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Hopes Dim for a Grant Fed Chairmanship

On February 2, 2012, in Currencies, Economy, by Tim

With Mitt Romney pulling away from both Newt Gingrich and Ron Paul in their bid for the GOP presidential nomination, hopes are now dimming that Jim Grant of Grant’s Interest Rate Observer will play an important role in the nation’s monetary policy going forward as Grant is increasingly unlikely to either sit on a new Gold Commission (as suggested by Gingrich) or head the Federal Reserve (as Ron Paul recommended), in the latter scenario, perhaps just exchanging dollars for gold under a new gold standard until such time that the central bank can be disbanded. In this report at MarketWatch, Brett Arends fills in the details:

“Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when I called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”

He may have to wait some time. Romney, a conventional Wall Street figure, is unlikely to tap him anytime soon.
…
He is best known these days — to Gingrich and Paul, among others — for his long-standing support for the gold standard. The world has moved in his direction. In 12 years, gold has risen from a derided relic trading at $250 an ounce to a hot investment at $1,750. Everywhere paper currency systems are under challenge. In 2008, the world discovered that you can’t just manufacture endless wealth out of thin air, as the gold bugs had long argued, and it is still struggling with the realization.

Many people will think of the gold standard as a relic of a bygone era, something as old-fashioned as bow-ties and stuffed animals. (My caveat: To me, that’s not an insult.) Grant, when we met, argued the reverse. He says paper currencies and our current monetary system are the ones that are out of date.

“The anachronism is today’s system,” he says. We have a “command and control, top down” system where the Fed imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be”.

There’s lots more in this story on Grant’s views of the financial system as currently constructed and what he would do if he were to sit in Ben Bernanke’s chair at the Fed. If you ask me, his gold standard price of $2,500 an ounce for the metal seems a bit low.

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Bernanke’s War Against Savers – Part 63

On January 30, 2012, in Economy, by Tim

More fallout from last week’s Fed announcement of a one-and-a-half year extension to their freakishly low interest rate forecast comes via this MarketWatch story about the dim prospects of money market returns between now and sometime in 2015 (or later).

Money funds are designed to be ultra-safe cash-equivalents, and traditionally they provided a bit more return than bank certificates of deposit or savings accounts.

But for about 18 months now, nearly two-thirds of all money funds have yielded under 0.01%. To see just how horrible that is, consider that if you had $1,000 and split it evenly between a money fund and a piggy bank, at the end of a year the fund would only be ahead by a nickel.

This is not a new problem, but the Fed paints it in a new light. Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take a bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising.

Even when rates rise, money-fund yields aren’t likely to go up. Financial-services firms have been waiving costs, basically operating them at a loss to keep assets in-house; many smaller firms have simply shuttered their money-market funds. When rates finally do go up — and the Fed forecast doesn’t mean it can’t happen, it just suggests that it won’t until 2014 — firms will first take much of any increase for themselves.

By the way, does anyone know how stable value funds are doing these days?  I was tempted to not convert one of our 401ks to a self-directed IRA when we left our cubicle jobs back in 2007 in order to get the 3 or 4 percent these funds paid in the event that the early-decade low rate environment returned which, as it turns out, it did with a vengeance.

I regret that decision a little more each year…

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Ben Bernanke is the Next Arthur Burns

On January 27, 2012, in Economy, by Tim

In yet another follow-up to yesterday’s Bernanke’s Disingenuous Message to Savers, it certainly looks like Fed Chief Ben Bernanke is the second coming of Arthur Burns when looking at real interest rates (i.e., the Fed Funds rate minus year-over-year inflation).

Note that the 2012-2014 period assumes the current 3.0 percent inflation rate and zero percent Fed Funds rate continue for three more years – it might move up a little, but not much. Also, that little red sliver in 1978-1979 represents G. William Miller’s tenure as Fed chief – it hardly seemed worth it to put his name up there.

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More on Bernanke’s War Against Savers

On January 27, 2012, in Economy, Our Culture, by Tim

A couple of items related to yesterday’s Bernanke’s Disingenuous Message to Savers come via this Reuters report that chronicles the difficulty older, fixed-income investors are having under Fed Chief Ben Bernanke’s policy of freakishly low interest rates and this item at The Aleph Blog that captures my sentiments fairly well.

Bernanke Does Not Understand Savings
Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans. He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.

(Speaking to The Bernank)

I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us. There are three problems with what you said:

- It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.

- Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets. Most people would like to do something to protect themselves from inflation, but lack the means to do so.

- Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers. Fed policy kills rates for savers. They will not become investors, because they lack the knowledge to do so.

I am again sorry, Ben, because your policies discriminate against the poor, and the lower middle class. Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.

Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy. If there is no income, why not grab safety from inflation?

Author David Merkel then suggests a comparison to Arthur Burns, one of the worst Fed Chairman ever, a subject that will be taken up in the next item that appears here.

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Roach: “Zero Bound Until 2025″

On January 27, 2012, in Debt, Economy, by Tim

Not surprisingly, Morgan Stanley’s Stephen Roach doesn’t think much of the idea of perpetual ZIRP (Zero Interest Rate Policy) as part of an ongoing policy by the Fed and he talks to Bloomberg’s Tom Keene on this subject and others while in Davos, Switzerland.

Roach says that, along with many other Western central bankers, Fed Chief Ben Bernanke is “betting the ranch on open-ended QE and zero interest rates” that, throughout history, have only been used as emergency measures, not long-term policy.

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Bernanke’s Disingenuous Message to Savers

On January 26, 2012, in Bonds, Stocks, by Tim

Skip to about the 28 minute mark in the video below of Federal Reserve Chief Ben Bernanke’s press conference yesterday and you’ll hear the confusing, not-very-helpful message the central bank has for savers in our super-low interest rate environment.

Basically, his answer to Gregg Robb of Marketwatch about the difficulties being experienced by fixed-income investors makes no sense as he confuses conservative investments with riskier ones in the rather disingenuous answer excerpted below:

In the case of savers, we think about all these issues and we certainly recognize that the low interest rates we’re using to try to stimulate investment and expansion of the economy also pose a cost on savers who have a lower return. And we do hear about that obviously and we do think about that.

I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate returns, in particular, people who own stocks, corporate bonds, as well as Treasury securities. And if our economy is in really bad shape, then they’re not going to get good returns on those investments.

So, I think what we need to do is, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and increase growth and that, in turn, will lead ultimately to higher returns across all assets for savers and investors.

That’s little comfort for all the risk-averse savers out there just looking to get more than one percent on a certificate of deposit when the inflation rate is running at three or four times that amount (by government measure, your results may be much higher).

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