When interest rates are kept low artificially, as has been the FED’s policy for at least the last 10 years, some benefit while others are hurt. Many times, those who are hurt don’t even know it is happening to them.
An insurance company, for example, collects premium money from policy holders, and then it invests that money. The actuaries working for the company are charged with figuring out the odds of a claim so that the premium can be set to very closely offset the money paid out in claims (plus the overhead).
This is an important point to understand – insurance companies generally DO NOT make money on the actual insurance they sell to you. Where they make the bulk of their earnings is from the profits from investing the money before they have to pay it out in claims.
Since they have your premium money, on average, for about half a year, they must invest very conservatively so that they don’t lose money. They do have a cushion of capital – shareholders’ book value – just in case, but losing money on investments is especially dangerous for an insurance company.
Being conservative investors, much of their portfolios will be held in highly rated fixed income investments, such as Treasury Bonds. When they can earn 5 to 6% on your money, the insurance companies do well for the stockholders. But, when even 30 Year Treasuries yield barely more than 2½% as they do today, that takes a big bite out of their profits.
Other investment choices also take their cue from the yield on Treasuries. Stocks are the main competitors to Bonds. When interest rates are super low, investors move out of Bonds and into Stocks, pushing up the prices, and we’ve seen just this with today’s levitated stock market.
The PE (Price to Earnings Multiple) for the S&P 500 once again is approaching bubble levels. The Dividend Yield – the dividend divided by the stock price – falls as the stock price goes up. Today, the dividend yield is at generational lows.
Stocks at these lofty levels increase the risk of a major sell-off for insurance companies at the same time that a measly dividend yield does little to boost company yields on the premium money.
In this environment, all the various kinds of insurance have seen premium amounts increase to make up for the artificially (manipulated) low interest rates. Consumers then must pay more for the same coverage for their homeowners’, auto, health, life, and other insurance policies.
But other organizations also keep substantial cash balances: hospitals, colleges and universities, business corporations, etc. If their return on their cash is reduced, then it must show up as higher prices, lower wages, or (for businesses) a lower return to shareholders.
Every customer, employee, or shareholder who gets a lower return on investment has the stupid FED policies to thank for at least part of their lowered earnings and higher prices.
Businesses also make decisions based on interest rates. Expansion plans, as well as replacement of equipment as it wears out, are affected by low rates. A company may buy one machine requiring many employee hours of labor to make the company’s products. Or, it may purchase a more expensive machine which would require fewer employee hours.
The price of the money needed for either of the machines is the interest rate the company must pay on a loan. When interest rates are low, the borrowed funds cost the company less, so the expensive machine is relatively more attractive. Workers at companies which have chosen to borrow at low rates to buy the expensive machine have the FED’s stupid policies to thank if they lose their jobs.
Potential competitors – or potential expansions at current competitors – also are affected by interest rates. In business, it’s all about weighing the possible returns compared to the risk that must be born. Low interest rates encourage increased competition, even to the point of over-supply, as we’ve seen in the oil patch recently. Over-supply has caused the price of oil to crash (good for consumers), and tens of thousands of the jobs created over the last couple of years have disappeared during the last six months. Again, stupid policies causing bad results for a lot of people.
So, if you can see that the policies produce hardships for most Americans, even if they don’t know the cause, why would our leaders continue doing what they’ve been doing? The answer is that those who benefit are the leaders themselves.
When interest rates are low, the National Debt, and the Budget Deficits which add to that debt, seem almost manageable. At 2%, the current $18 Trillion National Debt costs “only” $360 Billion in interest (which they have to borrow to pay). But, at a more normal 5%, that debt service would soar to $900 Billion!
And when Americans feel the pain of job losses and a generally lackluster Economy, the incumbents can take credit for the Welfare, Food Stamps, Medicaid, and other assorted largess. No matter that there are 50 Million Americans on Food Stamps – at least there are no bread lines!
Some of you may think that I am being unnecessarily harsh on the FED and on our leaders who allow the FED to continue to subvert the Free Market process which has been responsible for America’s rise to economic strength. I don’t think I’m being harsh – if anything I think I am more restrained than what is called for. I certainly wouldn’t call for the punishment used during the pre-American Revolution era – tar and feathers. However, I think the socialists in Washington don’t deserve to be making policy – they deserve to be making license plates.