A new report out by the Swiss insurance giant Swiss Re indicated that the Fed's polices of monetary accommodation, 0% interest rates, quantitative easing and other such measures actually ended up costing savers (creditors) nearly a half-trillion dollars.
This report may be new insight to some, but anyone who has been reading my posts here on Real Money over the past two years knows I have been saying this consistently. The loss of income to savers (creditors) represents a loss of income to the economy, and since national income equals national product, by identity that means economic growth has been reduced -- not stimulated -- by an amount equal to that half-trillion.
While there are some who may argue that low rates have helped spur credit demand and put money into debtors' pockets by reducing debt service burdens, one must remember that the private sector is "net saver." The very fact that private net worth (assets minus liabilities) is positive is evidence of that. And it is quite positive to boot: Household net worth in the U.S. is close to $83 trillion, and credit market instruments alone account for nearly $60 trillion of that.
The government is a net payer of interest, so if someone gets a higher interest rate, it is functionally the same as the government writing a check. Even if the rate paid to the creditor is from a non-government entity (person, firm, etc.), it is all tied to the rate set by the Fed. Rising interest payments are fiscal injections.
Many laud the Reagan period as a time when the economy boomed because of tax cuts and supply-side economics. Yet when the numbers are analyzed, there is one clear reason why the economy was strong during the Reagan years. That's because interest paid by the government as a percentage of GDP was the largest item of government spending.
In the 1970s, the amount the federal government paid on interest on the debt averaged 9% of GDP. In the 1980s -- the Reagan years -- that spending zoomed up to 13.5% of GDP. That was the biggest component of government spending by far, even outpacing Reagan's vaunted defense spending.
Compare that to the recent period since the Fed has been doing all the massive accommodation and 0% interest rates. The amount the government spends on interest is only 7.3% of GDP, and that is with a national debt of $18 trillion! The national debt was below $1 trillion at the beginning of Reagan's first term.
This is what really drove the Reagan economy. It was because of massive fiscal injections due to higher interest payments. In contrast, the Fed's actions today, which may stimulate some asset classes like housing and stocks, really have had the opposite effect overall on real economic growth, incomes and investment.
I hope that now you can see why I feel a Fed rate hike, if and when it comes (and I do think it is coming this year) will create a huge buying opportunity for investors. Oh, sure, we will defiantly see a reflexive big selloff in the stock market, but that will be the wrong move. Once the Fed starts hiking rates again, consider that the real economic stimulus has begun. It's "Reagan" time.
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