Ben Bernanke said last week that he would keep interest rates low virtually forever. And he got the intended response — the stock market rallied nicely and continues to do so.
The problem is, Ben is lying. Or, if you want to be kind, he can be accused of not telling the whole truth.
Take a look at the chart to the right. It's the yield on the 10-year government bond going back a year. The 10-year is considered the benchmark for interest rates that matter.
The 10-year's interest rate as of Tuesday afternoon was 2.97 percent. And the next decent economic report — whether it is credible or not — will probably put the rate over 3 percent for the first time in years.
The 10-year bond was yielding just 1.9 percent back in May.
Let's do the math.
In May, 1.9 percent; now, 2.97 percent. Well, that was easy. It seems that interest rates have risen by 1.07 percentage points — or, in finance lingo, 107 basis points — on the bond that Washington a decade or so ago decided to make its most important financing tool.
If you look at the charts of the government's 30-year and 5-year securities, you'll see the same upward trend in rates.
So Washington has had to pay about 55 percent more to borrow money at each of these maturities now than it did seven months ago. And people who have been lending money to Washington during this time — the Chinese and OPEC, as well as American citizens — are receiving this added return.
(On the other hand, investors who bought US government securities before May — whether by buying the bonds themselves or by investing in them unknowingly through mutual funds — have taken a beating on the value of the principal. But that's another story.)
Back to my first story: So how can Bernanke, with that straight academic face of his, say he's going to keep interest rates low? And how can he say it over and over and over again without any of the journalists at the Federal Reserve's press conference or economists on Wall Street calling his bluff?
Because like everything else, this is all a matter of definition. In Washington, where insider trading isn't really insider trading, interest rates also have a vague meaning.
Bernanke, who is leaving his job next month, controls something called the Fed Funds Rate. That's the rate at which banks can lend each other money for a very short term, generally overnight. That rate is set by the Fed and has been stuck at a puny 0.25 percent for the last few years as the Fed tries to — well, I'm not really sure what the Fed has been trying to do.
As you can see from the way the 10-year — and the 5-year and 30-year bond too, trust me — have been defying the Fed's wishes, Bernanke really has little control over most of the interest rates that matter. One of the few rates he has been able to keep low is the yields on things like money-market and savings accounts.
The banks love him, since the less they pay out to depositors, the more money they earn.
I want to get off the main topic for a minute because we've just finished up a Christmas shopping season that didn't seem to go very well for retailers. And I think what I just wrote explains it.
The money Americans earn on things like savings accounts and money-market funds is liquid. If someone sees the balance in their bank account rising, they are more likely to take some of that extra money out and spend it.
Remember when we used to keep Christmas Club accounts in the bank? That was money we'd put away all year with the distinct purpose of it being spent on holiday gifts.
With interest income on bank accounts flat — and jobs and pay raises hard to come by — people didn't increase spending by much this Christmas. And if the same economic conditions exist when Christmas 2014 arrives, they will again disappoint retailers.
People who invest in the stock market, of course, have made lots of money thanks to Bernanke. But when was the last time you heard someone say that she was going to sell stock to buy Christmas presents?
That would involve calling a broker, having the broker try to talk you out of liquidating any money, then executing the trade, putting money aside to pay capital -gains taxes — all before you go to the store.
Money held in brokerage accounts is not liquid. It's not the equivalent to the old Christmas Club.
So Bernanke is like a gangster holding up US savers — robbing them of interest income. And that helps keep Christmas spending low.
And his promise to continue to keep short-term rates at historic bottoms dooms Christmases to come.
Meanwhile, the Fed announced two weeks ago that it will have its shills purchase only $75 billion in government bonds and mortgages per month beginning in January — down from $85 billion.
With the Fed easing up on its bond purchases, bond prices will fall and rates are likely to rise.
But the real problem will come when we get what all of us have been longing for — a true economic recovery in which people and companies start borrowing money vigorously. When demand for loans improves, Bernanke's successor as Fed chairman, Janet Yellen, won't be able to lie her way out of that situation.
If you don't believe Bernanke is lying to you, try this: Apply for a mortgage and compare the rate you'll get today with what you would have gotten in May. Then call the Fed and ask why its chairman keeps lying.
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