The Federal Reserve just didn’t manipulate markets, supply the well-connected with billions of dollars and create rampant price inflation, the United States central bank also cost the savers hundreds of billions of dollars in the process.
According to a major report by Swiss Re (via CNBC), the Fed’s quantitative easing program, which added more than $4 trillion to the central bank’s balance sheet, cost depositors and savers close to half a trillion dollars in lost interest income.
When the Fed decided to slash rates to nearly zero in late 2008, savers that maintained large deposits in general savings account and money market mutual funds lost out on $480 billion between 2008 and 2013. No wonder why the U.S. has a savings rate of only 5.8 percent (SEE: Poll: Half of Americans are saving close to nothing).
Despite the fact that retirees were likely to be hit the hardest on these artificially low interest rates, supporters of QE say the policy directive was necessary in order to ramp up the economy and stock market. Although the stock market is roaring with bubbles and record-high returns (SEE: Nasdaq soars past 5,000 for first time since dot-com bubble – a bubble burst near?), the average person is still in disarray: millions unemployed, stagnant wages, price inflation, massive debt and the list goes on.
Swiss Re further noted that the “financial repression” has frustrated savers but also placed a damper on various places of investing and insurers, says Swiss Re CIO Guiod Furer.
“Besides the impact on long-term investors’ portfolio income, the consequence for capital market intermediation is not negligible either,” Furer said in a statement. “Crowding out investors due to artificially low or negative yields will reduce the diversification of funding sources to the real economy, thus representing a risk for financial stability and economic growth potential at large.”
The company warned that the financial repression will remain a tool for policymakers moving forward because of the lackluster economic growth in numerous parts of the world.
“Financial repression is likely to remain a key tool for policymakers given the moderate global growth outlook and high public debt overhang. Whether the costs outweigh the benefits largely depends on the ability of governments to take advantage of the low interest rate environment by implementing the right structural reforms,” Swiss Re said. “So far the record for doing so hasn’t been comforting.”
Former Fed Chairman Ben Bernanke called the policy of suppressing interest rates necessary (SEE: Ben Bernanke launches blog on economics, finance and baseball).
With central banks worldwide imposing artificially low interest rates, it should be interesting to see how much investors lost on a global scale because of these devastating initiatives.
The Fed has hinted that it may raise interest rates in June, but many economists peg the month of September for any rate hike. Other contrarian investors, however, say the central bank won’t raise interest rates at all because of the enormous debt levels accruing in all parts of the government and overall economy.
Leave a Comment