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Michael Hodges

Michael Hodges

The Grandfather Economic Report -- Graphic presentation reviewing economic issues facing todays generation compared to prior periods, on: family income, debt, savings, government spending and…

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Financial Terrorism Against Seniors -- Crushed Incomes and International Buying Power

This essay was originally published November 20, 2004 at FinancialSense.

Seniors have seen the earning power from their savings devastated, which is pilling on economic and health risks for one of the most vulnerable segments of our society - - its grandparents and great grandparents.

Many are very, very scared.

Beginning in 2001, the Federal Reserve reduced short-term interest rates 13 times, dropping the federal funds rate 84% (from 6.5% to a 1% rate, the lowest in generations) and injected massive amounts of liquidity into the monetary system - - all aimed at subsidizing existing debt in all sectors, and promoting even more debt, much more debt - - believing that the U.S. economy and its government cannot function without more and more debt injections, just like a drug junkie needs higher doses each week.

These actions devastated interest income from savings upon which seniors depend to pay their cost of living in food, property taxes, prescription drugs, dental care, etc. Such causes health and economic angst for many seniors. (Although the funds rate moved to 2% recently, its still down 70%).

If a politician would publicly propose a policy to reduce senior citizen incomes by 84% we know what would happen to him. But not a peep is heard when politicians quietly allow and even encourage government (and its Federal Reserve) policies that devastate senior citizen interest incomes from their savings by 84%, and also trash the international value of the currency in which their savings reside by 43%. Why not? Politicians even brag about 'the lowest interest rates in generations' as if they personally created a free lunch for everybody - with zero losers. Why do they brag about devastating senior incomes?

There is no doubt that many senior citizens feel a wave of 'financial terrorism' has purposefully been launched against them by their government and the financial sector. They feel their pockets are being picked, each and every day.

Interest income from their hard-earned savings has been crushed to rates not seen in their adult life-times, and the international buying power of those savings is also being crushed. Such actions have been promoted by powers-to-be which are in fact confiscating those savings to subsidize more debtors to 'save the economy' - - as if siphoning-off earnings of savers to subsidize the financial sector and enable others to borrow their ways to prosperity were equitable concepts. What kind of government and what kind of financial system would allow senior savers to be crushed to subsidize more debt by others? Answer: ours.

Many believe, wrongly in my view, that a nation can excessively borrow itself to prosperity while crushing the few savers still standing, including many senior citizens. And, many also believe, wrongly in my view, that a nation can resolve surging trade deficits both by promoting soaring debt in all sectors and by devaluing the international value of its currency as ways to reduce imports and drive exports to a positive trade balance of prosperity while continuing to pile on more debt - - even if it means crushing the international value of their savers and sticking the finger in the eye of all those foreign holders of US debt on which this nation desperately depends.

Many senior citizens deferred consumption during their working years to save hard cash to generate income for their retirement. They thought that approach was good for them and for their nation, never believing their planning should consider interest rates of 1-2% or less and a devaluing currency. Would any knowledgeable senior citizen vote for anyone who allowed policies that caused an 84% cut in interest income from their savings PLUS a 43% cut in the international buying power of the principal value of savings?

Don't yawn just because you are not a senior, unless you are certain all your own assets increased at least 43% to compensate for their loss of international buying power.

Several years ago a senior's $100,000 savings invested in a 7% 2-year certificate of deposit produced $7,000 in interest income, which was then equivalent to 7,900 Euros. Today he's lucky if he realizes $2,000 (2%) on that certificate of deposit, which is equivalent to about 1,500 Euros. This represents a 71% ($5,000) cut in dollar income, and an 81% (6,400 Euro) drop in Euro-equivalent income. Additionally, the principal value of that original $100,000, which used to be worth 110,000 Euros, is now worth just 76,000 Euros - - a 34,000 Euro ($43,000) loss in international buying power via exchange rate loss.

I think everyone will agree these are huge loses - - humungous losses.

