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"No Country For Old Men?" Bernanke Plan To Exterminate Savers Is Unsustainable

Tyler Durden's picture


Bernanke's recognition of his penalizing savers with low rates as an 'issue for people' sparked an interesting note from the WSJ on how sensible and stoic savers are being herded (unsafely) into risky investments. Bernanke's insistence that "our savers collectively have to hold all the assets of the economy and a strong economy produces much better returns in general" must be juxtaposed with comments from a money manager that "I don't think that's a fair-trade" for money intended to be invested safely. By removing the last shred of hope for a rise in savings rates anytime soon, the Fed is once again creating the potential for major unintended consequences as the 30% drop in interest income for US savers from the 2008 peak forces them to extend duration (TSYs), lower quality (corporate bonds), and/or increase leverage/risk (equities). One only has to look at Treasury yields, Muni yields, investment-grade bond yields, and now high-yield bond yields for how tempted investors (retail and professional 'insurance/pension' assets) have become to take their safest net worth asset (low risk liquidity) and expose it to the business/credit cycle and all its myriad event risks. While reducing the rate of savings might seem sensible for the short-term from the Fed perspective, it leaves a wholly unsustainable recovery (or bubble in who knows which asset class next) and as Nordea notes this week, based on their models, a considerably higher savings rate will be needed going forward (for any sustainability) even as 'saved money' is rotated into risk or spent on quality-of-life maintenance. Perhaps it is time for many to listen to the sensibilities of the WSJ's last (75 year-old) interviewee who notes "At my age, I can't be a risk-taker anymore" as maybe it is time to consider the reality of the recent good US data in relation to coinciding elements such as inventory build-up, plummeting household savings, and lower gas prices when adding to that risky investment.

Wall Street Journal: Itchy Investors Ramp Up Risk 

 Robert Marcotte can't afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holdings of stocks and municipal bonds, using money now at the bank in certificates of deposit.


"It gets me a little uneasy," says Mr. Marcotte. "Since I'm not working, I am very risk-averse, but still need to generate income."



The Federal Reserve is presenting a broad swath of conservative investors, from retirees and college savers to banks and insurance companies, with a tough choice: move into riskier investments or continue coming up short from low-risk investments that aren't even keeping pace with inflation.




The Fed has "removed the last shred of possibility that interest rates were going to revert to normal in the near future," says Johns Hopkins University economics professor Christopher Carroll.



In congressional testimony on Thursday, Fed Chairman Ben Bernanke acknowledged that low rates penalize savers. "We understand it's an issue for many people," he said. "That being said, our savers collectively have to hold all the assets in the economy and a strong economy produces much better returns in general."




The low interest rates of the past several years have taken a toll on U.S. savers. All told, Americans collected interest income from CDs, savings accounts, insurance products and other sources at a seasonally adjusted, annualized rate of $976 billion in the fourth quarter of 2011. That's down nearly a third from the peak rate of $1.42 trillion in the third quarter of 2008.





One worry is that some investors will take on risks they aren't prepared to handle.

Brent Burns, an investment manager who builds bond portfolios for financial planners, says that since the Fed announcement he has fielded a flurry of questions from advisers considering high-yield and international bonds, and real-estate investment trusts. "I don't think that's a fair trade" for money intended to be invested safely, he says.



It isn't just retirees who are taking on more risk. Sotirios Keros, a 39-year-old pediatric neurologist in New York, says he plans to shift his emergency reserve to a long-term municipal bond fund when his CDs mature this summer. "I would still like to keep that as liquid as possible and as risk-free as possible, but I'm not really happy with the available options," he says. The Fed's decision makes it clear that "there's no value in waiting" for higher rates, he says.




Low rates are also pressuring life-insurance companies, which rely in part on returns from high-quality bond investments to pay their obligations. "We have about $175 billion in cash and investments, and 94% of that is conservatively invested," says Chris Blunt, executive vice president of New York Life.


