TARP, Stimulus and Bailouts Hurt Prudent Savers
As of today, few things would be less appealing in your portfolio then dollars. As the Federal Reserve pours liquid-ity into the economy through TARP, stimulus and bailouts, and the Federal Government runs record deficits, interest rates stay artificially low…depressingly low. In fact, a quick surf of Bankrate.com tells me the highest yielding money market account (MMA) currently fetches 1.81%, while the average yield comes in at a whopping 1.113%. (1) That means if a person has $20,000 of hard earned money stuffed away in a MMA, he or she will earn roughly $30/month in taxed income. Nice.
As certain industries are deemed too important to fail (cough, cough…U.S. autos), major financial firms get propped up (I’m looking at you AIG), and the government decides to spend money in health care, all of the new money showered on the economy hurts prudent savers. Imagine if you were one of the few disciplined Americans who saved money for decades? And what about grandma and grandpa who are retired, well past their prime earning years, and living on a fixed income of Social Security and a savings account? It’s all about looking out for the little guy.
The purchasing power of the dollar does not look promising moving forward. Yes, consumer prices overall are not skyrocketing this year; this is a recession. And yes, we’re experiencing deflation in key asset classes like housing. Having said that, the dollar has lost 15.86% to a basket of currencies since the March highs. (2) Plus, we’ve seen what has happened to the value of the dollar over the decades. According to the Bureau of Labor Statistics’ inflation calculator, a shade under 19 cents in 1971 dollars has the same buying power as $1.00 today. (3) It just so happens this was the same year the dollar standard took hold. Quite a currency peg, huh?
At least those AIG execs will be getting their bonuses.
Pay Czar Tackles AIG
White House “pay czar” Kenneth Feinberg has the daunting task of deciding who deserves bonuses and who doesn’t, and what a person’s value is to an organization. What could possibly go wrong here?
The pay czar is looking into recipients of bailout funds and stumbled across AIG this week. His final ruling? Three executives will keep large retention payments due to their critical roles in the company’s long-term financial success, and as recipients of taxpayer funds, the “public interest”. Feinberg also rubber-stamped CEO Robert Benmosche’s compensation plan he previously OK’d on October 2nd. And finally, Feinberg is cutting the bonus pool for the Financial Products division that was largely responsible for the risky investment products that sank the global insurer. (4)
Real Estate Keeps Deflating
We have a policy at SwiftEconomics.com: never refer to real estate price movements as appreciation or depreciation. We like to be more accurate and tend to opt for describing real estate price movements as inflation, disinflation or deflation. Besides, housing is like any other marketplace: driven by supply, demand and monetary policy.
Even with all of those helpful $8,000 tax credits, the future for real estate doesn’t look too bright. Fiserv, a financial information and analysis firm, is projecting an 11 percent decrease in the national median home price by June 2010, with 342 out of 381 markets to stomach deflating home values.
It comes to no surprise here that home values have probably yet to bottom out. So start thinking about your dream locale and floor plan; your mini-mansion will be available at a delightfully affordable price in a couple years.
Here are some of the hardest hit markets through June 2009, dating back to second quarter 2008:
Source: National Association of Realtors (NAR)
As they say: the higher they climb, the harder they fall. Turns out it’s true with asset bubbles as well.
(1) High Yield Rates for MMA and Savings Account – Bankrate.com, retrieved October 22nd, 2009, http://www.bankrate.com/funnel/savings/savings-results.aspx?local=false&IRA=false&prods=33
(2) Dollar Index Spot – Bloomberg.com, retrieved October 22nd, 2009, http://www.bloomberg.com/apps/cbuilder?ticker1=DXY%3AIND
(3) CPI Inflation Calculator – BLS.gov, retrieved October 22nd, 2009, http://www.bls.gov/data/inflation_calculator.htm
(4) 3 AIG execs get bonus OK from pay czar – CNNMoney.com, retrieved October 22nd, 2009, http://money.cnn.com/2009/10/22/news/companies/aig_bonuses_feinberg/index.htm?postversion=2009102218
(5) Latest home prices: April – June 2009 – CNNMoney.com, retrieved October 22nd, 2009, http://money.cnn.com/2009/08/12/real_estate/second_quarter_home_prices/index.html