Thursday, September 22, 2011

They're Selling, You're Not Buying

Everything is sales. In terms of the economy, the Administration and the Fed, you are the customer and what they want out of you is for you to buy things.

That's grammatically complicated, so let's see if we can spell this out.

The Administration and the Fed make a "sale" when you buy goods or labor. If you're a company, they want you to buy labor - hire people. If you're an individual, they want you to buy things - houses, cars, appliances, llama food, whatever. The economy is in the tank because you're not buying. In fact, some of you are selling - selling houses, selling labor (firing people) and selling stocks. Working with the Administration, the Fed has a new plan to help you make the "buy" decision.
The latest move by the chairman was a decision to dramatically recast the Fed's $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.
Just how this is supposed to work is beyond me. Interest rates of all durations - long, short, medium, microscopic, galactically huge - are all near historic lows. We just refinanced our house and we're now practically borrowing money for free. We're paying about 4% or somewhere around there. Going from 4% to 3% isn't going to make me go out and buy a house. Interest rates are now irrelevant. Just look at this.
  • Payment on a $250,000, 30-year loan at 4%: $1301.87

  • Payment on a $250,000, 30-year loan at 3%: $1162.34

They've been trying this same thing for a few years now and it's not working. They keep lowering interest rates and borrowing and spending and nothing's happening. It's like they have no idea at all why you aren't making that "buy" decision.

The only thing they refuse to do is to drastically cut regulations and surrender power to you.


Secular Apostate said...

What The Bernank's poilcy is going to do is wreak yet more damage on risk-averse retirees.

K T Cat said...

SA, I'm not sure I'd lay that entirely at Bernanke's feet. The market is tanking again and that would cause lots of damage, too. I would argue that the markets are going down as a result of the natural death of Eurosocialism and it's weaker counterpart here.

tim eisele said...

My mind keeps coming back to this point: when I look at what happened to the stock market around the Great Depression, and during the 1970s, there was a big crash (1929-30, and 1974) right about in the middle of a period of about 16-20 years when, on average, stock prices were flat.

In our current debacle, stock prices have been, on average, flat ever since 1999. The bubble went up and then back down, so it averaged to nothing. The crash came right on schedule, about 10 years into the plateau. We are now two years past it, and so if the pattern repeats the stock market is going to stay flat for about another 7-8 years. And while I'm sure that there are a few really stupid things that the government could do to make the recovery take longer, I'm not sure that there's much they can do to make it shorter.

So. Seven to eight years. Don't count on the stock market being much of a short-term investment until then. And as long as the stock market is down, people will be reluctant to hire or to spend money.

Secular Apostate said...

KT, I don't disagree with you about the equity markets. But the point of Twist is to lower the yield on 30-year bonds to bend the yield curve down.

Apparently, it worked. As of this moment, the yield on T30s is 2.81%, and T30s are where many risk-averse retirees stash their money. Twist is also likely to depress corporate bond yields as well, and investment-grade corporate debt is another haven for risk-averse money.