Federal Reserve Chairman Ben Bernanke laid out his argument for super-low interest rates today in an appearance before the House Financial Services Committee. His opening statement included this (insert adjective here) statement on U.S. interest rates:
“It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can’t go below zero.”
OK, let’s play ‘insert the adjective’:
- A. insightful
- B. encouraging
- C. mysterious
- D. SHOCKING
Hint … the correct answer is in capital letters. I could add a few other expletives, such as #@$^&*$ and a few !!!, but let’s just say that this statement is SHOCKING, in capital letters.
“Interest rates are too high”
Really? Right now, you can buy a 10-year Treasury at 1.98%, about 1% below the current rate of inflation, which is 2.93%. The inflation rate could go higher, at least short term, if gasoline prices continue the steep rise we have seen so far in 2012.
You can get a 5-year bank CD at about 1.8% (best case) or about 1.45% (typical). Both of those are well below the rate of inflation, but are preferable to a 10-year Treasury, in my opinion, because the term is 5 years and you can bail with a minimal penalty.
Your money market account is paying about 0.5% (best case) and probably more like zero.
For TIPS investors … Ben Bernanke is giving you a secret pat on the back. For nearly a year, you have been suffering through negative base rates, before inflation. The investing world has been in shock (negative rates!) but in reality, a TIPS buyer today is simply recognizing that inflation is a threat and it’s extremely important to have inflation protection.
“interest rates can’t go below zero”
It worries me somewhat the Bernanke seems to be longing for interest rates to drop below zero, and that means a real return (after inflation) of about negative 3%.
What is Ben Bernanke telling us? My interpretation: The United States is Japan of 15 years ago. You can expect near-zero economic growth for the next decade, and you can expect interest rates to hover near zero, possibly even below zero. Why else would Ben Bernanke long for interest rates to drop below zero when inflation is running at about 3%. Why?
For I Bond investors … You can put on a party hat and spin the noise makers. You are the big winners. Not only can your investment not drop below zero, it cannot drop below the rate of inflation (unlike TIPS, which have negative real returns.)
But we all benefit from rising stock prices. Bernanke made the argument that rising stock prices and a growing economy benefit almost all Americans. Here is the quote:
Remember people also own equities, they own money market funds, they own money mutual funds, they have 401ks and a variety of things and those assets depend very much on how strong the economy is. In trying to strengthen the economy we are actually helping savers by making the returns higher, as we have seen in the stock market for
Sure, I appreciate that my total net worth has increased in 2012, and my wife and I still have a bit more than 50% of our assets in the stock market. But that is not the same as owning a rock-solid Treasury or bank CD investment that you can predict with 99.9% certainty will be worth $X on X date.
The stock market is risky, and we all know that, all too well. Real estate is risky, and we all know that, too. Gold is risky. Copper is risky. Fine art or vintage wine, risky.
Treasuries are not risky. But with Treasuries, the Federal Reserve has decided that you cannot receive a market return (at or above the inflation rate). The Fed is telling you: Put your money elsewhere, in risky investments.
That works … until it doesn’t. When it doesn’t, you can expect losses of 30%, 40%, 50%.
Investors deserve a market rate on their super-safe investments. Investors cannot find that today, anywhere, with the possible exception of I Bonds, which have purchase limits. Why? Why is this one part of the financial market under government manipulation?
Ask Ben Bernanke.