If I were about to retire and hoped to depend on my pension for an income, I would be very worried about the implication of the US Federal Reserve’s move last Thursday.
Before we look at the pension implication of the world’s new zero-interest rates policy, lets examine what the Fed did last Thursday, why it did it, what is says about politics in the US and what it says about what might be around the corner for the US. After that, we will bring it all back home and see what it means for pensions.
Here’s what Ben Bernanke said: “We’re looking for something that involves unemployment coming down in a sustained way, not necessarily a rapid way, because I don’t know if our tools are that strong, but we’d like to see an economy which is strong enough that it will support improving labour market conditions.”
With this statement, Bernanke set the record for American – and to a large extent – global monetary policy for the foreseeable future. This is the most radical monetary move by a central banker that I have witnessed since the Bundesbank converted worthless East German marks to real Deutschmarks at a rate of one for one. But back then, the German central bank’s reason was a once in a two-generation moment – German reunification.
Even Draghi’s moves last week were set against the backdrop of a collapsing monetary union.
In contrast, the Fed acted because it was fed up or mildly annoyed with the jobs market not reacting to previous stimulus quickly enough. It was impatient, so it decided to fire the big bazooka.
But the true scale of the radicalism is not yet appreciated.
The Federal Reserve has said that it will print money in unlimited quantities, with no upper limit, and it will lower its own standards about what sort of collateral it will accept in exchange for these new crisp dollars.
From now on, Bernanke has eliminated any doubt about what he is going to do. If economic data is weak in the US, the Fed will buy up all sorts of securities, creating money and making sure that, whatever else might be lacking in the US economy, it won’t be liquidity.
This is in contrast to the ECB’s move of last week, which now seems prudent and coy. The ECB is targeting Spanish and Italian bonds to save the euro – which is a big deal. The US central bank is reacting because it’s a bit irritated.
Both central banks have signalled that monetary policy will be used extensively to achieve different aims. In Europe, it is to bring down bond yields so that countries don’t default. In America, rates are to be kept low primarily to coax people to invest and spend, generating the demand necessary to bring down unemployment.
While I can see why Draghi acted, Bernanke perplexes me. It scares me to think what horrors he sees down the road for the US economy to justify such an aggressive response.
We know that monetary policy takes a while to work, so does he see a massive recession next year or a major bond sell-off? Is that why he wants the dollar weaker and is prepared to use everything in his power now?
The move has prompted rallies in all sorts of assets from stocks and gold to property prices in Singapore. Obviously, the timing of the move in the US has also given political commentators much to chew on.
Those in the Republican camp see this a blatant economic engineering to protect Bernanke’s boss, Obama, ahead of the election. Those in the Democratic camp see it as responsible central banking in the face of a weakened jobs market.
Indeed, in the great culture war that defines American economics, the different sides are interpreting Bernanke’s move completely differently.
On the Democratic side, left-of-centre economists are urging Bernanke not to stop here, but to keep printing money until the economy turns around. They depict the Fed boss as a well-intentioned man who hasn’t got the courage of his convictions, which are urging him to be more aggressive. They argue that the absence of inflation means that he can do more and more. They say let’s worry about jobs now and worry about inflation later when it emerges.
On the other side, the type of economics that were on display at the Republican convention the other week, believe that, the more the Fed prints now, the more hyper-inflation in the US will become a reality in the years ahead.
They also point to the fact that there have been two previous bouts of quantitative easing and nothing has happened. They offer this as evidence that monetary financing doesn’t work.
The Democratic side says it hasn’t worked because it wasn’t big enough and therefore, the US needs more of it.
Whatever side you are on, there is no denying that the moves from both central banks – but now led by the US Federal Reserve – will drive interest rates down to extremely low levels.
The angle I would like to finish on is all this means for your pension and for the outlook for investment in general.
There are many thousands of Irish baby boomers, who are now looking to live off their private pension, and there are more who depend on the state pension.
There are people who are managing their savings and need to get a low-risk return over the coming years to live off. What does the zero-interest rates policy mean for them?
In short, it means they are up the creek. The simple truth of the matter is that keeping interest rates near record lows tramples all over investment income and retirement prospects.
There is no return now in the safe bond market with yields down at 1 per cent. This is less than the rate of inflation in Ireland so you would be paying a government to hold your money.
In the past, when bond yields were at 5 per cent, a risk-averse investor could invest in bonds and not worry. These days are over.
Investors now have to go looking for yield ,and this is dangerous and risky. Also, the many fund managers in Dublin who simply took people’s money and put it in a bond fund, took a fee and headed to Guilbaud’s for lunch, now have to think a bit harder.
