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BLOG: Nothing is Free

Don outlines the recent actions of the Federal Reserve, and the winners and losers as a result of its policies.

The function and purpose of the Federal Reserve is not widely understood, but most people know that it regulates interest rates.   They also know that "The Fed" has been driving interest rates down to historic lows in the last few years.

The purpose of its action is to "stimulate" the economy.  It is easy to find news articles about how "The Fed" is planning on maintaining this "easy money" policy until the economy "recovers". (also here)  The theory is that if businesses can get money cheaply, they will investi it, and grow their businesses.

The result of this policy is that interest rates are at historic lows.  The rate on a 10-year T-bill is currently 1.62%, less than half the historic average.  This is great for those who want to borrow money, but not good at all for those who have savings and need the interest income.

Retirees have been severely squeezed by this, because conventional wisdom guides retirees to keep most of their money in bonds.  Planning for retirement was probably done with yields on those bond funds in in the 4-5% range. When bonds are trading at sub-2% interest rates, those plans are ruined.

Another effect of the "easy money" policy is that as a large corporation, you are able to borrow money at next to no cost.  Smaller companies cannot do this, because the overhead and risk involved in loaning to them is larger, relative to the size of the loan.  The big beneficiaries of this policy are companies like Amazon.com and Google.  (Read here)

In an ironic twist, easy money also burdens our young people.  Encouraging borrowing encourages debt.  Case in point, state and federal governments borrowing like mad because it's so cheap.  The losers?  Our young people, who will be stuck with the bill.

In any economic policy, there tend to be winners and losers.  There may be lots of disagreement on any given policy both about who these winners and losers are, but about who they should be.  In this case though, the winners are clear - big companies, big banks, and politicians.  The losers are clear as well - retirees, savers, and the young.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Ken in MN December 04, 2012 at 01:02 PM
Timothy is correct: Long-term interest rates are set by the market, and the market has concluded that the Republican't stranglehold on fiscal policy is choking off the prospects of economic growth anytime soon. Thirty years of working class wage stagnation thanks to the policies of Reagan/Bush/Shrub hasn't helped, nor has Blue Dog/Wall Street Democrats buying into the economic fantasies of Supply Side "Economics". You can't dispute that the US economy grew fastest when top marginal income tax rates were high, when capital gains were taxed the same as income, when unions were strong, and people could live a decent life after retirement thanks to defined-benefit pension plans supplemented with Social Security and Medicare (while spending trillions of dollars into the consumer economy.) That said, Donald is correct when he says nothing is free. The Plutocrats can't expect economic growth (of even the continuation of a stable society) if they expect their workers to work for free...
Donald Lee December 04, 2012 at 03:59 PM
The point of my post is to highlight the winners and losers in a low-interest-rate environment. The big winners are often not the mom-and-pop small businesses, but big players, like Google. Big losers include retirees. The Fed has been explicit that it's policy is to drive down interest rates. Operation "twist" was specifically aimed at reducing medium term interest rates. Interest rates are now low. Whether and how the Fed influenced this is an interesting topic, but not the one I intended to discuss here.
Ken in MN December 05, 2012 at 01:18 PM
Then why the slam on union pension funds? They, like every other pension and 401k fund are invested in the stock and bond markets, and they, like every other pension and 401k fund, felt the effects of the Reagan/Bush/Shrub economic meltdown, and they, like every other pension and 401k fund, will recover when the economy recovers. In addition, union pension fund contributions are set by contract. They just don't demand more money and get it! Try educating yourself on union pension funds. Here's a good first step: http://www.startribune.com/blogs/141614483.html
Donald Lee December 05, 2012 at 06:35 PM
I apologize if I am unclear. This post is not intended to be politically inspired. It is not a commentary on the complexities of the Federal Reserve and its policies. There are no "slams" on anyone. It can be summarized like this: We have a low interest rate environment. The actual winners and losers in this environment are not those we expect. The winners include large firms like Google and Amazon. The losers include those depending on interest income, like retirees. This is a simple, factual message. I am frankly surprised that those commenting insist on seeing everything BUT the point.
Ken in MN December 06, 2012 at 01:45 PM
OMG! Low interest rates are "crushing retirees", as the TIME Magazine said. Too bad it's more anecdotal hype than reality: http://articles.businessinsider.com/2012-02-01/news/31011704_1_low-interest-rates-bernanke-pension-funds Of course, by looking at actual data, instead of relying on anecdotal neighborhood conversations or "gee, everybody knows that" thinking, we find that investment income only accounts for 11% of all income reported by seniors in 2009. The largest sources, by far, are Social Security (38%), earnings from active employment (29%), and pension plans (19%). http://www.aoa.gov/aoaroot/aging_statistics/Profile/2011/docs/2011profile.pdf (And yes, I looked back at reports from before the Bush Great Recession and found it was only 13% in 2005 vs. 11% in 2009 http://www.agingcarefl.org/aging/AOA-2007profile.pdf) So the benefits to the "winners" of low interest rates (like taxpayers servicing the Reagan/Bush/Shrub Federal debt, homeowners, businesses seeking to expand, car buyers, students borrowing for college) far outweigh the over-hyped harm to the "losers" of low interest rates.

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