For the moment, the Fed remains leading the charge to hold interest rates low, based on what I would say is a faulty premise that the US economy just needs more expensive homes and homeowner tax income to get out of the hole it finds itself in.
The primary advantages of low interest rates are:
1) Cheap borrowing/refinancing, taking pressure off consumers
2) Allegedly easier to acquire homes, raising tax receipts (except for banking restrictions on lending)
3) Increased home sales enable retirees to downsize without collapsing pricing/bankrupting themselves
4) Support prices of goods and services, avoiding debt spiral
Each of these virtues, however, comes at the assumption that the consumer had the leeway to borrow more, and would take the pause to put themselves on solid footing, paying down debt and restructuring. Cheap credit was (and is always) supposed to be a momentary stepping stone to a better tomorrow.
In reality, it always becomes a game a chicken.
Consumers haven’t repaired their savings accounts at all. Debt levels should be something like three quarters of what they are – we’ve had near zero interest rates for five years and banks have so many programs running to help consumers pay off loans, it’s ridiculous. But it hasn’t happened. Consumer finances remain horrible, the money has largely been spent in ways that haven’t strategically benefited the recipients, and the low interest rates have seeded a newer, more dangerous problem.
The nation’s retirement system is on the rocks.
Looking at the state of public pensions and private 401k’s, the baby boomer’s retirement is in peril. Misallocations into housing and malinvestment have taken their toll. This isn’t exactly breaking news.
However, heretofore the assumption has been that the Fed’s knee jerk reaction to keep rates low was the only pathway and that there would be no push to counter this until unemployment levels and economic prosperity returned.
I would suggest that within the next few years, as baby boomer retirement heats up and the ability to create a virtuous cycle built on higher home prices and cheap credit slips away, the pressure on the Fed to maintain low rates will actually begin to cave to a growing murmur from the crowd demanding higher rates to maintain retirement obligations.
While this move will be a death knell for economic growth, from the point of view of aging boomers (the reigning political powerhouse and largest voting segment) economic growth would be a hollow victory as their own retirement obligations come under pressure and we increasingly see benefit cuts, such as are being witnessed in Detroit or California. Maintaining the status quo at the expense of economic growth puts them ahead, as they have a larger share of current goods and services, whereas permitting growth would ultimately lead them personally to greater poverty.
High interest rates takes pressure off of pension systems, and enables savings accounts to grow rapidly (such as those of boomers who have taken the final steps of downsizing homesteads and transferred much of their wealth into fixed income investments). It also improves quality of life for those savers by putting pressure on pricing.
Within three to five years, I expect interest rates get pushed up above 6% annually, for the purpose of refinancing retirement accounts for the benefit of boomers, at the expense of the rest of the country (planet?). When this occurs, I don’t think it will be because the Fed has lost control of the bond market. I actually believe it will be done intentionally, driven from political expediency.
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If and when interest rates get to 6%, the boomers won’t have a care in the world. Because they’ll be dead.
When rates move higher, the economy will implode.
quite a bit of inflation comes with those fries.if warren wants to pay more taxes to save so-sec and the boomers,i suggest that the irs forces the politicians to remove the cap on fica. warren and the rest can afford a few more bucks every week, why not,he talks a good game about paying more,this way he can put his money where his mouth is.
i suggest that the irs forces the politicians to remove the cap on fica. I’ve been saying this to friends for years. So many have saved little if anything for their golden years that SS needs to be there. 6% int. sounds good, but I won’t hold my breath.
We have low rates for at least 12-24 more months. The Fed is in a box
Sure, but as soon as it looks like the banks and main body of the recovery can afford to lose a little money, I think you’ll see the discount window rate start to creep up, a half point here, a quarter point there, and when the economy slows down, there will be no relief. Because it was all part of the plan.
Since the Boomers have always been the most selfish generation, this will probably happen.
Cain,
Interesting post. You make a good point about the political clout that Boomers carry, and their failure to transition to retire will definitely be talked about in 2016.
However, I can’t see how we can actually raise rates, our entire system is based on lowering rates until they cannot get any lower. In a few years, our debt will over $20T and interest alone at 6% would bankrupt us. I just don’t see how we could do it IMO. I see more along the lines of SS expansion/getting rid of FICA caps as the gentlemen above me discussed.
SS needs to be shored up on it’s own, but there’s too much private retirement funding that needs to be recapitalized. They’ll figure out how to rig the game as they go. It’s the fastest path to boomer financial security – higher rates. Maybe the Fed pushes the funds rate higher, but keeps buying the higher yield?
Usual disclaimer- I am not an economic genius.
Two comments:
1. Doesn’t the US Government need to keep interest rates down until a plan is devised to solve debt service?
2. Are not the Baby Boomers and elderly going to be thrown under the bus anyway? The electorate is changing, and new technology will enable greater voter turnout among the young.
Sorry to be political, but isn’t it clear that the younger entitlement generation is gaining control?
I think Congress will act more and more like advertisers, and it is a fact the older generation is useless and unwanted by marketing people. No one sells to the 55+ group if they have an opportunity to sell to the pliable and impulsive under 30 group instead.
At the risk of sounding wacko-
All it would take is easy online voting, and then the balance of power would turn. It is true that older people go online as well, but not in the volume of young people.
More importantly, a new REQUIREMENT to do something in order to vote, could instantly disenfranchise an older voting generation. For example, requiring engagement in social media or providing personal information that may be offensive and unacceptable to those who do not buy into a complete loss of privacy as the new norm.
Some people presently do not like the idea that showing an ID to vote is necessary, and/or do not support a national ID card.
I think a much larger (and older) group reject the idea that an online or “fully information mined” existence should be required in order to live and participate in American life.
Why would any of those things happen? People have been waiting on the youth vote to show up since the 60’s. The youth vote usually shows up in its mid thirties, i.e. not youth vote.
As for the interest payments; yes the US government does need to keep low interest rates to service debt, in theory. But there’s another option, which involves the Fed buying as much high interest rate debt as need to get the job done. It would reek havoc on the dollar, but if we have 76 million people retiring into poverty, this would be the fastest way to recapitalize those men and women.
I think the youth vote will show up when it is possible to vote on a smartphone or personal device.
I regret being a sourpuss; the lower economic class does not matter. The retirees who need interest income are the losers, along with the poor of all ages. The boomers and retirees who are in stocks and real estate are set, and part of the upper economic class.
btw. this is a narrative, a description of how I see conditions.
Just an opinion, not a crusade.
Oh sure. I’m just argumentative by nature – I enjoy the different narrative.
I’m thinking if/when people can vote with the same ease as purchasing something, then elections will become a consumer item. Marketing people target the younger demos, and one day politicians may do the same.
Politics and consumerism will become one and the same. The consumer world revolves around the young, and politics may soon follow.
No one will be too concerned if 50 million of the low income elderly can only afford one can of tuna instead of two. But if 50 million in the younger demos can no longer afford smartphones, clothes, fast food, etc the great consumer engine will be at risk, and that cannot be permitted to happen.