Yesterday we left you with a cliffhanger.
Although if you subscribe to one of our paid investment services, and you get the free weekly digest that comes with them, Scoops Lane, you may already know what we were on about.
After 40 years of expanding credit like nobody’s business, and four years of printing money and bailing out zombie banks like it was going out of fashion, the US Federal Reserve has worked out why it’s plan to boost the economy isn’t working.
It’s not because its ideas are bad.
It’s not because it needs more time.
No. The Fed has done its homework. The Fed knows exactly why things aren’t going to plan.
So who or what is at fault? We can only describe them as economic saboteurs…financial terrorists. You’ll read all about these evildoers below…
On Tuesday we sent a Bloomberg News article to our colleagues. We had mixed emotions when we read it.
Our first reaction was to liken it to having a dentist punch us in the mouth and then tell us we need new teeth.
Our second reaction was to laugh…in despair.
Here’s the specific quote that caused our emotions to run hot and cold:
‘Federal Reserve officials say they’re concerned that retirees […] are blunting the impact of record easing aimed at creating jobs. The reason: Older people are more likely to forgo purchases of houses, cars and other big-ticket items that the Fed is trying to encourage with near-zero interest rates. And their numbers are growing, making the Fed’s task ever harder.’
Clearly those retirees are scum…complete dirtbags.
Don’t these filthy retirees understand the Fed is trying to create jobs? The Fed has to reduce interest rates to zero so people can borrow more and spend more.
So what’s wrong with these selfish retirees? So what if interest rates are so low they can’t earn a living from the money they’ve saved during a lifetime of work?
They should keep on spending. What’s that you say? Retirees don’t really need a new house or new car when they’ve retired? Rubbish, they’re traitors.
Seriously, that quote and the rest of the article is probably the most ridiculous thing we’ve read all year…or at least as ridiculous as the last thing we read in the mainstream press.
But what’s the origin of the Fed’s thinking?
You may be familiar with the so-called Paradox of Thrift. If you’re not familiar with it, it’s a silly Keynesian idea that saved money is dead money. Saved money means that people aren’t spending…and according to Keynesians, that’s bad.
It won’t surprise you to know that the world’s central banks are full of Keynesians. Central banks and governments love Keynesian theory because it gives them the green light to interfere with economies and markets.
The Paradox of Thrift theory is part of the reason why the Fed and other central banks have lowered interest rates.
The idea is that if interest rates are low, savers will either invest in riskier assets that pay a higher income, or they’ll just spend their savings in the belief that inflation will eat away at it…better spend it now while it’s worth something.
That’s the theory. But as we’ve explained many times in these pages, humans are unpredictable creatures. You can’t put human behaviour in a spreadsheet or mathematical formula to spit out answers.
When the Fed and its cohorts smashed interest rates to record lows, they didn’t bank on old folks preserving their capital and reducing their costs. As retiree Grisel Muina told Bloomberg News:
‘I used to spend a lot of money, let me tell you – I was a compulsive buyer. Now I have to watch every penny that I spend, and it’s hard for me. Once you’re used to a certain way of living, it’s hard to reduce.’
This is the impact of central banking policies. This is what people like Dr Ben S. Bernanke, Sir Mervyn King, and Glenn Stevens have done and are doing to retirees’ incomes.
In their rush to bail out banks and keep their buddies in jobs, every day, retirees in the US, UK and Australia are falling into poverty. Just when they should be putting their feet up and enjoying the fruits of 40 or 50 years of work, they’re forced to eat tinned hotdogs and stale bread.
Yet every day the mainstream press hails the central bank chiefs as heroes…they brown nose and call them the world’s best minds.
In a way it’s funny. Old-timers have outsmarted doctors, knights, and the world’s highest paid central banker. Of course, for them it’s a hollow victory, knowing that their income has suffered.
And so, billions and trillions of dollars later, central bankers have failed. Those who rely on income from investments have seen their incomes slashed. And rather than taking the kind of risks the central bankers want them to take, they’ve decided to cut their spending instead.
As we warned yesterday, the condition of the world economy is much worse than stock markets would have you think.
We’re now four years into the Second Great Depression. And like the original Great Depression of the 1930s and 1940s, this one has plenty of years left to run.
For many in the US and UK, it’s too late for them to adjust their retirement plans to take into account zero percent interest rates. But as an Aussie investor, you’re lucky…you’ve got an advance warning of what will soon happen here.
The biggest mistake you can make is to think it won’t happen…that Australia is different. Believe us, it will happen, and to some degree it has already started. Thinking it won’t happen is a dangerous trade. So don’t sit back and let the retirement poverty trap snag you.
Cheers,
Kris
PS. We can’t emphasise this enough. Aussie savers and investors will face the same shock as US investors in the years ahead. Most US investors never had a chance, they just didn’t see it coming. Within four months of the world economy melting down in 2008, the Fed slashed rates and cash deposit rates sunk.
You’ve got an advantage. You’ve had four years to prepare, and it’s still not too late. The only question is: where do you start? Well, we’ve got the answer. Simple. Check out this retirement investing tutorial right away. Grab a note pad and tune in now…
From the Port Phillip Publishing Library
Special Report:
Retire Rich, Happy and Free From Money Worries
Daily Reckoning:
Why Banks Won’t Buy Risk Free Gold
Money Morning:
Attention Investors: This Market is Worse Than it Looks
Pursuit of Happiness:
Buying a House? If I Could Give You One Piece of Advice…
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks