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.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Heyl: Longtime disc jockey Jimmy Roach to turn dismissal into brighter times
- Armstrong escapee caught; murder charges pending
- WikiLeaks says U.S. spied on another ally: Japan.
- Man attempts to take firearm onto plane in Pittsburgh; tenth attempt this year
- Judge rules McCullough guilty of taking money from elderly woman’s estate
- Lawrence power plant being converted to gas from coal
- Pirates bolster bullpen by trading for former closer Soria
- McKeesport tattoo artist will stand trial for allegedly beating man to death
- Inside the Steelers: Rookie linebacker Chickillo continues to excel
- Pitt, McConnell-Serio agree to new contract through 2020-21 season
- Steelers’ reserve quarterbacks vie to secure spot behind Roethlisberger, Gradkowski