0.2% interest ?

[obgyn65]

This article may be of interest to some of you :

http://www.nytimes.com/2012/03/04/b...or-complaint-fair-game.html?_r=1&ref=business

To summarize (with some liberty) "The issue — as anyone looking for income-producing investments knows — is that the Fed drove down interest rates to almost zero to shore up big banks and an economy that those banks helped drive off a cliff. Now savers, who did nothing to create the financial crisis, are being punished.
This is one of the more troubling paradoxes of the Fed’s rescue of the financial system. And, according to Ms. Raskin, it is likely to continue for some time.
So suck it up, America: If it’s good for the financial system, it’s good for you. "

 

[Alan]

We need to raise spirits in nursing homes for those badly affected fixed income people. Like this place in Ireland.

Spirits High at Irish Nursing Home that Provides a Pub

An Irish hospital may have moved a big step forward in reducing the dread many senior citizens have about moving into a nursing home. St. Mary’s Hospital in County Monaghan provides a bar for its elderly patients and their guests. It helps attract more visitors for the residents, too.

 

[brewer12345]

For the average investor, this is like complaining about the tax code or the law of gravity. You cannot do anything about it, and complaining does nothing. Instead, what do you do to minimize the damage or take advantage of the situation?

 

[Gone4Good]

This is an example of confusing cause and effect.

What do people think would happen if the Fed started raising interest rates? Would the economy recover, or would higher short rates push the economy back down causing a flight to quality and lower long rates? Would savers really benefit from such a scenario?

As Milton Friedman once noted, the only path to higher real interest rates is via economic growth. You can't have one without the other.

 

[mickeyd]

St. Mary’s Hospital in County Monaghan provides a bar for its elderly patients and their gue

"Nurse, is it time for my 3 fingers of Jamison's yet?"

 

[Chuckanut]

We need to raise spirits in nursing homes for those badly affected fixed income people. Like this place in Ireland.

Spirits High at Irish Nursing Home that Provides a Pub

The next thing we will see is a study that shows that older people who enjoy themselves and can socialize with others, live longer and in better health. What a shock!!!!!

 

[Midpack]

This article may be of interest to some of you :

To summarize (with some liberty) "The issue — as anyone looking for income-producing investments knows — is that the Fed drove down interest rates to almost zero to shore up big banks and an economy that those banks helped drive off a cliff. Now savers, who did nothing to create the financial crisis, are being punished.
This is one of the more troubling paradoxes of the Fed’s rescue of the financial system. And, according to Ms. Raskin, it is likely to continue for some time.
So suck it up, America: If it’s good for the financial system, it’s good for you. "

Until the damage to the economy is more fully purged, the housing market stabilizes and the economy picks up some steam (sustained GDP growth), what's the alternative?
BEA : Gross Domestic Product (GDP) Graph

 

[Alan]

"Nurse, is it time for my 3 fingers of Jamison's yet?"

The next thing we will see is a study that shows that older people who enjoy themselves and can socialize with others, live longer and in better health. What a shock!!!!!

Sounds good, doesn't it.

I particularly like the fact that it is open to visitors as well, so you can wheel your Mom or Dad into the pub and sit with them there. Wonder if they have a dartboard?

As to the low interest rates, I would rather have low interest rates than high inflation. Of course, I am biased since I have non-COLA'ed pensions.

 

[Chuckanut]

I think that opening the pub to others is a key to its success. Otherwise, it is just a place where old folks go. My parents lived in a retirement communithy and while they appreciated it, they often said they missed having people of other ages around. This did not mean somebody's
screaming spoiled grand kids, it meant younger adults (you know, like about 24 -55) .

The low rates are better than another deep recession, though I question if they have to be this low. There is low and then their is ULTRA low. We have the later. And, my pension is only partially COLA'd so I do fear out of control inflation.

