We are a commune of inquiring, skeptical, politically centrist, capitalist, anglophile, traditionalist New England Yankee humans, humanoids, and animals with many interests beyond and above politics. Each of us has had a high-school education (or GED), but all had ADD so didn't pay attention very well, especially the dogs. Each one of us does "try my best to be just like I am," and none of us enjoys working for others, including for Maggie, from whom we receive neither a nickel nor a dime. Freedom from nags, cranks, government, do-gooders, control-freaks and idiots is all that we ask for.
We're told regularly that, at some point, Quantitative Easing will end and interest rates will rise. Zero Hedge provides a window as to why this is unlikely to occur in any meaningful way.
It's not uncommon to hear Fed officials and politicians deny that we are monetizing debt. Technically, we are not. We issue debt, the debt gets purchased, and the Fed (which is essentially a private institution, though it's really a quasi-governmental institution) buys it back. Normally government debt is held by the public, which is why economic analysis of the old "crowding out" problem was so prevalent.
By keeping interest rates low, and repurchasing debt, the appearance of private ownership is maintained, but it is a roundabout method of monetizing debt. Allowing rates to rise to any meaningful degree will have severe negative impacts, in the short term. Since we are in a politically driven economy, this cannot be allowed to occur, so interest rates must remain artificially low.
Of course, the long term ramifications of monetizing debt are inflation (followed by deflation) and severe misallocation of economic resources. In other words, bankruptcies, unemployment and a financial morass. Not to mention the end of an expectation of comfortable retirement (how can you retire on a fixed income if interest rates are below 1%?).
Don't expect interest rates to move up any time soon, and don't expect any reporting of realistic inflation. Just vote for the guy/gal who will shovel the most tax money toward you.
You're actually better off with low rates and low inflation in retirement.
You think you're living off the interest in normal higher interest rate times, but you're actually living off principal, after inflation.
In addition you pay income tax on what is essentially inflation, thus putting you behind.
What the fed has been doing is recapitalizing the banks and holding their money in the form of reserve deposits, so it's not out there being spent.
They hold the deposits at the moment by paying interest on them. But they could hold them any time by just raising the reserve requirement, as they used to do before market transactions served the purpose better of regulating the money supply.
Sadly, inflation is much higher today than is reported. Normally, real interest rates are positive. They haven't been positive for about 6 years and won't be anytime soon, which is very BAD for retirees, as it is a de facto tax on savings.
To make matters worse, the inflation rate is really much higher than the reported CPI - which is kept low via hedonic adjustment (lowering of prices due to perceived gains - if your bandwidth doubles but you only pay 10% more, that is a downward hedonic shift).
The concept that "it's not out there being spent" is misguided. This implies a recapitalized bank isn't lending the money. It is. The reason inflation is "low" is due to external short term factors best described as exported inflation, which is happening in many nation trying to keep up with the Fed.
Normally, higher interest rates correlate with lower inflation, when the market is allowed to function properly.
I meant to say I agree that you don't live off as much as you think when you live off interest. You can dip into principal for the reason you mentioned (like today's retirees are), but normally you have a positive difference between interest and inflation. Frequently people think it is larger than it really is, the so called "money illusion".
Your bottom line nails it (Just vote for the guy/gal who will shovel the most tax money toward you.) When you're at the mercy of a system, learn the system, then work the system. Through no fault of my own my retirement plan, which exists only in retrospect, consisted almost entirely of having tax money shoveled my way in retirement, and it has been very comfortable so far.
"Of course, the long term ramifications of monetizing debt are inflation (followed by deflation) and severe misallocation of economic resources."
That is one possible outcome, another is for asset bubbles to occur, inflate, and burst, think oil, gold, commodities futures, housing, etc.
What happens is the money chases commodity growth instead of interest yields since the assets are inflating rapidly, while interest rates are stagnant. The bubbles inflate and create paper wealth but quickly deflate consuming all of the paper wealth and all of the Fed's fictitiously created wealth as well, perhaps more.
It would be interesting to compare how much wealth the Fed has created with how much wealth has been imploded by the recent loss in so many of these assets.
Disappearing inflation like this is another but likely unintended way the fed is keeping inflation low.
Oh, and don't forget that nearly every first world country and many others are attempting to export deflation. The US is a common dumping ground for deflation.
To understand deflation better you might wish to read Chris Farrell's book, Deflation, What Happens When Prices Fall.
By definition, any bubble is an isolated form of inflation, rather than a general price inflation. Either way, the net result of many short term bubbles and their bursting is, eventually,long term general inflation (depreciation of currency).
It's not that what you describe is different from what I described. They are part and parcel.
The only meaningful way to export deflation is to increase your production to the point a potential importer cannot compete at all (which is improbable unless their is political desire to not compete, which leads to calls for protectionist policies).
Of course we see these calls. But not because deflation is exported, but because business would prefer to not have to compete and drive productive capacity upward. It's easier to tax imports, hurt consumers, and claim a Pyhrric victory (protectionism never works for very long time).