On Common Ground: The Fed has no interest in seniors

Last week’s front-page story highlighted how rising property taxes in Rappahannock County are causing big problems for middle-aged and senior citizens living on fixed incomes. “This continued tax rate increase is killing us, and frankly, we have to make a decision about whether we can stay here,” said Karen Ruble of Castleton. Supervisor Chris Parrish echoed “that the supervisors are keenly aware of the difficulty of those living on fixed incomes amid rising expenses, not just here but nationwide.”

All of which brings us to the Federal Reserve. Why should we care about the Fed here in Rappahannock? Since 2008, it has run an unprecedented, giant monetary experiment of negative real interest rates and huge asset price inflation, the chief beneficiaries of which have been the big banks, stock market investors and the federal government itself. Low rates have also helped small business borrowers and younger people with mortgages.

But seniors and savers are getting clobbered by the Fed’s current policies.

I worked in the investment business for almost four decades and during most of that time, savers and seniors could routinely get 5 to 8 percent on their money with riskless CDs and short-term Treasury bonds that exceeded the rate of inflation. Today, things are very different. Earlier this year the yield on the 30-year Treasury bond hit an all-time record low at 2.45 percent. Today, the one-year return on a CD is a little over 1 percent (!), while the Fed is engineering inflation of more than 2 percent. According to a study by McKinsey, households headed by seniors 65 to 74 years old over the past six years lost on average $1,900 in annual income.

My father-in-law, who was a wise old banker from the era of three-piece suits and passbook savings accounts, said that the first rule of saving and investments was: “Never dip into your principal.” Well, the Federal Reserve’s zero-interest rate policy is forcing millions to do just that.

Says John Allison, the long time CEO of BB&T bank: “In my 40-year career, the Fed has a 100 percent error rate in predicting and reacting to important economic turns.” Yet it persists in believing it can determine the proper price of money, i.e. interest rates — though its forecasts, based on massive mathematical models, have proved as unreliable as any. We are in uncharted economic waters.

Our economic policymakers have driven us into a box canyon. If they do begin to increase interest rates to help savers, they run into a big problem. The debt owed by the federal government now stands at $18 trillion. With interest rates at record lows it can manage the interest on the debt. But if the Fed raised interest rates by, say, 3 percent, that would increase the interest paid by the federal government by more than $500 billion a year, seriously crowding out all other discretionary spending categories.

This is a thorny bipartisan problem and it’s tough to figure out a clear line of action. At the least, we should let our Rep. Robert Hurt and our Senators Tim Kaine and Mark Warner that we know how much Federal Reserve policies are hurting Rappahannock seniors, and that Congress should step up their oversight of the Fed.

While we squabble about small things in our lovely province in ancient Gaul, our financial Rome is beginning to burn.