Wednesday, October 23, 2013

The Stability of The Purchasing Power of Our Money

Take two words, monetary policy, go to sleep, and in the morning you will have less purchasing power.  Does it work that fast? No, but over a period of time, say 20, 30, 40 or 50 years, your purchasing power will erode. Few people even care what the words monetary policy means, much less what monetary policy does.  As all of us who carry Federal Reserve Notes, also known as our paper money, in our wallets, you would think that we would care about monetary policy and who makes it.  Monetary Policy in the United States is made by the Federal Reserve Bank Board, with input from bankers and economists.  My problem with this is that there is no input from people living on a fixed income like Social Security or a pension.

Monetary policy today is designed to accelerate economic growth, and that is where I have a problem. I do not think that monetary policy should be responsible for economic growth as it is interpreted by the members of the Federal Reserve Board.  Economic growth should be encouraged by the laws passed by Congress, and not by the manipulation of monetary policy.

Keeping interest rates very low may bode well for those borrowing money, but it does not bode well for those seniors trying to live off of their pension, Social Security and a few certificates of deposit (CDs) paying a fair rate of interest.  When interest rates are held down by Federal Reserve Bank policy so as to encourage faster economic growth through greater borrowing by everyone that knows how to use leverage, there is only one class of people left holding the short straws, and that is those seniors investing in CDs from their bank.  Because CDs are paying so little in our present low interest rate environment, many seniors are being "forced" by circumstances to invest their money in the stock market in search of higher current yields on their money.

I will stop here, and let you who read my blog MONEYTHOUGHTS digest these three paragraphs.  It is important to understand what I have written.  Not because what I write is important, but because what I write explains why 1.) the stock market is up so much, and 2.) why it is important for everyone to take an interest in what is happening with monetary policy.  We are all part of the monetary system we use in the United States, and as such we should all have a say in how monetary policy is formulated.  Monetary policy is too important to be left just to the bankers and a few economists. Perhaps it is a bit radical to insist that we all have some say in how monetary policy is decided. After all we that live on a fixed income are most dependent on the stability of the purchasing power of our money!

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