 

[Gone4Good]

The low rates are better than another deep recession, though I question if they have to be this low. There is low and then their is ULTRA low. We have the later. And, my pension is only partially COLA'd so I do fear out of control inflation.

Consider this, then:

Treasury Ponders Negative Interest Rates

Treasury bills have occasionally traded in the secondary market at negative yields, most recently in December. . . .. Chalk it all up to the extraordinary demand for and very high prices of United States government debt, driven by investors’ concerns about the economy, a flight to dollar-denominated assets and foreign governments’ insatiable appetite for American bonds, among other trends.

That aint the Fed. That's demand for safe assets outstripping the supply.

 

[clifp]

Consider this, then:

Treasury Ponders Negative Interest Rates



That aint the Fed. That's demand for safe assets outstripping the supply.

Perhaps. I've seen lots of article in the last couple of years by respected investor/economist, like this recent one from Bill Gross, suggesting the Fed policy including recent announcements of keeping rates low are a major factor.

In addition to the obvious income loss for seniors and the small saving class I think their unintended consequences for 0% interest rates.
Now I am not nearly smart enough to know if raising interest rates is the right solution but 0% interest rates hasn't worked for Japan and it doesn't appear to help much here.

 

[Gone4Good]

Perhaps. I've seen lots of article in the last couple of years by respected investor/economist, like this recent one from Bill Gross, suggesting the Fed policy including recent announcements of keeping rates low are a major factor.

I have many thoughts:

1) It's not clear from the linked article whether Bill Gross is blaming Fed policy or simply pointing out that a flat yield curve discourage longer-term investment.
2) But despite low rates, the yield curve isn't flat. 10-yr yields are ~200bp higher than short rates.
3) What would a policy of Fed tightening (raising short rates) do to the yield curve? It seems hard to imagine a scenario where the curve would steepen as a result: short rates go up (flatter), inflation expectations come down (flatter), economic growth expectations come down (flatter). Bill doesn't explain why this wouldn't be true. I'd love to have him explain it.
4) Bill Gross has a very good track record, but he's called the current environment pretty badly. Bill Gross apologizes for poor performance (largely because of bad calls on the impacts of monetary policy on interest rates)
5) The idea that "zero rates haven't helped much" ignores the counterfactual - What shape would the economy be in if the Fed had been less aggressive.

 

[Lsbcal]

For the average investor, this is like complaining about the tax code or the law of gravity. You cannot do anything about it, and complaining does nothing. Instead, what do you do to minimize the damage or take advantage of the situation?

Exactly!

What to do:
1) Have a portfolio plan (not just fixed income or zero risk savings accounts) that conforms to your risk tolerance and preferences.
2) The plan should take into account various rate environments including rising, falling, and flat rates at all points on the yield curve.
3) Execute the plan ... continuously
4) Maybe have a Plan B in case Plan A (steps 1-3) fail badly

 

[Koolau]

5) The idea that "zero rates haven't helped much" ignores the counterfactual - What shape would the economy be in if the Fed had been less aggressive.

I guess we'll never know since they didn't try being less aggressive first. The ironic thing is that getting a mortgage is HARDER now (even with EXCELLENT credit) than it was when rates were higher and housing prices were higher (and, therefore, theoretically, payments would have been more difficult to pay by mortgage holders.) I'm not claiming to have the answers, but it's clear to me the Fed plans to clear out the debt on the backs of folks who didn't cause the problem. Of course, anyone is welcome to another opinion. YMMV

 

[Free To Canoe]

Until the damage to the economy is more fully purged, the housing market stabilizes and the economy picks up some steam (sustained GDP growth), what's the alternative?
BEA : Gross Domestic Product (GDP) Graph

A little less damping is needed on the oscillation.

 

[justplainbll]

One positive of low interest rates is that it makes keeping money in the mattress less expensive. Unfortunately the gubmint breaks chops with mattress savers- eg limiting currency denominations to a max of $100 and breaking chops about taking more than $10k cash on person for overseas trips.

