The Effects of a Financial Repression

Something — we’re not altogether sure what — touched off MSNBC’s Dylan Ratigan yesterday.

We love it when these guys lose their cool. This is not nearly as entertaining as Jim Cramer’s tantrum imploring the Fed to “open the discount window” in 2007, but pay attention to the content…

Dylan Ratigan

(Also watch the faces of the support staff behind him! Heh…)

We’re not 100% sure what Mr. Ratigan means by “extraction.”

“Privatized profits, socialized risk” is a theme you should be familiar with here in The 5. “Financial repression” is another we heard a lot about during the Symposium in Vancouver.

“Extraction” sounds more like a dental procedure, but from the context, we believe he means a class of financial engineers intentionally stripping the productive classes of their remaining assets.

That’s our best guess… considering his rant came two hours after the Federal Reserve made its own extraction plans known to the world.

Yesterday, the Fed put savers on notice: You’re screwed for the next two years. At least.

The pertinent background: On Dec. 16, 2008, the Federal Reserve launched the first round of “quantitative easing,” accompanied by a decision to slash the federal funds rate to an unprecedented 0-0.25%. The Fed statement said conditions would warrant these “exceptionally low” levels “for some time.”

On March 18, 2009, the Fed sought to be more precise in its time horizon, promising these “exceptionally low” levels “for an extended period.”

Every six weeks, the same language has turned up in the Fed’s statements — an all-too-easy source of mockery for your 5 Min. editors.

Yesterday, the fun stopped. Now there’s an actual date (well, year, anyway) attached to the “extended period.” Boo.

“The committee currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

There you have it: The Fed has acknowledged the economy is going to be jonesin’ for at least two more years and will require the IV drip of near-zero interest rates just to stay alive.

Following the Fed’s decision, the yield on a 10-year Treasury note sank to 2.14%. That’s only 7 basis points away from the all-time panic low reached a couple of days after that first QE declaration from the Fed in December 2008.


More to the point, the Fed has made it plain that savers will continue to be relentlessly flogged.

“From this day onward,” wrote former hedge fund manager Bruce Krasting at his blog last night, “every buy-and-hold investor who acquires Treasury debt with maturities of less than five years is guaranteed to lose money.”

This is the reality of something we discussed in Vancouver last month: Financial repression. The Fed will keep interest rates artificially low so the Treasury can keep its own debt service costs down.

The Treasury Department blows through $3.8 trillion in a year on $2.2 trillion revenue. But at the moment, barely 5% of that total goes toward interest payments on the debt they issue to make up the difference. That’s a sweet deal. Treasury officials would love to keep the drip going for as long as possible.

Good for the Treasury, not so good for you… because it means you get still more in the way of “negative real interest rates.” This morning, a 5-year CD yields 2.25%. But consumer prices are running at a 3.6% annual clip. So your CD is actually losing you 1.35% in purchasing power… before taxes.

That’s financial repression.

To borrow a phrase from the computer world, this isn’t a bug: It’s a feature. The Fed is purposely forcing you “out onto the risk curve” so that prudent savers will buy stocks and prop up the stock market.

In another 2007 flashback, Alan Greenspan accidentally gave away the game in his Daily Show interview with Jon Stewart:

Stewart: When you lower interest rates, it drives money to stocks and lowers the return people get on savings.
Greenspan: Yes, indeed.
Stewart: So they’ve made a choice — “We would like to favor those who invest in the stock market and not those who [save]”…
Greenspan: That’s the way it comes out, but that’s not the way we think about it.

We featured the segment in I.O.U.S.A. despite Greenspan’s own proclamations in the film that “without savings, there would be no future.”

“In a negative rate world,” said David Franklin of Sprott Private Wealth during the Symposium in Vancouver, “speculation must be part of your portfolio.” And gold is the safest among those speculations.

Sure enough, gold is powering to new highs… again. The spot price crested $1,800 briefly today, later pulling back to $1,777. Only 72 hours ago did the price break through $1,700 for the first time.


Addison Wiggin,
for The Daily Reckoning

The Daily Reckoning