The Federal Reserve's War On Savers

Got any American dollars? Well you better spend them fast before they ain’t worth a Continental.

With a policy that has spanned the last two presidential administrations, the Federal Reserve has waged an all-out assault on the U.S. Dollar, and by proxy, the American people. It was about two years ago when the Federal Open Market Committee implemented its policy of keeping interest rates at or near zero percent for an “extended period,” in what has become a kind of running joke.

But the American people aren’t laughing, mainly because the joke is on them. They refused to go along with Bernanke’s monetary masochism, which he hoped would spur consumer spending and create demand for credit. Those visions have proven to be pure fantasies. Consumer spending for August was the lowest since March, and is still below August 2009 levels, which were below fall 2008 levels when Wall Street was falling apart. Furthermore, banks are reluctant to lend in these uncertain economic times, especially in a country where subprime lending served as a catalyst for the destruction of the banking sector so recently. Not surprisingly, the official unemployment remains high, hovering around 10%.

So the Fed has done everything in its power to discourage Americans from saving their money: rock bottom interest rates, quantitative easing, the attempted competitive devaluation of the dollar on the foreign exchange market, e.g. by trying to pressure China into allowing the yuan to appreciate. (The recent accusations from some American officials that China is manipulating its currency are hilariously hypocritical.) However, only until recently has the global economy cooperated with the Bernanke’s ambitions. Previously, sovereign debt crises in Europe, China’s rigid yuan policy, and the ongoing sputtering of the Japanese economy, helped foil the Fed’s best laid plans to depreciate the dollar vis-à-vis the world’s major economies and inflate the home economy upward by boosting exports and domestic consumption.

Now, after two long years of inflicting serious pain on American savers, the Fed is finally beginning to see some of the rotten fruits of its mischievous labor. The vigilantes are out in full force—gold vigilantes, bond vigilantes, and even Euro vigilantes. (Remember all that talk about EUR/USD parity a few months ago?) The Fed’s warning to the world is clear: You do not want to be holding our paper.

Indeed, the looming second round of quantitative easing measures (QE2, i.e., asset purchases, i.e., more money printing) has already prompted many economists to downgrade their growth outlooks for the U.S. economy in 2011. I suspect that the forthcoming QE2 is the primary reason for the stock market’s torrid run of late. Low bond yields and low rates on savings, combined with an inevitable inflationary trend courtesy of the Fed is having the surely anticipated effect of artificially greasing equity markets as investors seek higher returns. Expectedly, gold has risen to record levels, $1,381 an ounce as of this writing. And although a short-term correction is surely in the cards soon, the long-term trend for bullion remains up, up, up. Ditto for silver; perhaps more so.

Will Americans get the Fed’s “message” finally and begin to part with the money they have? Given that America’s total household debt is an astounding 123% percent of annual after-tax income, it seems unlikely that many Americans will take on additional debt burdens. Then again, never underestimate the American’s capacity to spend beyond his means. Whatever happens, this debt-ridden mess we call the U.S. economy is a completely unsustainable model for economic development. It is not going to end well.

- Max