& Market Trends
The Federal Reserve's policy:
Punish Savers and Rob the Retired
February 24, 2004
Before the Alan Greenspan model
of economic growth which relies on creating rising asset prices
in stocks, bonds and housing to fuel spending, our economy ran
on a traditional and conservative model. The old model relied
on paying savers a real rate of return to forgo consumption
so that precious capital could be made available for investment.
The new model punishes savers
and guarantees they will receive a rate of interest far below
the inflation rate on cash, bonds or stocks. This rate of interest
does not adequately compensate savers for the risk of default
or loss. Moreover, capital will be provided for investment but
not through recycling savings. Instead, capital will be provided
by creating new money and credit. This creation of new money
and credit defines inflation and favors debtors over creditors.
A major part of the new Fed
economic model is designed to use savings to subsidize corporate
profits. Psychologically, high stock prices make people feel
so successful that they don't feel the need to save when so much
wealth is freely created by just owning stocks.
Currently, 30% of the valuation
of the S&P 500 is dominated by finance companies, and another
10% of corporate profits are related to financing activities.
(For example, if GM did not own GMAC it would not have made any
profits last year; 40% of GE's profits are from finance). So,
in today's world of leveraged finance, 40% of corporate profits
are created by making sure savers only get 0.5% on their Money
Market accounts and then get to borrow their own money back to
mortgage their house or finance their credit card balance.
Getting 0.5% on your bank balance, paying 4%-6% on a mortgage
and 12%-18% on a credit card, is great for bank profits!
Worse yet, at least another
15% - 20% of the increase in corporate profits comes
from the falling dollar. Any American traveling to Europe and
elsewhere abroad this spring and summer will notice how savers
are being punished!
In the old days, finance company
profits were only 12% or, at most, 15% of corporate profits.
Now, with financing 40% of corporate profits and dollar devaluation
another 15%, how can the Fed ever firm without wiping out the
It is no surprise, then, that
savers and retirees on fixed incomes are in a world of pain.
The Federal Reserve's clear policy is to make them pay for the
economic recovery. In the 4th quarter of 2003, personal interest
income alone was falling at a $30 Billion annual rate! Savers
and retirees are being punished so that Fannie Mae can make record
profits. Moreover, principals at major Wall Street firms and
hedge funds using leveraged finance as their business model,
can once again trade up on their mansions in the Hamptons this
A central bank running a "weak
currency" and "negative real interest rate" policy
is simply standard operating policy and one where intelligent
investors, who know the game, can take defensive action. Unfortunately,
for savers and retired workers on fixed income, it looks like
the declining dollar, which has already fallen 50%, has further
to go because there still has been no drop against China as of
After listening to Greenspan's
testimony to Congress recently, if the Fed tightens after the
presidential election, they will not make the "real interest
rate "positive, but only neutral. (The real interest
rate is the interest rate minus the inflation rate - or, your
"real return"). Robbing savers could go on for
years! Deciding how to invest is not easy because not only are
the stock, bond and housing markets artificially inflated in
price, but, at some point, world central bank money growth may
not be able to prevent violent market corrections.
February 23, 2004
Finance Group, LLC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480