The Fed Has Forced Investors To Take On Excess Risk

Since the “Financial Crisis,”  the hope was that inflating asset prices would trickle down into economic growth. Unfortunately, after a decade of monetary interventions and artificially suppressed interest rates, the wealth gap has exploded. More problematic is the Fed has forced investors to take on excess risk due to the lack of alternatives.

No Return

I previously wrote an article on retirees’ primary problem: the 4% Rule is dead. To wit:

“The 4% Rule has long been used as a guideline for retirees in determining how much they should be able to withdraw from their retirement account while still maintaining a balance that will allow for the same income stream to flow through their golden years.”

The 4% rule originally suggested that once retired; portfolio allocations shift to ultra-safe Treasury bonds. Such an allocation shift provides for the income required to live on, plus a guarantee of the principal.

Here’s the problem.

When the 4% rule originated, Treasury yields were 5%. Today, they are just slightly above historic lows set during 2020.

Fed Investors Excess Risk, The Fed Has Forced Investors To Take On Excess Risk

Such is a massive problem for retirees today. As shown, $1 million will no longer generate a $50,000 income for retirement. Today, it is just $17,250/year, much better than the paltry $5500 set at the lows in 2020.

Fed Investors Excess Risk, The Fed Has Forced Investors To Take On Excess Risk

However, that is a deceptive number due to the lack of an inflation adjustment. When we look at “real rates,” the problem for savers because more apparent.

Fed Investors Excess Risk, The Fed Has Forced Investors To Take On Excess Risk

With “real” rates currently negative, what are “savers” supposed to do?

 

Pandora’s Box

The question we should be asking is, how did we get here?

For that answer, we have to go back to 1982 as President Reagan launched a mission to break the back of spiraling inflation and interest rates. At the same time, he was working to restart the U.S. economy following two back-to-back recessions.

For this task, he joined forces with then-Fed Chairman Paul Volker to start using active monetary policy to fight inflation and create employment. Reagan engaged in deficit spending to fill gaps in the economy, cut taxes, and deregulated the banking system. It worked, he produced more than 9-million jobs, and inflation and interest rates started falling, leading to a pickup in economic growth rates.

What he didn’t realize then was that he had just opened “Pandora’s box.”

Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the change in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

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