Tag Archives: borrowers

09.14.2012 | QE3 and the Baby Boomers

At the beginning of yesterday’s QE3 press conference, Fed Chairman Ben Bernanke referred to the plight of savers. Similarly, during an August “Conversation With the Chairman,” Dr. Bernanke was asked, “What about the savers?”

Both times, Dr. Bernanke had the same response. “Obviously interest rates are very low. They are low for a good reason…our economy is still in a fragile recovery…low interest rates are….to help the economy recover [and] restore more normal levels of employment and growth in our economy.”

What if, though, you have $360,000 in savings? Retired, you depend on the return from your investment. With a 5% return, you might have gotten $18,000 annually from certificates of deposit (CDs) in addition to maybe $18,000 from social security. Each month, you would have received $3000. Now, that CD return is close to zero and your monthly income plummets.

This takes us to the baby boomers.

Every month, for the next 17 1/2 years, 10,000 baby boomers will celebrate their 65th birthday. Pew Research says boomers feel 9 years younger than their chronological age and consider 72 the threshold of old age. I wonder though, how retired boomers are feeling about QE3, especially with food and gas prices rising. (Please see the ground beef graph below. Since January, 2008, ground beef has risen from $2.73 a pound to $3.45 during July 2012.)

So when, Chairman Bernanke says that his goal is very low interest rates until 2016, you can see the tradeoff. Lower interest rates are supposed to target the corporate borrowing that creates more jobs, fuels expansion, elevates tax revenue and buoys stock prices. But many senior savers pay the cost.

Sources and Resources: Talking about the plight of savers, the NY Times, here and USA Today, here do a good job of conveying the cost of QE3. To see how Dr. Bernanke commented, here is a WSJ blog and his ‘Conversation With the Chairman” talk. Finally, the Bureau of Labor Statistics (BLS) was my source for price information while here is Pew Research data on baby boomers.

The Price Per Pound of Ground Chuck Beef, January 2002-January 2012

Source: BLS

Posted by: adminEcon
Tags: baby boomers, Ben Bernanke, borrowers, certificates of deposit, cost benefit, Federal Reserve, low interest rates, opportunity cost, QE3, retirees, savers, social security, tradeoffs
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04.13.2012 | Size Inflation

Inflation is not only at the cash register.

Our story starts at H&M where an Esquire journalist tried on a size 36 pants that were too tight. He continued his search for pants with the 36″ waist label at Old Navy and they were too loose. After that, he sampled a pair of Dockers. Curious, this gentleman did the math. The H&M pants had a 37″ waist, Old Navy, 41″ and Dockers, 39.5″.

Women also have experienced some “downsizing.” Graphing size changes in the UK, The Economist concluded that women’s sizes have plunged by 2 numbers. If you wore a size 14 several years ago, now it is labeled a 10. If you wore a 4 or a 6, your size might have declined to a double zero.

Size inflation–the trend toward smaller sizes getting larger—has its pros and cons. While smaller sizes make us feel good and might elevate retail sales, they enable us to ignore weight gain.

The bottom line: Price inflation also has pros and cons. Saying that inflationary policy helps borrowers, lowers unemployment, and makes holding cash less attractive, Paul Krugman supports expansionary Fed policy. By contrast, a more traditional view suggests that inflation is a hidden tax that distorts price signals, punishes savers, and creates a less stable business environment.

So, whether we are at the clothing rack or the cash register, we should think about inflation.

Here is the journalist who looked for the size 36″ waist, an Economist chart of size inflation, a Bloomberg columnist worrying about inflation and Paul Krugman asking for more. The CPI data is here.

Posted by: adminEcon
Tags: borrowers, clothing, CPI, deflation, H&M, Old Navy, price inflation, savers, size inflation
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04.05.2011 | Savers or Borrowers?

In 1987, a $100 savings account would have earned close to $9 in interest. In 2005, $3.75 or so. Now, maybe 47 cents?

The WSJ, had a good article describing how savers are suffering. The retirees who expected to depend on interest income until they died have much less. As one retiree said, “At one point we thought we’d have a little money to leave our kids. That ain’t gonna happen.”

The Economic Lesson

Monetary policy decisions force us to make trade-offs.

When the Fed started targeting lower interest rates, its goal was to jump-start the economy. With a 0-.25% fed funds rate, banks could borrow from each other for almost nothing and then have inexpensive money to lend. Lower interest rates, they hoped, would encourage businesses to borrow, expand and hire.

If the opportunity cost (the sacrificed alternative), though, was higher rates for retirees who live on their savings, then should the Congress implement deficit reduction through Social Security and Medicare?

Posted by: adminEcon
Tags: borrowers, Federal Reserve, interest rates, Medicare, opportunity cost, recession, retirees, savers, social security
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08.23.2010 | The Two Sides of ZIRP

Hearing economists discuss the Fed’s zero-interest-rate policy, Harry Truman would again search for a one-handed economist.

On the one hand…if you can borrow money cheaply, you are more likely to expand your business and buy a house or a car. Especially during a recession, low interest rates can encourage business expansion and consumer loans. As a source of economic stimulus, many believe that zirp is desirable.

On the other hand…households and businesses that have income based on interest rates are suffering. Historically, savers have been able to earn an average of 3 percent. Now, they receive close to 0% when they invest in such financial instruments as short term treasury securities, The problem? If we look at what they could have earned, savers have lost a total of $350 billion annually–350 billion that would have been saved or spent.

For countries also, there are two sides. According to the Bank for International Settlements (BIS), countries with zirp, such as the U.S., can borrow money very cheaply. Also though, other nations such as Australia that pay higher interest rates, can lure investors away from lower yielding securities elsewhere.

The Economic Lesson

The interest rate is the price of money. When an economy experiences rapidly rising prices, central banks usually increase the price of money to constrain spending. Recession, by contrast, requires a lower price of money (interest rate) in order to stimulate business and consumerr spending.

The Federal Reserve has three traditional tools to affect interest rates in the U.S. 1) It can change the amount of money that banks have to keep in reserve. 2) It can change the interest rate that it charges banks when they borrow the Fed’s money. 3) It can enable banks to have less to lend by selling them securities or more money to lend by buying securities from banks.

During the recent recession, the Federal Reserve expanded the contents of its monetary policy “toolbox”.

Posted by: adminEcon
Tags: borrowers, Federal Reserve, savers, zirp
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