The implication of the zero-interest rate policy for Ireland’s retiring baby boomer generation, traditionally dependent on bond yields for their pension’s income, is disastrous.
A cynic looking at the ways that different generations in Ireland have fared over the past two decades might say that it is only fair. Since the late middle-aged and recent retirees made all the money on the property boom, we shouldn’t worry too much about them.
In terms of the generations in Ireland, it is now clear that the zero-interest rate policy is the debtors’ revenge. Maybe it’s about time.
Whisper it David (follow the money) If you use the above statement as a guide and apply it’s principles to Beranke’s policy the motive in my view becomes clearer. The above council was offered to the investigative journalists investigating the watergate scandal remember. In last weeks article the points you made were that in the future we were likely to see hetrodox economic policy as well as fiscal expansion. It appears that you have been proven correct again at least on the hetrodox issue and will be on the fiscal issue shortly.  Beranke’s  policy seems to be hetrodox to me because… Read more »
David, are you not a big fan of Paul Krugman? Krugman actually said he was disappointed with QE3 in the sense that quantity of money involved is not large enough.
What’s interesting is that it seems whenever physical goods and services are traded/exchanged for fiat (or whatever the medium is) the system seems to naturally correct itself. What the central banks are doing now is the equivalent of the dutch boy sticking his fingers in the holes in the dyke in order to prevent a flood.
And I used to think economics was a science :(
David
Have you still not figured out what the Fed is about?
Unrelated to the above but of interest here is the essential problem with Germany – from the Guardian here is a link to an article entitled “Angela Merkel’s austerity postergirl, the thrifty Swabian housewife”
http://www.guardian.co.uk/world/2012/sep/17/angela-merkel-austerity-swabian-housewives
The Guardian have a group of articles and info graphs on Germany today on the front page.
Bernanke’s Bible; “A Monetary History of the United States, 1867-1960,” http://www.amazon.co.uk/Monetary-1867-1960-National-Economic-Publications/dp/0691003548/ref=sr_1_1?ie=UTF8&qid=1347897719&sr=8-1 “A Monetary History of the United States, 1867-1960,” a book of nearly 900 pages published in 1963, is considered a classic. Ben S. Bernanke, the Federal Reserve chairman, called it “the leading and most persuasive explanation of the worst economic disaster in American history.” The authors concluded that policy failures by the Fed, which largely controls the money supply, were one of the root causes of the Depression. Mr. Bernanke acknowledged as much when he spoke at a 90th birthday celebration for Mr. Friedman in 2002. “I would like… Read more »
Guys if you buy one book this year buy that book – No central banker wants to preside over a 1930’s style deflationary depression.
http://www.nytimes.com/2012/06/22/business/anna-schwartz-economist-who-worked-with-friedman-dies-at-96.html?pagewanted=all
http://www.fgmr.com/cyclical-or-structural.html
a hyperinflationary depression is in view and the more Benanke shovels money out the helicoptor door the bigger the bust will be.
Well there we go, the Fed’s dollar printing press is been raided by insiders while Rome burns.
Basically what we are witnessing is the crony class of USA looting the dollar before the imminent collapse of USA economy into a massive real depression.
The insiders in USA see the writing on the wall and figure why not just completely loot the dollar now that the economy as it stands is toast.
Turn this back to us and what I want to know is how much of a hole there is in our pensions,I was due to start getting my pension at 60 and I am 54 now ,I was told there was 70000 left out of 200000. What I keep thinking about is these pensions to the government and civil service ect ,who’s going to pay there pension bill . Is there pension going to be cut and if not why and if there pension is going to be cut by how much. Is there still such a thing as a… Read more »
While I appreciate David’s angle on this in relation to pensions and investments, what’s infinitely worse is what this means for the economies of the world as a whole. This vast money printing of both the Fed and the ECB, leaves massive amounts of cheap money in banks who at the moment will only lend in large quantities to financial investors. All this has led to in recent times is the money heading into government bonds, creating a bond bubble, but more worryingly into driving up the prices of commodities, especially oil. The fact that oil is traded worldwide in… Read more »
First of all, monetary explanations for the Great Depression don’t really hold water anymore, now that we’ve seen monetary solutions tried and fail in Japan and the US. The unemployment of Great Depression was caused by the insiders in society getting too much power and control, and being able to protect this position thanks to government regulation and unions. In other words, the same thin we fact now. Check the statistics, in neither the Great Depression nor the Great Recession have skilled or unionised workers taken much of a hit, despite soaring unemployment, in fact I would argue that deflation… Read more »
It is naive to think people like Bernanke , who are in such position of power but still answerable to public will give a true reason for their actions. They instead find a good reason to justify their actions. QE is attracting considerable opposition in America ,not just from opposition party but also in media and from prominent intellectuals. What could be a better reason to justify QE to the public then its claims to reduce unemployment ? Has Bernanke ever explained how money printing is supposed to help unemployment ? I think if he did , he would probably… Read more »
Hi Tony Brogan,
Excellent observation. I agree completely. The mother of all stag flations. Lived through one already as a child in the 70’s.