After waiting three years for rates to rise, Jenny Fleming, a financial planner, is putting client funds into dividend-paying stocks. One of her clients, Margie Stewart Alford of Austin, Texas, is using dividend-paying stocks to provide interest income that might normally come from CDs. While Ms. Alford, 75, still plays Friday-night poker, she says she can't afford to boost her stock exposure too much. "At my age, I can't be a risk taker anymore," she says.


From Nordea Bank this week - Households´ savings have plunged

One likely factor holding up personal consumption is that US households have diminished their savings ratio at a rather brisk pace in H2 2011. While one can argue about the reasons behind this, we believe that it is unsustainable. On the contrary, our models suggest that savings actually should increase (see fig 4 above).

The average savings ratio since 1960 is 7% and considering the appalling fiscal situation (and the lack of will to do anything about it), a higher savings ratio is most definitely in the cards going forward.


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Mon, 02/06/2012 - 15:41 | 2131470 diesheepledie
diesheepledie's picture

I don't understand why everyone is against ZIRP. Bernanke is leaving the choice up to the people. You can greedily horde your dollars, and have them become worthless, or you can participate in the common good and invest in Americas future. If the currency collapses under hyperinflation it will nobody's fault but the people, their hatred, masochism, and greed. Bernanke is just pushing you to take the high road, and do the morally correct thing.



Mon, 02/06/2012 - 15:52 | 2131523 Uncle Remus
Uncle Remus's picture

I'll take "hatred, masochism, and greed" for $600 Alex.

Mon, 02/06/2012 - 17:25 | 2131917 Renfield
Renfield's picture

+1 for good sarcasm. I think a few people missed it though...

Tue, 06/19/2012 - 01:00 | 2538591 diesheepledie
diesheepledie's picture

There are many ways to cull the herd. Death to the moron sheeple!

Mon, 02/06/2012 - 15:41 | 2131472 MiniCooper
MiniCooper's picture

""At my age, I can't be a risk taker anymore,"

My Dad said those very words to me last night. He is age 70 and lives in the UK. He said he is calling his broker and selling all his shares now the market has recovered to somewhere near the old highs.

He said he is happy to live off his inflation index linked private annuity pension and state pension and live within that limit. He is not splashing out and does not need to. This is what all 'baby boomers' are going to do. 

Mon, 02/06/2012 - 16:11 | 2131591 riphowardkatz
riphowardkatz's picture

My dad is doing the samel but if you read When Money Dies it seems like this could be the exact wrong time to do it. The pensions are "linked" now but if 10-13% inflation hits that link may be undone. The main things that seemed to work in Wiemer were farm land, gold, rental property, real stuff and stocks.


Mon, 02/06/2012 - 22:55 | 2132759 malek
malek's picture

To both of you: if your dad expects to live more than another 6 years, buy some physical PM goddammit!!

Mon, 02/06/2012 - 15:44 | 2131483 divedivedive
divedivedive's picture


I think they are worried about the upcoming shrinking tax base. As baby boomers leave the work force they won't be contributing. They need to slow that exodus. One way is to affect the value of an individual's primary investment. Another way is to affect the value of equities. Have to keep them working and contributing, and not cashing out.


Mon, 02/06/2012 - 15:52 | 2131522 flyme
flyme's picture

Phrasing... I feel a Dalek moment approaching!

Mon, 02/06/2012 - 17:02 | 2131817 TheFourthStooge-ing
TheFourthStooge-ing's picture

flyme said:

Phrasing... I feel a Dalek moment approaching!

(in a metallic, ring-modulated voice): Savers detected in sector four. All Dalek patrols proceed to this location. Print, Hypothecate, Exterminate! Print, Hypothecate, Exterminate!


Mon, 02/06/2012 - 15:55 | 2131535 kito
kito's picture

Ha ha, bank CDs are safe investments...ha ha...that's a good one....

Mon, 02/06/2012 - 15:57 | 2131543 lasvegaspersona
lasvegaspersona's picture


In the long run (the one where we are all dead) I believe gold will be risk free. I struggle with suggesting it to older folks though because while I am willing to roll the dice I do not want to be the one who caused them to go on a catfood diet just because gold was pushed down for another few years.

