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Great Article On Bernanke And How He Is Wrecking The Economy And Hurting Savers

Thursday, May 3, 2012 - 6:52 PM
David Einhorn, an incredibly successful hedge fund manager has written an article lambasting Bernanke for the zero interest rates and the destructive impact it is having on savers and the economy. He also has created a fictional couple who have been hurt very badly by the Fed's shortsighted and obtuse policies. Here are some excerpts:

"A Jelly Donut is a yummy mid-afternoon energy boost.

Two Jelly Donuts are an indulgent breakfast.

Three Jelly Donuts may induce a tummy ache.

Six Jelly Donuts -- that's an eating disorder.

Twelve Jelly Donuts is fraternity pledge hazing.

My point is that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn't giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish"

"When interest rates are low, everything changes. Homer and Marge are getting only a little interest on their savings, and are struggling to live off Homer's pension. They need to rethink their finances."

"What happens if interest rates go to zero and stay there?" Marge asked the advisor.

"You mean indefinitely? If you weren't willing to start taking investment risk, you'd need 50% more in savings, or $300,000. But why would you ask such a silly question?" asked the advisor.

To which Marge replied, "Well, we were thinking about moving to Japan..."


"Homer and Marge aren't the only ones doing this sort of math. Every single day for the next 19 years, more than 10,000 Baby Boomers will turn 65. Those who started saving for retirement 15 years ago are suddenly finding themselves with insufficient savings to do so."

David Einhorn: The Fed's Jelly Donut Policy
15
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
1. Thursday, May 3, 2012 - 8:02 PM
Excellent article. Thanks for posting it lou. Einhorn is right on the mark.
4
ShorebreakShorebreak2,364 posts since
Apr 6, 2010
Rep Points: 12,590
2. Friday, May 4, 2012 - 10:26 AM
When interest rates are low as a rule nflation is low. When interest rates are higher inflation is usually higher. I think that tax policy is the key. When tax rates are higher people with the money invest more in ideas rather than keeping it and paying taxes. They spend and invest to avoid higher taxes. Tax rates to a large extent guide how they live and spend. I worked in finance for 30 years and this is what I saw.  I would rather have a slow even growth rate than the boom and bust we have had for 30 years. When we have boom and bust only those that understand it can take advantage of it and win.

These low interest rates are hurting those of us that live on interest from the CD's (including me) but in this rebuilding of the economy I would rather see lower interest rates (at least as a retiree we have social security) and can survive. I remember the 80's and people taking out 13.5% mtgs. No one could survive with that rate of interest but they took them out before the rates went up even further. Trying to keep the inflation rate at 2% to prevent deflation is the key to a slow steady growing economy. It hurts some of us but it is better for the long term for everyone rather than boom and bust. Those that have lost their jobs do not have much of a safety net like those of us that have social security.  Let those of us who can should give to our children and others that need help, buy goods (75% of the GNP) to do our part to help with the economy. Let's us not just complain because we want more.

 
4
AllyAlly772 posts since
Jan 16, 2010
Rep Points: 2,252
3. Friday, May 4, 2012 - 12:40 PM
Rosie, you don't think the evaporation of trillions of dollars of interest income from savings accounts and CD's has an impact on consumer spending. The 75% of the GNP you refer to must have been hit hard by this loss of income.
4
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
4. Friday, May 4, 2012 - 3:01 PM
 

Corporations view periods with historically low tax rates as opportune times to take their profits, as opposed to reinvesting them. One of the main goals of a CEO is to pay as little corporate tax as possible. Therefore, when corporate tax rates are historically high, the CEO is much more motivated (encouraged) to reinvest in their company, rather than pay all of that "high" income tax on any profits.  In a study titled, "Having their cake and eating it too", which was published  by the "Canadian Centre for Policy Alternatives", the researchers arrived at the following conclusions:
"This study examines historical data on business investment and cash flow from 1961 through 2010, and, using econometric techniques, finds no evidence in the historical data that lower taxes have directly stimulated more investment."
They go on further to find that, "As a means of stimulating growth, employment, and even private business spending, the historical evidence suggests that business tax cuts are both economically ineffective and distributionally regressive."
6
ShorebreakShorebreak2,364 posts since
Apr 6, 2010
Rep Points: 12,590
5. Friday, May 4, 2012 - 4:39 PM
Shorebreak, having had my own business, the findings you cite from this study does not make sense to me. Increasing taxes on small businesses can't be a good thing. If the govt takes more, generally speaking you end up with less to reinvest in the business. Remember, capital investments are not tax deductible (they are depreciated over time), so reinvesting is not saving you any taxes. I can't understand why high taxes would motivate a business owner to reinvest in his company.
5
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
6. Friday, May 4, 2012 - 9:24 PM
Re: Lou @Friday, May 4, 2012 - 4:39 PM

It's very simple. During the Eisehower administration when taxes on millionaires were as high as 90% there was a tremendous amount of reinvestment into businesses and hiring rather than hoarding the money in off-shore savings accounts, or in the case of companies like Apple, just piling up the profits.  Look how high our economic growth was during that period. Facts speak for themselves.
5
ShorebreakShorebreak2,364 posts since
Apr 6, 2010
Rep Points: 12,590
7. Sunday, May 6, 2012 - 11:56 AM
To Lou #3

I believe that the money lost from workers wages will and has affected people and the country much more than lost interest income for the seniors. Seniors have health insurance, food, heat, a home and car. Those without a job do not. This is what is important. The workers purchase more things like automobiles, clothing, homes and appliances to keep others working. Seniors purchase much less and they are not consumers of these goods in the same manner like the younger citizens. We drive less, we need fewer clothes, less food, we do not need to drive everyday.
4
AllyAlly772 posts since
Jan 16, 2010
Rep Points: 2,252
8. Sunday, May 6, 2012 - 2:26 PM
Rosie, savers are not only seniors. For example, I have been a saver my whole life. If I hadn't saved, there would have been no way I could have sent my children to college. I can also tell you the bulk of those savings did not come from stocks. Zirp has affected way more people than just one population group.