This time it really is different for all the wrong reasons much bigger and more destructive!
Enjoy your trip by the way!
Michael.
DMcW : “While I can see why Draghi acted, Bernanke perplexes me. It scares me to think what horrors he sees down the road for the US economy to justify such an aggressive response.” Horrors are the right words. Now imagine Obama’s owners and himself, incapable of creatively implementing FDR’s game-changer. We face immediately war. If Bernanke thinks he can do a QE3 to appease Obama he is tragically mistaken. It may be an act of desperation knowing what’s being planned otherwise. Is it clear to everyone why Obama got a mustache now? He is capable of starting a war… Read more »
Unless and until the financial markets are reined-in and shut down there can be and will be no resolution to the global financial crisis.
The longer this obvious truth goes unacknowledged, and the obvious course of action is avoided, the closer we move to the destruction of the physical economy and our civilisation.
http://www.amazon.com/Exit-Strategy-Ending-Tyranny-Finance/dp/0847840247/ref=sr_1_29?s=books&ie=UTF8&qid=1347912185&sr=1-29&keywords=exit+strategy
If we believe what it says on the tin — that buying 40 billion dollars of derivative junk a month is to stimulate the economy and employment — then we would have to conclude that Bernanke is a complete incompetent and an imbecile. But if we ignore what it says on the tin, and presume that Bernanke is not incompetent, we might ask instead: what is Bernanke really up to? I would say Bernanke’s actions are calculated to continue the destruction of the wealth of the American people. I would say Bernanke is involved in the controlled demolition of America… Read more »
Never got an email notification of this article.
http://thechatteringmagpie14.blogspot.ie/2012/09/a-letter-to-taoiseach-enda-kenny-from.html
Link to the letter Ballyhea Bondholders group will present to the Dail today
TUESDAY
1pm: Begin to gather at Garden of Remembrance.
2pm: March to the Dáil, meet Enda Kenny or Michael Noonan, or if not, hand in a letter demanding they stop repressing and start representing the people who elected them.
Details of the 3rd day Ballyhea Bondholders march, aim to be there at 2, hope they get good coverage.
Print-Baby-Print !!!!!!!!! Swiss Investment guru Marc Faber predicted that there would be loads of QE. That we would have QE18, QE19, and so on. Bernanke is a money printer. Of course he cannot print oil or gold. But he will print USD. Bernanke is a revolutionary the same way that the central banker of Zimbabwe is a revolutionary. And he also printed to prop up the regime. There is a large quantity of people in this country who have a defiant loyalty to the US Democratic Party, which is ver similar to the loyalty that used to go with FF.… Read more »
The fed is not acting to halt the recession or to restore growth.
The Fed is acting to manage the descent into depression.
The Fed is acting to manage the deconstruction and transformation of America.
@ Jimmy R Some of what you say is correct…imo. Neoliberal economics, which underlies the global crisis, is inherently an abstract discipline based on a priori assumptions about human nature and society which are fundamentally wrong. But I don’t believe what it says on the tin when it comes to the Fed. Nor do I accept the fiction that Bernanke is the Fed. He is a frontman for a vast organisation with global strategic intent. Bernanke is media meme. He is not the generator of Fed policy. He is its public face. You seem to believe what it says on… Read more »
@ Adam Byrne I wrote: Why would the Western elites want to transform America in this way? Adam wrote: Why would they? Please expand on this. I will say more about this anon. Meantime, the mainstream fantasy is that our rulers have our best interests at heart. They are always acting for our good. They destroyed Libya; and will destroy Syria and Iran….for our good Likewise, They have given the banks 20 trillions or so in bailouts and free loans….for our good. And the Fed will now buy 40 billions of derivative junk every month to help American workers find… Read more »
https://twitter.com/ballyhea14/status/248046941966065664/photo/1
Ballyhea Says NO to bond repayments. March just over now; letter delivered to the Dail.
Happy Birthday Occupy Wallstreet
http://pbs.twimg.com/media/A3C0cFgCIAAg5Kp.jpg:large
Hi Philip,
The Holocaust was a conspiracy of the magnitude you describe and it took the whole world to bring it to an end.