Seniors and other savers are taking the hit - - big time - - with no light pointing to the end of this tunnel.

Let's look at this another way. A senior with a $5,000 home property tax bill, or an annual expenditure of $400 per month for prescription drugs, several years ago could cover one of these with the interest earnings from savings invested in a $70,000 (7%) certificate of deposit. Now, with CD rates at 2% or less, he would need (if he could create out of thin air) a $250,000 CD ($180,000 more) to produce the same income - - provided, of course, his prescription prices and property taxes did not go up (have you ever heard of property taxes or prescription drug prices going down?).

So, where does he get that extra $180,000 to produce the required income?

Answer: he doesn't, he spends more and more of his principal to survive - - and the anxiety of this should produce a few more heart attacks than normal.

And, he goes into debt via credit cards or borrowing against his precious home - - which produces even more anxiety about the future. The research firm Economy.com reports that the fastest-growing segment over its head in debt is the elderly. Squeezed by higher health insurance and drug costs those over 65 have turned to credit cards to close the gap.

How about social security income. Well, at the beginning of this year the government told all seniors since there is hardly any inflation social security will be increased by just 2%. At the same time, the same government said since there is a lot of inflation there will be a deduction to cover a 14% increase in the Medicare care premium. (This is a good example of how government plays down inflation when it comes to paying out or getting elected, but plays inflation full blast when charging others).

Of course the financial sector is hoping record low interest rates might drive more seniors to give up conservative protection of their savings in bank accounts and send it all to Wall Street. In other words, place hard earned savings for this age group more at risk than prior senior generations. Many seniors were smart enough to dodge the bullet in recent years when stock markets slumped by keeping to the conservative way of seniors of the past - - protecting their savings by bank savings deposits.

But now they feel others are coming after their savings, anyway.

So, a senior, faced with rising living costs and dropping interest income has the option to send his savings to Wall Street and worry, spend his principal and worry, or go deep into debt and worry - - or remain conservative and watch his earnings disappear. A society that promotes such for its senior citizens is not the America most of us want to know.

Interesting that Congress recently passed a Medicare reform bill which included nebulous prescription drug coverage for some seniors starting some years from now, hoping thereby to create some political smoke screen to garner senior votes with the 'free lunch' gimmick. At the same time congressional members allowed interest rate policies which zapped the ability of seniors to pay for their medicines out of current interest income from their own savings. Meanwhile, the Federal Reserve chairman says the social security and Medicare system is in deep doo-doo. We all know that congressional members, year after year, allow the government to spend every penny of social security trust fund surpluses on non-social security stuff, as fast as it arrives - - which is a cause of the deep doo-doo - - a practice that is a crime if performed by a private company regarding its pension plan.

Also interesting that Congress recently passed a bill allowing corporations to delay funding their pension fund deficits because 'its not their fault that interest rates are so low which reduces pension fund earnings.' Don't hold your breath for Congress to also pass a bill allowing senior citizens to delay funding their property tax and prescription drug bills because, just like corporations, 'its not their fault interest rates are so low which depresses their earnings.'

This interest rate manipulation against savers to promote debt-debt-debt consumption, devalue the dollar and suck the saver dry approach is a form of senior citizen financial terrorism against one of the most vulnerable segments of our society.

There can be no doubt that federal policies which allow forced manipulation to record low interest rates and a depreciation in the dollar's exchange rate are devastating many senior citizens.

We often hear this > It seems that all players in the financial markets agree that a lower dollar is necessary if we are going to correct our negative balance of trade. They believe imports need to get more expensive for Americans, and exports need to be less expensive to foreigners.

Why should America have any policy aimed to debase its currency and lower its international buying power? Is that the way to treat those who have saved, or those (foreign and domestic) who have, in good faith, lent money to others?