I believe and many other economists believe it has become counterproductive after 4 years. It was justifiable during the crisis when the capital markets weren't functioning but that time has long passed. If after 4 years, it is still not working then maybe it's time to assume it may not be helping the economy and could be hurting it. When you lose trillions of dollars in interest income from savings accounts and CD's, it would be naive to think it isn't detrimental to the economy. Zero interest rates are killing pension plans, insurance companies, small community banks not to mention the net worth of many people, not just seniors. You make this to be a problem of only seniors, when it is far broader than that.

Also, Zirp hasn't helped your children very much. The unemployment rate is still very high after 4 years and the economy is growing far too slowly from the recession, particularly when you compare it to past recessions. As a matter of fact, zirp has also had negative repercussions for the housing market. Why would you buy a house today if you knew rates were not going up until at least late 2014. However, if you thought rates might rise, it might provide some incentive to buy now before it was too late.

Rosie, you have bought the nonsense our Fed Reserve is selling, however, time is proving Bernanke to be very wrong. If you were really worried for your children, think about the trillion dollar plus annual deficits and the $16 trillion in public debt (growing everyday) that the Fed is encouraging by keeping rates so low. What's going to happen when the Fed stops buying 70% of govt bonds.  Someday, we are going to look like Greece, and your kids' standard of living will be a far cry from the one you enjoyed your entire life. It is a disaster waiting to happen, and the Federal reserve and our govt (politicans from both Parties) will be culpable. Even now if the Fed raised rates by 100 basis points, it would increase our deficits by at least $160 billion. That is a huge hole the Fed and our politicians have dug for our country. One last thing, I totally disagree with you and Shorebreak regarding the benefits of increasing taxes for small businesses, but that's a conversation for another day.
7
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
9. Monday, May 7, 2012 - 8:08 AM
Lou:  You are on top of this issue.  Rosie's theory is the same crap Bernanke is feeding to his Board and why they keep voting for "zero interest rates".   They just refuse to see it isn't working!  Too bad you didn't write that Savers Petition for us and make your theory clear in it.  Many signers did add memos stating how the low rates are affecting their ability to spend.  I wrote a thank you letter to the one person on Bernanke's Board to thank him, Jeffry Lacker,  for voting against zero rates and also asking him to try to get other Board members to vote against it this next vote.  This can't go on much longer.  It's not helping savers or people in business!
4
paoli2paoli21,140 posts since
Aug 10, 2011
Rep Points: 5,080
10. Tuesday, May 8, 2012 - 11:08 AM
i 4 1 like zero interest rates helps my bond portfolio an helps me with the britelites
1
pricklypearpricklypear2 posts since
Jun 28, 2011
Rep Points: 63
11. Wednesday, May 9, 2012 - 7:22 AM
Lou,

If after 4 years it's not working? More private jobs have been created in the last 4 years than the previous 8. Read RECON. More people are working in manufacturing since 1994. The 80's were bad for people also. We had high interest rates and high inflation. 15% mtg's, 21% interest to some business owners, and in Michigan 17% unemployment one Jan. Highest business tax increase ever was also was in the 80's.

We will have to agree to disagree.

We also sent our children thru college. One is a doctor and the other is a musician and is part owner of a recording company. We were huge savers always, and paid our first home off in 6 years, second home in 9 years and paid cash for our last home and gifted the money from the second home. We are now retired and live on SS only. I married at 18 had our first child 9 months later and we had 37% down payment on our first home a year later and I paid off my husbands red chevy convertable for his birthday. I had my first job, (a paper route) at 8 years old and started babysitting at 9. Our children were the first to go to college. My husband and I were the first to be able to finish high school. I worked 2 jobs for 23 years after my husband was put on disability. I believe the secret to success is to always live on less than you make. 

 
3
AllyAlly772 posts since
Jan 16, 2010
Rep Points: 2,252
12. Wednesday, May 9, 2012 - 1:32 PM
What's that famous saying: There are three kinds of lies: lies, ****ed lies, and statistics

"More private jobs created in last 4 years than previous 8."  That only works if you include the job loss in 2008-2009. Take those two years out and that statistic becomes a talking point of this President and his Party. If you think the job data for the last 4 years has been good, you are living on another planet.

"The 80's were bad for people. 15% mtg's, 21% interest, 17% unemployment"  Rosie, please don't take the talking points of certain politicians and spread that drivel here. Those numbers occurred in 1981-82. It occurred because the Volcker Fed thankfully extinguished the double digit inflation of the 1970's.  For the rest of the decade we had a vigorous economic recovery, which most objective people would be very happy to see repeated today.
2
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
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