The slave trade of African Americans in the US up until the US civil war was a conspiracy of the magnitude you describe and 600k people had to be slaughtered in the US before that industry was consigned to history.
Regards,
Michael.
When Iran gets hit by Israel it’s going to kick off an enormous world conflict because Iran won’t roll over like Iraq. The Israeli leadership are currently trying to get the Americans to state openly the limits the US will tolerate regarding Iran’s nuclear capability because it’s looking for an ally to stick up for it after it”s airfarce knocks out the nuclear installations. No one in the world has ever been asked to debate the strategic aim of the attacks on the world trade centre in 2001. The tactical aim was to slaughter as many civilians as possible. It… Read more »
Hi Philip,
Forgot to mention apartheid, Pol Pot and year zero, thenpenal laws etc.
Michael.
Hi Tony.
Your point of view can be very easily achieved you know. All people and companies have to do is barter their goods and services. No currency no money involved at all.
Regards,
Michael.
My Daddy’s funeral in the morning guys. He died Sunday, looking forward to a massive day in Kenny’s Bar in Lucan, his spiritual home. He will love that we are having an all day session there after the ritualistic formalities. Two beautiful caring Indian nurses were in the room with us on Sunday when he passed, kind of negates the whole nationality / sovereignty / discrimination / immigration / racist shit that people espouse on here. Even Colin (my friend) is more open minded that some of the lefties in that respect. Anyway… I appreciate all that I have learned… Read more »
Ron Paul: We Must Learn Our Lesson! Sept. 18, 2012 (EIRNS)–Rep. Paul ends a post on antiwar.com today by noting: “Currently, the U.S. is actively supporting rebels in Syria that even our CIA tells us are affiliated with al-Qaeda. Many of these radical Islamist fighters in Syria were not long ago fighting in Libya. We must learn from these mistakes and immediately cease all support for the Syrian rebels, lest history once again repeat itself. We are literally backing the same people in Syria that we are fighting in Afghanistan and that have just killed our ambassador in Libya! We… Read more »
@ Tony Brogan
Gold is not money….it is a commodity.
As you would put it; “go get a proper definition.”
https://www.google.ie/search?hl=en&safe=off&site=&source=hp&q=define+money&oq=define+money&gs_l=hp.3..0l10.3580.6119.0.6814.12.12.0.0.0.0.180.1439.1j11.12.0.les%3B..0.0…1c.1.TmFyND5V_nQ
As a commodity, gold is a useful investment in times like these for people who want to preserve monetary wealth.
@ Jimmy R I argee with most of what you say in your last comment jimmy. I would add this. Collapse is only inevitable if their diseased system is maintained blindly to the end. Collapse is possible….maybe even probable….but it is not necessary. If humanity generally can wake-up sufficiently from the media trance it is in and recognise the disease, then the purging of the system can be managed in a rational and humane multilateral reorganisation and reset of the global monetary system. The main problem with the current system is that it is in private hands and run for… Read more »
This article has provoked some very philosophical, and, instructive responses from contributors. Some very good posts made and not a slanging match in sight.
Hi cooldude, Thanks for the video link which I will look at later. In life you find what you look for. The twin towers took well overban hour to collapse not 9 seconds which was only the final catastrophic failure sequence. If thousands of tonnes of building hit the street from half a kilometrr up st 120mph your not going to get a stack of concertinad floors you are going to get a huge amount of pulverised dust. Until more proof of a plane hitting the pentagon is made available it is only then I will believe the story. Looking… Read more »
Interesting to see the contrast between the hard line being taken in regard to the property tax and that of the reduction of public service allowances.
The next budget will attempt to spread the pain accross so many headings no one group will rise up in rebellion.
Public service allownaces dealt with now two months in advance, trade unions bought off again. Simple formula for lulling population into self ruin.
Hi everyone, To understand the mindset of the scumbags on both sides railroading the world into war in the middleast you must understand the parable of the frog and the scorpion. A frog is standing at the side of a fast flowing wide river preparing to cross when along comes a scorpion. The Scorpion asks the frog for a lift on his back to which the frog responds that if I give you a lift on my back you will sting me and I will be paralysed and drown. The scorpion responds that if he stings the frog he too… Read more »
The debate is becoming more introspected and philosophical I think because many people have recognised that the system and it’s immovable power is greater than themselves. Anyone questioning person who was around in 1950s Ireland would have recognised the same feelings of helplessness each of us face internally when viewing through sad eyes an external system that seems so awesome in it’s capacity for evil and self destruction that you feel it will never be toppled People are waking up and proof of this can be seen on this blog as many posters lived though these times and been searching… Read more »
Ever get the feeling that there are a lot of end games starting to be described in the above comments. Lot of darkness everywhere – even in David’s own articles. And add this…
China and Japan
Iran and US/Israel
Print baby print
Funny Weather
etc
Debtors revenge indeed…but will they be able to savour it? When this finishes, I fear we may need to forgive a lot more than mere monetary debt.
