Run A High-Pressure Economy? Janet Yellen Does Not Understand The Problem

Introduction

Since the 2008 collapse, the Fed has been buying government debt to keep interest rates low in hopes of inducing more spending by individuals and business. There are several reasons this approach is wrong:

These issues are covered below.

Eliminating Safe Income

In 2007, the 10-yr Treasury bond yield was 5%. Today, it is 1.7%. In 2007, many retirees were holding Treasuries: with 5% annual payments, and they were fixed for life. The Fed’s action wiped out this safe retirement strategy. Needing more than a 1.7% payment annually, retirees have been forced to purchase more risky assets.

I quote John Mauldin on the subject:

“I must confess, the more I think about where the “monetary policy community” of academic elites has brought us, the angrier I get…what the Fed has done is to destroy the retirement hopes and dreams of multiple tens of millions of my fellow US Boomers, and when we include the effects of the destructive policies of the rest of the world’s central banks, the number becomes hundreds of millions.… Remember when you could invest in a CD at 5% to 6%? What a quaint notion. By reducing the incomes of retirees and terrifying near-retirees, the Fed successfully reduced economic activity. Hopefully, that was not their intent, but that is what happened. Low interest rates have traumatized US pension funds and basically made it impossible for funds to meet their investment targets. And the consultants to whom the funds pay large fees are still showing them models (based on god knows what assumptions) that say it is okay to project 7% to 7.5% compound returns for the future.” 

Enough said.

It would be one thing if the Fed’s low-interest policy was getting individuals and firms to spend more. In all likelihood, it is not. In fact, in an overreaction to the 2008 collapse, it is very difficult to get a bank loan.”