Record low interest rates help the government and hurt savers...
ON THE SURFACE, the Federal Reserve's objective is to make sure America doesn't fall into ruins, writes George Leong for Investment Contrarians.
Following an aggressive strategy of monetary easing, the end result is interest rates at nearly zero percent and an endless flow of easy money. The Federal Reserve has created an artificial economy.
Yet, if you think about it, the Federal Reserve's push for low interest rates has helped the economic recovery—but it has also made life difficult for many Americans. The Federal Reserve's low finance rates tend to make consumers buy more, enticed by the low carrying charges. This means more buying in homes, furniture, cars, clothes, or whatever goods and services that can be financed at cheap rates. But therein lies the problem. What happens when the Federal Reserve begins to raise interest rates? It's going to get ugly.
There will be massive debt loads that will be subject to higher carrying charges and greater hardships for many consumers as wages for many continue to be flat.
And with the low interest rates due to the Federal Reserve, people are reluctant to save. Making less than one percent at the bank is not exactly an incentive to deposit money. According to the Employee Benefit Research Institute (EBRI), a staggering 57% of workers surveyed said they had less than $25,000 in combined household savings and investments, excluding their homes. (Source: Greene, K. and Monga, V., "Workers Saving Too Little To Retire," Wall Street Journal, March 19, 2013.)
The problem is that the low savings now will likely translate into hardship in their retirement years. In fact, we are already seeing seniors working later in life, at a time when they should be living carefree.
Seniors who depend on interest income are facing historically low income from their investments. Imagine making 25 basis points on $1.0 million in savings; that's a mere $2,500 a year in income! And this is with a million Dollars! The majority of Americans don't even come close to this figure as far as savings. Can you see the problems? It will be extremely difficult for seniors who depend on interest-bearing income. The Federal Reserve knows this, but they have little choice at this time.
The reality is that the low interest rate climate created by the Federal Reserve is helping those who have the money to buy, whether it's a primary residence, investment property, or financing for equity investments.
The low rates are also helping Uncle Sam avoid massive interest payments on the $16.7-trillion national debt; albeit, the time will come when rates move higher along with the government's debt carrying costs. And can you imagine the consequences?
With the possibility of further financial distress down the road for America, you will need to be proactive and look for ways to help shelter your investments.
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