The European Central Bank recently announced plans to bailout its bankrupt members by buying their short-term bonds with newly created money. There is wide expectation that Ben Bernanke will announce plans for further bond purchases at the Fed’s Sept. 12-13 meeting. Central banks are busy these days! Jeff Harding summarizes the calculation of central banks as follows:
Despite the overwhelming evidence that money printing doesn’t work, the Eurozone overlords will to do it anyway. Why do they do this? Monetary inflation is the last resort of governments who are over their heads in debt. Instead of going bankrupt (there is no way we or the overindebted Eurozone countries can repay the debt) they make the debt cheaper to pay off by inflating the money supply. It’s an age-old last resort of incompetent rulers.
As we pointed out in our 2011 blog post, “The Silence of the Lambs,” savers are taking a thumping at the hands of the Central Banks:
…today’s near-zero interest rates are no laughing matter for many American savers—not just my kids. They are my parents, my friend saving for a down payment on a home, and my retired neighbors down the street. You may be one of the many Americans trying to live off of your well-earned savings, whether those funds are in money market or checking accounts. In my mind, savers—as opposed to investors—are the proverbial “sacrificial lambs” of monetary policy.
The Federal Reserve has held its interest rate target between 0% and 0.25% since late 2008. Adjusted for inflation, the yield on 3-month Treasury bills is actually negative, as illustrated in the chart below. Quite frankly, yields on such savings vehicles are likely to remain that way for some time, with the Fed expected to keep its target rate near 0% at least for another year—and possibly longer.
Since December 2007, personal interest income has declined by close to $100 billion. The modest economic growth the nation has experienced since 2008 has come, to some extent, at the price of a negative real rate of return for savers. -Joe Davis,Vanguard
While savers may be getting hammered by these policies, it just might be a different story for investors. In fact, real estate and domestic equities are up sharply this year (and have made substantial gains since the March 2009 lows). Even European equities and commodities have shown some signs of life recently. Adhering to the adage, “Don’t Fight the Fed,” has surely paid off lately. Perhaps slow economic growth and psychological wounds from 2008 have been contributing factors to the weak risk appetite of many investors, but it’s important to remember that one of the primary reasons for exposing your portfolio to different asset classes is to preserve purchasing power. Inflation is exactly what the Central Banks are trying to achieve! Foreseeing all the effects of the policies of Central Banks is impossible. However, investors need to be cognizant of risks that these policies pose to their purchasing power. This is no time to sit on your hands (because the Central banks surely aren’t).
Different men. Different continents. Same mission: More quantitative easing!
Source:CNN Money
