The Motley Monk is no fan of the outgoing Fed Chief, Ben Bernanke. The reason is simple: Printing all of that money (called "Quantitative Easing" or "QE") and reducing interest rates will eventually lead to inflation and perhaps hyperinflation. For people in the middle class who have saved or are saving for retirement, for example in an IRA, they stand to lose a whole lot of money long after Bernanke and crew have departed Washington, DC.
Yet, a report from the McKinsey Global Institute (MGI) indicates that QE has saved more than $1T in national debt since 2007.
According to MGI, the federal government profited by issuing Treasury debt that pays interest at a reduced rate. To wit: The effective rate on outstanding U.S. debt fell 50% between 2007 and 2012 (from 4.8% in 2007 to 2.4% in 2012). The scheme saved the US Treasury $900B in interest payments over those five years.
Is The Motley Monk wrong? Should the nation's taxpayers should be jumping up and cheering? After all, the federal deficit is $17B not $18B (5.83% less than it otherwise would have otherwise been), all due to Bernanke and crew's crafty scheme.
Well, wait just one minute!
MGI notes that QE and ultra-low interest rates have had the negative effect of creating some losers, namely, American households. On average, they lost $360B in net interest income. In addition, Americans aged 75+ lost an average of $2.7k/year in interesting income (or, a total of $13.5k over those five years).
Time to take Bernanke and crew out to the woodshed?
Maybe not. After all, this is economics and MGI also notes that QE and those ultra-low interest rates raised U.S. household wealth an estimated $5.6T. In turn, that increase translated into ~$167B in additional consumer spending in 2012, strengthening the nation's overall economy. Those effects far outweigh the household income lost. In addition, even if ultra-low interest rates continue (and they are expected to for the near term), the folks at MGI don't foresee inflation to be a "major" risk.
So, after reading the MGI report, should The Motley Monk just calm down about the potential negative effects of QE and ultra-low interest rates? Even if unemployment and underemployment in the labor market will continue at present rates due to weak economic growth?
It all depends on whether one evaluates the glass to be "half empty" or "half full." Unfortunately, those economic prognosticators who are correct in their analysis are known only long after the effects of policies, like QE and ultra-low interests rates, are evident. And, like Bernanke and crew, are long gone from the scene.
Let the discussion begin...
To read the report published by the McKenzie Global Institute, click on the following link: