Stephanie writes ....
Hello Mish,Clobbered by the Fed
I don't know if you give advice, but I heard you on Coast-To-Coast and you seem to know what you are talking about. I am 65 years old, get $938 from Social Security, and this is all I live on every month.
I have a CD that is about $16,000 now and is providing $75 a month. In about a year that will stop because the interest has gone down so much. If you were me, what would you invest in?
I lost $2,000 in the stock market a few years ago and the way it is now it is rather scary. I don't know what else to even consider and when I ask my banker he seems to be at a loss too.
Any help you could offer would be a blessing. Thank you for your consideration and kindness.
Stephanie - Somewhere, USA
Hi Stephanie
You and many others are getting clobbered by the policies of the Fed. Not only did taxpayers bail out the banks at taxpayer expense, Bernanke and the Fed continues to do so.
By holding interest rates low, the Fed is hurting everyone on fixed income with savings in the bank or CDs. You get almost no interest on your savings, and that is robbing you and everyone else like you.
Bernanke is hoping people like you gamble and invest in risky assets. Indeed, he is doing everything he can to force people into taking more risk.
Don't do it. It is not a prudent thing to do.
The stock market is extremely overvalued here and could easily decline hard. Indeed, I think it will at some point.
Emergency Fund in Cash
My straight forward advice to everyone is to have an emergency fund of at least a year's worth of living expenses in the bank before they invest in stocks, bonds, gold or anything other than short-term CDs or treasuries.
It is obvious that Bernanke's concern is doing what is best for banks. He shows no concern about the damage he is causing elsewhere.
Bernanke is a Coward Hiding Behind Mathematical Formulas
I wish I could get Bernanke in a room with you and everyone in your position, and take questions from you.
Bernanke will not do that because he is a coward. He hides behind mathematical formulas, the same ones I might point out that told him housing was not in a bubble, there was no risk of recession, and that the unemployment rate would not top 8%.
He did not know what he was doing then, and he certainly does not understand the risks now.
Moreover, his "Quantitative Easing" policies have helped fuel speculation in commodities, especially food and gasoline. That speculation is contributing not only to rising prices in the US, but even more so globally.
To be fair, there are some severe weather problems in other parts of the world that affect growing conditions and thus food prices. In addition, there is massive credit expansion in China and India that puts upward pressure on food and energy.
However, there is also little doubt that Bernanke has fueled commodity speculation with his low interest rate policies and that too has pushed prices higher.
Believe it or not, Bernanke is worried that prices might fall. I suspect you would love to see prices fall, and so would everyone else in your situation.
Unfortunately, Bernanke intends to keep interest rates low until prices go up to his liking, and then when prices do start rising, interest you earn on your CD will not keep up with prices.
Bear in mind, that the Fed excludes food and energy from the prices they monitor. They desperately want housing prices to rise. However, the Fed can make money available, but it cannot control where that money goes.
Serial Bubble Blowing
The Fed's loose money policies fueled a housing bubble last time, now money is pouring into commodities, junk bonds, and leveraged buyouts (once again). This is bound to end badly once again.
Meanwhile, the unemployment rates is still 9.4% officially, and much higher unofficially.
Fed's Policy Is Theft
Stephanie, it's a little known fact that inflation benefits those with first access to money, such as the banks, the wealthy (via rising asset prices), and the government (think rising sales taxes and property taxes when prices go up).
Everyone else gets screwed. You are right in the middle of the pack of those most hurt by the serial bubble blowing policies of the Fed.
Viewed this way, Bernanke's policies are nothing but theft, robbing the poor, for the benefit of banks and the wealthy.
This is why I support Congressman Ron Paul's effort to end the Fed.
No Good Solutions for Those on Fixed Income
Your dilemma is 1-year treasuries yield a mere .23%.
Unfortunately, I have no good investment solutions for you, because there are none. You are not suited for stock market risks, and if there is any chance you will need to use your savings any time soon, you cannot afford to risk being in long-term CDs.
Arguably the best thing for you to do is find a bank that has 1% or higher rates on savings accounts.
Avoid Fees
There are some other common-sense things you can do. For example, it is critical for you to avoid all fees. If you have fees on your checking account now, find a place that does not have them. Bankrate can help on CD rates, savings rates, and checking account rates.
Invest in a Freezer
I do not know whether you have a home or an apartment, but if you have room, get a suitably-sized freezer and only buy meat on sale. The price of meat on sale is frequently 50% or less of meat not on sale.
Wrapped properly, many food items will last a year or longer. Use freezer paper for roasts and date every package. Packaged bacon also freezes well. I only buy bacon when it is 2 for 1. If you are nimble, learn to cut your own chicken. If not, buy the cuts you like on sale and freeze those.
Buy ground beef on sale and make patties the size you like and freeze those. Pork chops freeze well too. I use good quality plastic wrap doubled up. Costco has excellent quality wrap in a large spool that will last a very long time. Get all the air pockets out or you will get freezer burn.
Vacuum packaged cheese also stores well. It needs to be refrigerated and can be frozen, but does not have to be frozen.
Buy storable commodities such as spaghetti, pinto beans, brown rice, etc. on sale. Try not to buy anything unless it is on sale. Then buy large quantities.
Complain to the Fed
If I had an email or Fax number for Ben Bernanke or the Fed I would post it. Unfortunately all I have is a link to a contact form. You can use that form to Contact Ben Bernanke and give him a piece of your mind.
Change the button on the form to "Comment for Board Members" and blast away. It will not do any good because the Fed does not care about the plight of those on fixed income, but it might make you feel better.
I hope some of these ideas help. Best wishes.
Good luck to you Stephanie.
For everyone else ... This does not change my stance on deflation. I think round II of a major credit crunch is likely. All of the structural problems remain and the global economy is at least as unbalanced as before, possibly more so. On a credit basis (which is what matters to those not retired and struggling on fixed income), I expect the US to dip in and out of deflation over a number of years as did Japan.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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