You thought you did everything right. You worked hard, because that was what you were supposed to do. You saved for the future, because that’s what you were supposed to do. You were wise in your purchases, because that was what you were supposed to do. Now you have a little bit in the bank. So what is your reward for doing what you were supposed to do? Maybe two percent interest on your savings, if you are lucky.
Don’t expect that rate to go up anytime soon. Federal Reserve Chairman Ben Bernanke announced Thursday that the central bank would start buying mortgage bonds at a rate of $40 billion a month for as long as the central bank feels necessary. This is an attempt to drive mortgage rates even lower, and hopefully spur more employment. At this pace, the Federal Reserve’s holdings will soon pass $3 trillion. By the way, in 2008, the Fed had less than $800 billion in bonds held.
This is called, in government speak, “quantitative easing.” The move is basically a plan to pump money into the economy in hopes to stimulate business and purchasing. Directed toward the housing market, the Fed hopes this will lead to more job creation. Already near record lows, they hope the even lower rates will lead to more house purchases and more jobs.
This is the third round of quantitative easing, or priming the pump, by our government. The first round in 2009 injected over a trillion dollars into the system. It did not have the desired effect of getting the economy sufficiently going, so another $600 billion purchase of Treasury bonds took place in November, 2010. Evidently, Bernanke feels that the third time will be the charm. And I’m sure that the move to try to get the economy going happening less than forty-five days from the presidential election is just a coincidence.
How can the U.S. government afford to buy these bonds? I thought we were broke, to the tune of a $16 trillion national debt. We are. The additional $40 billion a month, just like the trillion in 2009 and the $600 billion in 2010, is additional U.S. debt and basically has no backing. So, realistically, our government is printing the money and inserting it into the economy. But, all these extra dollars, with no backing, will make all the other dollars in circulation worth less. So it will take more dollars to purchase an item. That is why the banks are paying next to nothing in interest to use your money, and when you take that money out of the bank to buy something, the dollars do not buy as much.
But who does low interest rates and cheaper dollars benefit? The stock market loved Bernanke’s speech Thursday and the market rose over 200 points. I suppose that they feel that the more money will be invested in the market since there is little to be gained with the banks. Right now, they may be a dirty shirt, but they are the cleanest dirty shirt in the drawer.
It also benefits debtors. They get to borrow at a lower rate and pay off with cheaper dollars. By the way, who is the largest debtor in the United States? It is the U.S. government itself. The U.S. debt would completely spiral out of control, if it hasn’t already, if the low interest rates had not cut the cost of debt service. But on the other hand, countries, like China, whom we owe over $800 billion, may not be too thrilled at being paid back in cheaper dollars and may not be too ready to continue to finance our debt at low interest rates.
Who has it hurt and who will it hurt? The ones who thought they were doing it the right way. If you are on a fixed income or working and your wages are not going up, the inflation caused by cheaper dollars hurts. If you are counting on bank interest for income, it hurts. But I still think that doing the right thing is still, ultimately, the right thing. And although man attempts to manipulate the U.S. and world economy, he cannot manipulate the economy of God.