At a press conference today TDs for the United Left Alliance announced plans to launch a public campaign of resistance to property tax and austerity.
“Our society and our economy will be crushed unless we stop this austerity juggernaut with a mass movement of people power on the streets. Building such a movement will be our priority over the coming weeks.”
http://tinyurl.com/9rrsan9
Who creates money in the normal run of things? If it’s so extraordinary for the Central Banks to be creating money then I’m surprised this question isn’t being asked. It is the commercial banks which normally create the money supply and they do so as they issue loans. Hence the reason why there’s so much debt in the economy. Hence the reason why, economically speaking, we can’t support our elderly while of course we have all the real resources to do so. An adequate money supply, one which is rarely deleted through loan repayments, would negate the need for pensions… Read more »
Hi Everyone,
I’m not a conspiracy theorist BUT……….
http://www.youtube.com/watch?v=0kL6SXqVtEg&feature=youtube_gdata_player
Enjoy!
Hi everyone,
Final thought for the night. It’s 9.40pm Wednesday evenining. When the slaughter kicks off in the middle east all of you reading the blog will be delighted WITHOUT even knowing it. Know why?
McWilliams told you in the article. The currently worthless pension plans will recover in value AFTER America balances the books by transferring Iranian wealth to it’s own balance sheet. You won’t be told that part only the bit about your pension going back up in value!
Sweet dreams boys and girls tomorrow you wake up men and women.
Greek Opposition Leader Calls for Debt Moratorium Sept. 17 (EIRNS)–Greek opposition leader Alexis Tsipras of the Syriza party denounced the government’s new austerity policy at a press conference at the Thessaloniki International Fair, yesterday. He ridiculed the government’s claim that it is winning more time to implement the austerity, saying, “all it will do is make the rope with which we hang ourselves longer. What is important to us is that we do not continue down the slippery slope of disaster.” While warning that if the government implements the additional EU11.5 billion in cuts it will have “little chance of… Read more »
China Attacks Fed’s QE3: Will “Cause Repercussions to… Monetary Systems” Sept. 19, 2012 (EIRNS)–When “Helicopter Ben” Bernanke initially announced the Federal Reserve’s program, the official Chinese press took a very cautious attitude. It warned of inflationary effects, but emphasized the possible benefit to China, if, somehow, the measure could actually boost the US economy. Today’s China Daily has a far more realistic appraisal: “Fed’s new round of quantitative easing will cause asset bubbles, inflate bulk commodities and cut wealth of debt holders.” It notes that the new policy is unlimited, since the Fed will just keep buying those mortgage backed… Read more »
Weidmann Warns Against Inflation, Likens Draghi to a Fool Sept. 19, 2012 (EIRNS)–Jens Weidmann, the president of the German Bundesbank, used a speech at a bankers’ congress in Frankfurt yesterday, to once again voice his strict opposition to the ECB’s planned new unlimited bond-purchasing program. Weidmann said that efforts by central banks to pump money into the economy reminded him of the scene in Johann Wolfgang Goethe’s {Faust}, when “the devil Mephistopheles, disguised as a fool, convinces an emperor to issue large amounts of paper money. In Goethe’s classic, the money printing solves the kingdom’s financial problems but the tale… Read more »
Japan, Too, Increases Stimulus — by a Trillion Yen Sept. 19, 2012 (EIRNS)–The Bank Of Japan (BOJ), in what is described as an “unexpected” move by the financial press, increased the size of its government debt-purchasing program by 10 trillion yen ($126 billion). A separate program, to extend credit to banks (on valueless assets), was kept at $25 trillion yen. The bank also extended the duration of its asset buying program by 6 months, from December 2013 to June. The BOJ’s actions follow in the footsteps of the European Central Bank and the Federal Reserve to pump up liquidity flows,… Read more »
Stiglitz in Spain Displays the Criminal Stupidity that Earned Him the Nobel Prize for Economics in 2001 Sept. 19, 2012 (LPAC)–Interviewed by Spain’s {ABC} daily during a trip to Spain to present a book of his, the neo-Keynesian Joseph Stiglitz said: “Spain will stay in the euro, since the population understands that the price of leaving is too high. That said, it should request a bail-out as soon as possible. Until that happens, money will keep leaving the country and won’t return.” “[A banking union] is absolutely necessary if we want the euro to survive. A banking union should have… Read more »