It was a busy week in the monetary world, but most Americans wouldn’t know it unless they watch a financial channel on cable or seek out the news on the Internet.
While the Fed’s latest stance on monetary policy may not interest most Americans, that doesn’t mean it won’t affect them and their retirements.
The Federal Open Market Committee (FOMC) wrapped up its latest meeting on Wednesday. For its fifth straight meeting, it announced that the Fed would reduce its monthly purchases of assets by another $10 billion. So once again, while the Fed will still be creating money out of thin air, it will be doing so at a slower pace.
In 2013, the Fed was engaging in its so-called quantitative easing (money creation) at a pace of $85 billion per month. This translates to about $1 trillion annually. But since the beginning of this year, the Fed has gradually been reducing its asset buying.
With the latest announcement, the new rate will be $35 billion per month — that is still a lot of money.
The Fed has had something of a free lunch over the last six years. Since the fall of 2008, the Fed has essentially quintupled the adjusted monetary base.
But while the base money supply has grown by five times, we have not seen anything close to this in terms of consumer price inflation. Much of the newly created money has gone into excess reserves at the banks.
The Fed has been able to secretly bail out the banks by buying mortgage-backed securities that are worth less than what the Fed is actually paying for them. It has also enabled continued deficit spending on a massive scale by Congress. With low price inflation and low interest rates, it is no problem for the Fed to buy U.S. government debt to help finance the government.
Considering the unprecedented actions of the Fed over the last six years, it really has been given a free ride. While its policies have misallocated resources on a grand scale, the harm in its policies is not yet obvious to the average person.
Price Inflation
The Fed’s meeting wrapped up the day after the latest government inflation numbers were released. The Consumer Price Index (CPI) number came in at 0.4% in May. The median CPI, which tends to be less volatile, came in at 0.3% for the second month in a row.
If you annualize these numbers, the CPI would be at 4.8% (0.4 x 12 months), and the median CPI would be at 3.6% (0.3 x 12 months). Even looking at the CPI in comparison to last year, it is up 2.1%. The median CPI is up 2.3% from last year.
If this continues, this could be a major problem for Janet Yellen and the Fed. They have a targeted inflation rate of 2%. In reality, they have already overshot that target, yet they are still creating new money out of thin air.
Most of the Fed members, along with other Keynesian economists, believe there is a trade-off between inflation and unemployment. They look at it as a balancing act. In the short term, this can be correct, but the problem for Keynesians is always the long term. And the long term may be arriving sooner than they hoped.
The 1970s demolished the theory that you can’t have high consumer price inflation and high unemployment/recessionary conditions at the same time.
So what will the Fed do if consumer prices continue to rise at a faster pace than the artificial 2% target that has been set? Will the Fed completely stop its monetary inflation or even sell off some of its assets? If it does that, it will surely risk a deep recession.
If the Fed ignores increasing price inflation and continues with its quantitative easing, it will risk losing control of the dollar. It will risk a repeat of the 1970s… or maybe even worse.
With prices going up in the grocery store, Janet Yellen will soon be in an unpleasant situation.
Government Spending and Your Retirement
If the Fed is forced to stop its monetary inflation in order to save the U.S. dollar, it will no longer be buying U.S. government debt. This means the Treasury will likely have to issue debt at higher rates, unless the central banks of China and Japan decide to ramp up their buying even more, which doesn’t seem likely.
Perhaps American investors would buy U.S. debt at lower rates if there is a severe recession, but even this would not likely last long.
Eventually, Congress is going to be forced to cut back its spending or find other ways to get money to spend. While the American people seem to put up with increasing debt, they tend not to accept higher taxes. Therefore, I doubt increasing taxes will cover much of the shortfall.
This is where your retirement comes in to play. In Obama’s last State of the Union speech, he announced his new MyRA plan. It is a retirement plan that will be offered through employers but essentially run by the government.
If the Fed is forced to tighten due to higher price inflation, and if the stock market drops because of this, then Obama’s retirement plan may become more attractive to some people. It is being sold as a safe and secure place to put your retirement money.
Unlike regular IRAs and 401(k) plans, the MyRA will only have one investment option: a mix of U.S. Treasury bonds.
That’s right; you can ensure your money will be safe and secure by handing it over to the government for spending purposes. But they assure you that you will get it back… just like Social Security.
If the Fed is no longer subsidizing Congress by buying debt, then Congress will get creative.
While MyRA is initially being sold to lower-income individuals, I’m sure it will be expanded over time. If any American, rich or poor, is willing to hand over some of his hard-earned money to the government for protection, I’m sure the government will gladly accept it, especially in such a time of need.
The Federal Reserve Threatens Your Retirement
No matter what the Fed does at this point, it is a threat to your retirement. If it stops its money creation to save the dollar, then we will likely see a falling stock market, along with Congress trying to get more of your money to fund its deficits.
Obama’s MyRA scheme is being put in place to help Congress with its spending problem. But let me be clear: it is not there to help Congress reduce spending, but to be able to continue it. Bankrupting Social Security wasn’t enough, so they are moving on to another plan.
If the Fed decides to keep the economy going for a while longer by ramping up its monetary inflation again, then the depreciating dollar this will create will be a major threat to everyone’s retirement.
Two percent price inflation is bad enough, as it slowly eats away at your savings. But imagine if it’s 10% or 20% price inflation.
In this case, many Americans would see their retirement savings wiped out without even putting it in a “risky” investment. Money market funds or bond funds may turn out to be the riskiest investments there are.
If the Fed tightens its monetary stance, Congress is going to be looking for additional money to spend. Don’t get sucked into another government retirement scheme that is just going to spend your money.
But if the Fed continues to inflate, you will definitely want to be in hard assets to hedge against a depreciating U.S. dollar. These will turn out to be the investments with the least amount of risk.
Until next time,
Geoffrey Pike for Wealth Daily
