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August 18, 2016

How The Fed Policy Is Killing the Economy and Your Retirement

The Federal Reserve’s low interest rates – the same ones that caused the credit crisis and Great Recession – are absolutely killing savers, retirees, and the economy.
A landmark report from insurance giant Swiss Re shows how the Fed’s misguided interest rate policies cost savers $470 billion in forsaken interest income between 2008 and 2013.
Based on Swiss Re’s math, by the end of 2016 savers, retirees, and pension funds will have been shortchanged by an astounding $752 billion.
Swiss Re calls the Fed’s actions “financial repression.”
I call it tyranny.
And it’s getting worse. In fact, it’s about to feel like torture.
Here’s how savers, retirees, and the economy are being repressed by the Fed’s manipulation of interest rates and what’s about to happen that’s going to turn tyranny into outright torture…
Let’s get to it…

Keeping Interest Rates Low Hurts Savers

By the end of 2016 Americans will have lost out on $752 billion of interest income they should have banked.
Not only have they not made money on their savings and fixed income investments, they’ve been cannibalizing their principal to buy food, pay rent and mortgages, utilities, and live.
The population segment suffering most are folks nearing retirement and, of course, retirees.
That’s because every financial lesson ever taught, every investment plan laid bare before investors tells them to reduce their exposure to risky equities and load up on safer fixed-income products, and bonds as they head into their later years.
In fact the old rule of thumb used to be subtract your age from 100 to determine the percent of equities you own, keeping the rest of your savings in bonds. So, every year we get older we’re holding more and more bonds, collecting less and less income.
In fact, fewer households and individuals are invested in the stock market than ever before. The market’s almost 60% drop in 2008 through early 2009 sidelined millions of investors who’ve totally missed out on the market’s astounding rise since March 2009.
Right now, if you have a nest egg of $1 million parked in super-safe 10-year U.S. Treasuries – yielding 1.55% right now – your interest income per year would be a whopping $15,500 a year.
Not only can’t you live on that, I’m about to show you how that won’t even pay your health insurance premiums starting in 2017.

Here’s How Things Will Go From Bad to Worse

It would be one thing, maybe, if the Fed’s low- and zero-interest rate policies stimulated economic growth enough to lift rates, give investors confidence in the stock market, and power the economy so “all boats rise with the tide.”
But that’s not happening.
Imagine how the public’s lost income of $752 billion would have affected economic growth.
That’s a lot of capital that would have been available for long-term investment, which would have gone to businesses to expand, hire workers, and increase the velocity of money throughout the economy and power growth.
Instead, low rates allow corporations to borrow cheaply to buy back their shares, as opposed to them planning long-term capital improvements, expending capital, hiring and growing earnings. But earnings are shrinking and buybacks, or so-called shareholder payouts, that are supposed to benefit equity stakeholders, get almost completely erased when the market falls and artificially pumped-up share prices fall back to earth.
No wonder the economy isn’t growing.
According to the Swiss Re report:
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. So far the record for doing so hasn’t been comforting.
Sadly, that’s the good news.
The bad news is healthcare costs are increasing so rapidly that whatever savings low-income workers and retirees have is about to be decimated.
According to ZeroHedge:
A new study by independent analyst Charles Gaba – who has crunched the numbers for insurers participating in the ACA exchanges in all 50 states – we can also calculate what the average Obamacare premium increase across the entire US will be: using proposed and approved rate increase requests, the average Obamacare premium is expected to surge by a whopping 24% this year.
How does that translate into dollars and cents, you ask?
Fidelity Investments crunched the numbers into the future for us. Keep in mind these numbers came out before the latest calculation of premium increases expected by year end and in 2017.
Assuming a woman lives 22 years after retiring, Fidelity calculates her insurance premiums, co-pays, and standard medical costs for things like eye exams and glasses will cost $135,000.
A man’s cost will be $125,000, because men live on average only 20 years after retirement.
If you’re a couple, you’ll need to have about $260,000 to cover healthcare.
These numbers don’t include any long-term care or nursing home costs, because they aren’t even covered.
That’s torture on top of tyranny.
The truth is the Federal Reserve hasn’t just imposed financial repression on America’s savers, its retirees and the whole economy – it has doomed us to a future of low rates, a widening income and wealth gap, and probably another Great Depression.
Courtesy Shah Gilani at Wall Street Insights & Indictments (EconMatters author archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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