QE3 and the FED priority.

[Vanraw]

Wanted to start a new thread on this topic. I dont want it to turn into a political discusion. So if someone comes on and starts to talk about politics or Race Ill just delete the whole thing.

I am becoming more and more concerned about the FED's over all priority as it relates to the economy. It appears to me that the only priority the FED has right now is to prop up the stock market. Their priority is based on what I think is mis-guided concept that the market will drive the ecconomy as ooposed to the other way around.

I think that the market today is being propped up by the FED's action as ooposed to the economy, which means that it is unsustainable in the long run. At the FED's defense, the theroy seems to be that they will prop up the market until the real economy catches up. My concern is that this is like welfare. Once the core economy becomes adicted to the influx of FED stimulas, it will never go back until it all comes crashing down.

Interest rates at an effective rate of zero, are doing nothing to stimulate the economy and are effectivly crushing the majority of the middle class retired fixed income people. The FED is sort of competing with retired people on who the banks go to for dollars. The concept that the Banks will lend more and at cheaper rates simply is not true. Credit card companies are charging record interest rates, and banks are giving out loans to businesses and people like they are holding the last dollar in the USA.

What the FED doesnt seem to realize is that our retired population is a potenial market driver. Today a retired persons income on 100k investment is something like $30 a month. If you have 1 million you might get $300 a month in interest. This pushes retired people to either invest in more risky stock market investments or to live off the principle and cut spending way down. So one of the largest consumer groups in this nation have been stunted to stop spending.

While this isnt a popular concept, Im begining to think the best move the FED could do is to stop QE3 and start to raise interest rates to a respectable level. The market would go down initially but then quickly become less volitile. The retired population would start to see income again and start to spend excess as ooposed to having to dip into invested principle.

[Zirak]

Make sure you are sitting down.

I agree with you.

I don't, however, think their only priority is to prop up the stark market. I think that they also want to avoid exploding the cost of servicing the national debt.

[Breand]

The reason for QE is because the Fed has no choice, really. They have to resolve the insane deficits that there is no game plan for, they have to prop up the stock market (which, when you account for the inflation caused by all these QEs is still in the toilet), and they have to prop up the housing market. We are the casualty of the new global economy.

I think punishing the baby boomers is a just argument, frankly. Their generation got us into this mess, so devaluing their savings is OK with me. Most of them have pensions that our generation will not. My parents live comfortably off social security and my Dad's pension. They don't even touch their 401k account. Plus that age group are not consumers at a base level. They will not be buying the newest gadgets or cars that hit the market. They don't hit up a nice restaurant weekly. Advertisers generally ignore their age group.

Of course, the end result of all this is complete disaster. You can not inflate your way out of a problem. The end value of every fiat currency in history is 0. The best success we had with tackling debt was during the 80s when Volcker raised the interest rates to crazy levels and people became a savings society which gave us another 15 years of a decent run before Greenspan dropped the rate to nothing after 9/11. But with the housing market in the toilet I don't know if that is an option right now. The only savings people have nowadays is their equity and devaluing that makes things worse.

I am planning for retirement with the knowledge that the only way to survive is to get as much money into my 401ks and IRAs as early as possible. I can see myself just trying to live off a 3% savings rate on a large chunk of money.