Federal Reserve ZIRP has essentially destroyed household income growth: Households headed by those 45 to 54 see their real household income growth drop by 16 percent from 1999.
The Federal Reserve has pursued a zero interest rate policy as a mechanism for pulling the US out of the financial crisis. Interestingly enough low rates and heavy speculation were part of the cocktail that led us into the crisis in the first place. Ben Bernanke recently mentioned a bit of concern that speculation is once again entering the markets. The Fed of course is always cautious in their wording including saying things like sub-prime loans were no issue in 2007 right before the economy tanked. The Fed is truly in uncharted territory here with a balance sheet of $3.3 trillion and nationwide with incomes stagnating, the ZIRP move by the Fed isn’t exactly helping the middle class. A modest amount of inflation is disastrous when you are seeing your income stuck in neutral or seeing it move in reverse. Even older Americans are seeing tougher challenges (although young Americans have faced the brunt of this recession). What is the aftermath of ZIRP?
What does it mean to be retired in the United States? The age of disappearing pensions, dependence on Social Security, and stock market speculation.
A few days ago the stock market experienced a mini panic as someone hacked a reputable news source Twitter account and posted a sensational headline. The markets quickly reacted to this news. What was troubling is many algorithm-based trading systems are setup to scour internet information for these kinds of dramatic changes. Many of the quick trades hit with machines simply acting on their own programming within seconds. Of course the stock market came back up after the hack was mentioned but how in the world are regular Americans suppose to compete with this kind of stock market trading? First, most Americans have no investment in stocks. One in three Americans has no savings to speak of. In the early 1980s the idea was that Americans would move away from pensions and save into accounts like 401ks and little by little plug along so when retirement came, they would have a nice nest egg. 30 years later, this isn’t remotely the case. The plan has failed. For many, retirement is largely just a giant illusion. Many will be working well into their very last years. Pensions are becoming a massive anomaly. So what does it mean to be retired in the United States?
Feeling rich through debt: Modern banking has replaced real economic prosperity with massive levels of debt. Housing affordability reaches multi-decade highs while household incomes retreat to 1990s levels.
One of the biggest headlines right now is how the housing market is pulling the entire market up. Housing prices are soaring while the stock market is making record highs. Yet a large portion of the housing run-up is being caused by easy money that has been created by the Federal Reserve. Banks are out-bidding regular home buyers so it is dubious how much of this jump in prices is really helping households. Affordability is up because mortgage rates are incredibly and artificially low. Another bubble is brewing in this economic stew yet this time, it doesn’t seem like Americans are feeling all that richer since most of the new access to debt is being given to large banks that are outbidding regular home buyers. In some markets, investors are purchasing 50 percent of all homes. So what use is a low interest rate if investors are going to outbid you? The game is the same this time. Housing is the juice machine once again. Incomes adjusting for inflation are back to levels last seen in 1995 so the easiest way to make Americans feel wealthier is by increasing their access to debt.
Inflation in the most important things: Inflation hitting housing, tuition, and medical services. Is the Fed reinventing another debt based bubble?
Household income is a vital measure of the overall well-being for most Americans. This is why it is important to try to understand why overall household incomes are back to levels last seen in 1995. This is a critical barometer that measures the health of the US middle class. Yet we continually see the argument that inflation is a good thing and since the CPI is registering such a low level of inflation, that the Fed should have a free-ride when it comes to digitally printing our way out of the recession. Yet even a tiny level of inflation is going to hurt when wages are stagnant. That is our current predicament. The one area where Americans spend their most money, housing is becoming more expensive courtesy of the Fed. Inflation is around you if you actually pay attention.