Ultimately gold will come back as a monetary metal for savings. It will compete with fiat currencies and keep them well behaved. At that point it will be nice to have a good store of gold. The way points to that place zig and  zag however.

Mon, 02/06/2012 - 15:58 | 2131546 dojufitz
dojufitz's picture

Here in Australia we just had a politician call for a law against high interest rates....because it is killing our exports.....

Mon, 02/06/2012 - 15:58 | 2131549 Spigot
Spigot's picture

Buy physical gold. It has been returning an average of 22% per annum over the past 10 years.

Mon, 02/06/2012 - 16:03 | 2131561 americanspirit
americanspirit's picture

We already know that Betsey Wetsy, chief economist at BLS, doesn't think that old people count, so why should the Fed?

Mon, 02/06/2012 - 16:10 | 2131592 lasvegaspersona
lasvegaspersona's picture

This weeks FOFOA is a great reference on the role of savers. Charlie Munger (Warren Buffet's future cellmate) said they were evil jerks if they did not buy his paper risk be damned. FOFOA has a kinder and more realistic approach. Look what our government has do to our elderly. It is truly shameful.

Mon, 02/06/2012 - 16:18 | 2131624 CuriousPasserby
CuriousPasserby's picture

Anyone think older savers who never saw such bad interest rates will stampede to Obambi's opponent in November? While he might not be better he couldn't do worse than 0%. (Yeah, president doesn't control interest rates, but they don't know that, they only know O is prez, things are bad.) Landslide bitchez!

Mon, 02/06/2012 - 16:32 | 2131668 rsnoble
rsnoble's picture

The old savings rate was 7% and will be even higher?  Please more detail on that with all the people going from $80k a year to nothing like I have.  My savings rate is fucking negative.

Mon, 02/06/2012 - 17:05 | 2131826 Cranios
Cranios's picture

Bernanke sez 2% inflation target and 0% interest rates = robbing savers is now the official policy of the USA. But all "for the common good."

No doubt, this will build trust in the USA to look out for savers - right?

Mon, 02/06/2012 - 17:06 | 2131837 SillySalesmanQu...
SillySalesmanQuestion's picture

I say exterimate Ben and the Fed...maybe Ortho can come up with RIDBEN.

Mon, 02/06/2012 - 17:18 | 2131886 mrdenis
mrdenis's picture

That's why Obama is called the food stamp president ....he won't be happy untill every man Jack one of us in on em' ! 

Mon, 02/06/2012 - 17:25 | 2131916 john in cheshire
john in cheshire's picture

A normal government (US, UK) would stop taxing so much, stop spending so much and raise interest rates immediately. That's what normal people would do. But we are not suffering under the boot of normal people.

Mon, 02/06/2012 - 17:32 | 2131940 darkpool2
darkpool2's picture

Eeny meeny miney moe.... ( no, lets not go there....) . Better, " None for You, One for Me". .....who will dare write THAT book? How long would the ponzi exist with any modicum of stability if "savers/ seniors/planners" determined that a sound retirement plan consisted of " x" ounces of gold for each actuarially computed month from ( delayed) retirement, to death. Cash one in a month into whatever piece of fiat shit is being offered at the time, and i expect you will have a very reasonable chance of preserving purchasing power through your retirement years.........better chance than with almost any other fiat investment vehicle you can think of
Ps , would also bring on the reset that much bonus bonus bonus.

Mon, 02/06/2012 - 19:08 | 2132236 GoldenGal
GoldenGal's picture

This may be our last chance to SELL gold before it bottome out!

Are Diamonds the NEW gold?

Mon, 02/06/2012 - 19:10 | 2132239 GoldenGal
GoldenGal's picture

This may be our last chance to SELL gold before it bottome out!

Are Diamonds the NEW gold?

Mon, 02/06/2012 - 19:16 | 2132256 Dermasolarapate...
Dermasolarapaterraphatrima's picture

Low interest rates work in lieu of "death panels."

