It might be wise to fight the Fed
Recent minutes of the Federal Reserve's Open Market Committee revealed growing disagreement over continuing its stimulation of the economy through monetary expansion and low interest rates.
A few days later, Moody's stripped Great Britain of its highly prized triple-A credit rating. Once the world's two richest nations, the United States and the United Kingdom are now among its largest debtors.
Meanwhile, President Obama and Congress could not reach agreement on Friday over a mere 0.0125 percent cut in federal spending.
Under these circumstances, the threat — even longer-term — of an end to cheap, easy money carries major implications that put new pressures on consumers and savers alike. It may be time to reconsider a fundamental rule of investors: “Don't fight the Fed.”
Last week, Fed Chairman Ben Bernanke reaffirmed his faith in the so-called “quantatative easing” approach, hoping to force consumers and corporations to disgorge their cash savings into stocks and other more risky assets. Some on the Fed committee, however, see little good resulting from injecting trillions of synthetic dollars more into the economy.
Using Shadow Government Statistic's current estimate of U.S. inflation rate at 6 percent, 10-year Treasury securities offer a negative yield of 4.17 percent. For most savers, cash offers a negative 5.5 percent. Despite these unprecedented negative returns, consumers and corporations continue to fight the Fed by hoarding cash.
According to Shadow Government, the economy is in a recession, with negative growth of 5 percent to 6 percent. European Union nations are heading toward severe recession. Even so, central banks of the United States, the U.K., the European Union and Japan push more money into their economies.
Business managers question such irresponsibility. Politicians do not. However, central banks have directors attuned to private sector economic realities.
In the face of a disquieting lack of results, some members of the Fed committee question how long this approach can continue. Should their questions gain support and threaten removal of the central banks' financial punch bowl of cheap, easy money, interest rates would rise, likely causing bond and equity markets to plunge.
If, hypothetically, the interest rate on 10-year Treasuries rose from 1.83 percent to a more normal 4 percent, the Treasury's interest costs would rise to more than $1 trillion a year, causing further falls of confidence in the dollar and world currencies.
A serious fall in dollar confidence would hit Treasury securities hard. Like investors looking for security, banks have invested heavily in Treasuries, normally thought to be secure. They would suffer huge losses.
Investors hoarding cash, especially precious metals, are fighting the Fed, enduring negative yields and foregoing nominal gains in securities. However, unlike real estate, bond and equity markets can be closed and investors might be stuck.
Facing increasing losses, investors may think fighting the Fed was wise.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at email@example.com.