 

[brewer12345]

One positive of low interest rates is that it makes keeping money in the mattress less expensive. Unfortunately the gubmint breaks chops with mattress savers- eg limiting currency denominations to a max of $100 and breaking chops about taking more than $10k cash on person for overseas trips.

I guess it depends on how big your mattress is.

 

[Gone4Good]

it's clear to me the Fed plans to clear out the debt on the backs of folks who didn't cause the problem.

I think everyone agrees that prudent savers are suffering as a result of problems caused by other people. What I have trouble with is the idea that the Fed has better policy alternatives it could employ to restore growth and full employment. I'd love for someone to walk through the mechanics of how a different Fed policy would lead to better results. Mostly what I hear is the following:

1) Fed raises rates
2) Savers earn more money on risk free deposits
3)
4) Economic growth

 

[brewer12345]

Mostly what I hear is the following:

1) Fed raises rates
2) Savers earn more money on risk free deposits
3)
4) Economic growth

Sounds like the Southpark episode with the underpants gnomes, who followed the following steps:

Step 1: steal underpants
Step 3: profit.

 

[Gone4Good]

Sounds like the Southpark episode with the underpants gnomes, who followed the following steps:

Step 1: steal underpants
Step 3: profit.

Sounds about right.

 

[clifp]

I have many thoughts:


3) What would a policy of Fed tightening (raising short rates) do to the yield curve? It seems hard to imagine a scenario where the curve would steepen as a result: short rates go up (flatter), inflation expectations come down (flatter), economic growth expectations come down (flatter). Bill doesn't explain why this wouldn't be true. I'd love to have him explain it.
4) Bill Gross has a very good track record, but he's called the current environment pretty badly. Bill Gross apologizes for poor performance (largely because of bad calls on the impacts of monetary policy on interest rates)
5) The idea that "zero rates haven't helped much" ignores the counterfactual - What shape would the economy be in if the Fed had been less aggressive.

As I said I am not nearly smart enough to figure out what we should do instead. In many ways we need a threat of future inflation to raise interest rates and get people interested in investing in things like housing.
I guess it is ok that 0% interest have forced people like myself into higher equity AA to generate enough income to support my lifestyle. I more or less understand what is going on.

However, there are plenty of retirees out there who get roughly 1/2 their income from investments, this war on savers means these people need to cut back on consumption. One of the ironies of course is that senior have more wealth than any other groups so they can actually spend money they have (rather borrow to spend like some younger folks use to do) But they are tightening their belts because the 3-5% they use to have are now being replaced with 1% CDs

I guess we'll never know since they didn't try being less aggressive first. The ironic thing is that getting a mortgage is HARDER now (even with EXCELLENT credit) than it was when rates were higher and housing prices were higher (and, therefore, theoretically, payments would have been more difficult to pay by mortgage holders.) I'm not claiming to have the answers, but it's clear to me the Fed plans to clear out the debt on the backs of folks who didn't cause the problem. Of course, anyone is welcome to another opinion. YMMV

I agree with Koolau we have a very weird situation with very low interest rates, but pretty tight credit. It seems like we have the worst of both worlds savers aren't getting income they need, potential borrower aren't being able to borrow the money they want.

Perhaps what we need is higher interest rates and lax credit requirements. Sure we may get more defaults, but the higher interest rate lenders get will perhaps compensate for their loss. Higher interest rates will loosen the purse strings of savers generating economic activity. Yes I realize this what help bring on the crisis in the first place.

Right now the velocity of money is very low in no small part because of low interest rates. Right now I have $1800 check in my wallet it has been there for a couple of weeks cause it hardly seems worth the $.50 stamp to mail it to the bank. This is a not healthy cause in the past while I am lazy abut many things, making sure my money is working hard for me is not one of them.

 

[Chuckanut]

These low interest rates do cause behavior changes. I just paid my 2012 property tax in full - rather than just the first half - since the low MM interest rates do not give me much to lose.