Are US Savers Victims of a “Currency War”?
Surprisingly, there has been very little in the press regarding the hardship imposed by today’s ultra-low interest rates on US retirees. If rates were at 5% today, a retiree with a $1,000,000 bond portfolio could plan to earn roughly $50,000 a year in addition to any retirement benefits. Today, interest rates on 10 year bonds are under 2%, meaning that same retiree would struggle to earn $20,000 per year, which represents a 60% reduction in investment income.
The Federal Reserve has maintained their near-zero interest rate policy for some time now, with no end in reasonable sight. They have stated that they will continue doing so until either the unemployment rate comes down to 6.5% or inflation unexpectedly rears up above current expectations of 2.5%. Both of these scenarios seem unlikely in the near term. If the Fed is so worried about the economy that it warrants a near-zero policy, then shouldn’t a reduction in national income related to lower rates also be a concern? How are they balancing the damage to consumer spending from low rates with the impact of those low rates on their target, the unemployment rate? Perhaps a bigger question is whether the low rates have actually had an impact on the rate of hiring.
Which has led many to ask; is there another agenda that the Fed is pursuing with its low rate policy?
One theory is that the Fed is still trying to nurse the banks back to health, by allowing them to borrow at ultra-low rates to invest in bonds further out on the yield curve. This implies that the banks are perhaps not as strong as official proclamations and the results of official stress tests have suggested.
Another theory is that the Fed is keeping rates low in an effort to lower the value of the dollar, thereby helping US companies export more while also making it cheaper to pay off our foreign bondholders. That this low interest rate policy is being carried out in concert with other countries around the globe has led to circulation of rumors of a “currency war”, in which economic competitors vie to devalue their currencies in an effort to make their export products more attractive.
There have been other currency wars in our history including one that preceded the Great Depression and another that ushered in the stagflation of the 70s. So it is of little wonder that these rumors of a currency war have caused some alarm bells to ring.
This week, the chairman of the Federal Reserve specifically denied that the Fed was engaging in an effort to devalue the currency in favor of trade and made a strong case for the low interest rate policy, stating that these policies were a win-win for the world economy as opposed to a zero sum situation in which there were winners and losers. Goldman Sachs also came out with an assessment of Fed policy that was supportive of the Fed’s view and dismissive of the “currency war” line of thought.
As these rumors linger and re-circulate, the Fed will be compelled to further articulate the case for low rates as driver of full employment and economic growth. So far, the jury is out. In the meantime, savers are forced to take more risk to make ends meet.