Mon, 02/06/2012 - 19:35 | 2132307 honestann
honestann's picture

Attention everyone who depended upon savings interest:

Convert all your fiat into gold.  You won't receive "interest" (technically speaking), but you'll do vastly better than throwing dice in the wall street casino.  If you had wised up to this 3~4 years ago, the value of your gold would have doubled as measured in fiat dollars.  So you could now sell half your gold and still have the same number of dollars.  That's something like a 20% ~ 25% return.  Not too shabby.  Whatever you do, stay as far away from wall street as possible.  They are thieves.

Mon, 02/06/2012 - 21:33 | 2132565 dolph9
dolph9's picture

I don't have the answers.  To be fair, I don't think anybody does.

Having said that, there's stuff that those of us in the know can do, day by day, month by month.  And keep on doing it.

-Only buy stuff that lasts, hang on to it, maintain it, and don't let advertising tell you you need to replace it.  Stop being a consumer sheeple.

-Take all of your money out of conventional bonds and stocks.  Stay liquid with basic accounts, keep some cash on hand.

-Buy gold and silver.  Just buy it.  However much you can.  And keep it secret and safe.

-Try to get out of debt, and try to take on as little debt as possible.

-Maintain the health of your body. Don't enrich the tobacco, health insurance, or pharmaceutical execs.  Maintain your mind.  Be curious and pay attention to what your senses tell you.  Read, try to understand how the world works.  Reject propaganda from all sides.  Don't pollute the body or mind with junk.

-If they fight, fight back.  And keep on fighting till the bitter end.


Mon, 02/06/2012 - 21:48 | 2132599 barroter
barroter's picture

The very lessons those who survived the 30's Depression and managed ok during it.


Mon, 02/06/2012 - 21:43 | 2132587 barroter
barroter's picture

Wonder who will blink first? Bernanke or me?  I can hold out keeping my assets in risk-off for a while...can Bernanke hold his breath that long?


Mon, 02/06/2012 - 22:22 | 2132669 dcb
dcb's picture

please send to ny times and mr krugman who I have sent many examples (including the pap)er the other day that talks how the low interest rates and leverage hel0p mainly the financial industry) on how he endorses polices that hurt the poorest in society.

funny how mr liberal goody too shoes really backs the status quo and when push comes to shove he endorses elitist polcies with the best of them. the guy has so many people fooled about his true nature.

But hey one thing you can say about the guy is no matter how much evidence to the contrary he always sticks to his positions. just like the church and galilleo (him being the church).

Tue, 02/07/2012 - 02:41 | 2133112 chindit13
chindit13's picture

I suppose it has all been said before, but the dangers of ZIRP include...

---relatively painless increases in debt service, leading to greater sovereign debt levels that become excruciatingly painful in a rising rate environment

---penalties for savers, who either chase imprudent risk or reign in spending

---bank DISincentive to lend, fearing future funding risk of long term assets

---falsely large corporate profits that ignore pension underfunding

---oh, yes...then there's the inflation monster waiting in the wings (though Japan shows the wait might be long)

Haven't you already done enough, Ben?  May you be gummed to death by a million yield-strapped, non-denture-wearing Seniors.

Tue, 02/07/2012 - 05:42 | 2133271 toadold
toadold's picture

Well I'm semi-senile old fart and even I figured out that the only thing rreliably appreciating in value on the long was gold and silver. My "savings" each month goes to gold and so far it is beating the crap out all that other stuff Helicopet Ben wants to drive people into. 

What gets me it the constant and contiuous lying about the state of the economy from "noted" authoriities. "There is no inflation" everytime I get gas or buy groceries, or get cabin fever and go to a fast food resturant I find price increases.  Excuse me, I have to go to the closet and scream obscenities in the direction of Washington ,DC.

Tue, 02/07/2012 - 07:31 | 2133342 egoist
egoist's picture

Predictable as the sunrise, they will swoop in to "solve this...crisis" for the elderly by "shared sacrifice". If you have money, you'll be putting more of it into social security (or whatever new program name they come up with).

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