I present two charts demonstrating trends of debt. One shows the accelerating increase in our trade deficits (see Trade Report at http://mwhodges.home.att.net/reserves.htm) and the other shows surging debt in all sectors (see America's Total Debt Report at http://mwhodges.home.att.net/nat-debt/debt-nat.htm) faster and faster than economic growth. It can be argued that excessive debt generation creates excessive purchases of imports, and the better way to lower imports (in order to reduce the trade deficit) is to stop manipulating interest rates to the lowest in generations to make debt driven consumption so much fun.

We need to keep in mind the information reported by contraryinvestor.com that, "From less than 5% of the total S&P in 1980 (and 13% in 2000), the financial sector now accounts for just shy of 22% of the total capitalization based weight of the S&P. A financial sector that is ultimately dependent on interest rates and rate spreads for its current profitability and forward growth prospects."

Why is this important, this huge growth of the financial sector as a share of all sectors? Well, we know the financial sector does not create food that seniors need like the agriculture sector, or goods like the manufacturing sector, or coal like the mining sector, or transport like the transportation sector, or electric power generation like the utility sector. What then does this exploding financial sector produce to protect and enhance senior citizen living standards? Regardless of your answer to this we do know the financial sector (like the government sector) is getting larger not smaller while the other mentioned sectors shrink. Things don't sound too good for the senior 'sector', or for a lot of other sectors downstream, unless political leaders get with it.

I subscribe to the following statement > "the notion that higher growth - regardless of how it is achieved - is beneficial for the global economy, is fundamentally flawed," by Dr. Otmar Issing, European Central Bank Chief Economist, October 2003 at the German British Forum in London.

Question: do you think the World Trade Organization (WTO) would consider a ruling in favor of returning to U.S. savers their plundered interest income?

Hey, if the WTO can rule against government-manipulated tariffs because it negatively impacts international producer incomes then maybe seniors could lobby to get them to also rule against the U.S. Federal Reserve and politicians promoting policies enabling debtors to siphon-off their savings via government-manipulated interest rates.

A return to the old basics is badly needed, in my view. This means record debt in all sectors coupled with record current account deficits should command on the free market record high short term (and long term) interest rates. Higher interest rates mean fairness to all savers including a lot of seniors, and most likely less imports due to consumption curtailment of debtors - - which would go a long way to balancing current account deficits and the organized trashing of the U.S. dollar.

But, if powers-to-be can find no other way to run this economy going forward than by debt-debt-debt helped by continuing record low interest rates and disappearing savings and siphoning-off those savings existing, then perhaps the equitable thing to do would be to significantly increase social security payouts to seniors by a factor of, say, 4x. Then let's see where the chips fall.

In the meantime, senior citizens and other savers should watch politicians more than ever, watching what they say or don't say about debt vs. savings and senior incomes and the international stability of same. Seniors should not fall for games such as politicians suggesting that one day seniors will get free lunches like free prescription drugs and dental care (when today they are denied use of equitable earnings from their savings for those purposes), or that China should be blamed for an over-valued currency, or that terrorists should be blamed, or that oil producers should be blamed, or one political party blames the other. Our political leaders have the constitutional power to stop allowing manipulated interest rates that push debt-debt-debt driven consumption at the expense of savings. But, not a peep is heard - - from either political party.

Question: what are you suggesting to your elder parents and grandparents?

Telling them to stand pat with their conservative savings approach to protect their peace of mind and health while giving them a specific date that interest rates will move up - - and meanwhile showing them how to cut their prescription drug, dental, food, property tax and gasoline costs to make their principal last longer - - or telling them to go deeper into debt, or to consume their home equity, or to sell their home and rent, or just give in and send it all to Wall Street and hope?

Will the time ever come when government leaders (and their federal reserve) stop financial terrorism against savers and other creditors, and cease even the appearance of a near 'free lunch' to debtors?

In my view, this requires much, much higher interest rates for all maturities, climbing until debt ratios in all sectors and the current account deficit experience very significant reductions. Its past time to pay the piper, like responsible adults - - and stop siphoning-off savings of others.

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