute.
  • Eroding trust and credibility. Economics has been infused in recent decades with the findings of behavioralists and social scientists. While this social science research is valid, the uses to which it is put are often manipulative and intended to affect behavior in ways deemed suitable by Fed policy makers. This approach ignores feedback loops. As retirees realize the extent of market manipulation by the Fed they lose trust in government more generally.

The effects on retirees and retirement income security are both the intended and unintended results of the Fed’s efforts to revive the economy through a replay of the debt-fueled borrowing and consumption binges of the past fifteen years. Beginning with Fed rate cuts in 1998, which fueled the tech stock boom-and-bust, through the rate cuts of 2001, which fueled the housing bubble, until today the Fed has resorted to repetitive bouts of cheap money for extended periods. This monetary ease has found its way into inflated asset values that in turn provided collateral for debt-driven consumption. These binges drove the economy until the inevitable asset bubble collapses caused a contraction in consumption and launched another cycle. At no time were savers rewarded for prudence.
On a related note, here is an excellent interview of Rickard's discussing his bestselling book Currency Wars, the U.S. economy, and international markets:



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