As the stock market in America continues to move upward into elevated territory, the Federal Reserve and its monetary policy program of creating an abundance of liquidity and cash in the financial system deserve much of the credit.
However, the average American has not participated in this giant creation of wealth over the last few years and they are extremely concerned about their future retirement plans.
The problem with the Federal Reserve’s monetary policy program is that it cannot solve inherent structural issues prevalent in America today. Monetary policy initiatives can help only a certain section of America, namely the financial markets.
Many Americans over the last few years have seen wages stagnate while costs continue rising. This has left the average American with far less money available to invest, if at all. The net result is that millions of Americans do not have any investment in the stock market, leaving them to sit on the sidelines of the recent boom created by the Federal Reserve through its monetary policy initiatives.
Additionally, many retirees have their money in bonds. Because of the Federal Reserve’s monetary policy program of keeping interest rates low and aggressively buying bonds, this has left real yields extremely low; in some cases, they’re essentially nothing.
This means that retirees who do have some cash available to invest in a relatively safe investment can’t generate any income, because the Federal Reserve is so aggressive in its monetary policy stance.
According to the Employee Benefit Research Institute (EBRI), a survey reported that 57% of American workers had less than $25,000 in total household investments and savings, not including their houses. Additionally, the survey reported 28% had no confidence that they can retire comfortably, due to a lack of money. This is a record-low level of confidence. (Source: “Workers Saving Too Little for Retirement,” Wall Street Journal, March 19, 2013.)
In addition to those statistics, what was shocking was that when asked if they could come up with $2,000 due to an emergency next month, only about half of the workers and retirees surveyed stated this was possible.
While the Federal Reserve’s monetary policy program has been successful in raising the level of the stock market, it is clearly apparent that millions of Americans are not participating in this wealth creation.
The fact of the matter is that many Americans simply don’t have any funds available after paying their expenses from the meager income currently available. Economic growth remains elusive, which means a lack of significant job creation and increases in income.
While many retirees need income, the bond market is far too influenced by the Federal Reserve’s monetary policy program and is trading at levels at which I would not invest. With the current yields provided, I believe that over a 10-year period, many investors in bonds will suffer significant losses on their principal, in addition to inflation eating away at any returns.
The current price level of bonds is high, primarily because of the aggressive monetary policy program by the Federal Reserve. Essentially, I believe if one were to invest for 10 or more years in a U.S. government bond, after inflation, there would not be any real yield; once the Federal Reserve begins reducing monetary stimulus, the value of these bonds will decline significantly. It’s a lose-lose scenario.
By: Sasha Cekerevac
Posted: March 22, 2013, 7:52 am
We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....