How Much Is Enough?

How much money do you want to hold?  In other words, do you have some quantifiable amount that you want to have in savings?  If so, have you reached that goal?  Is your number a desired floor or ceiling?  What would it mean to you dollar-wise to say you have too much set aside in such an account?

There are just a few things you can do with money, spend it or putting it away for the future are the big ones.  Savings, especially with today’s rates approaching zero, might as well be buried in the back yard.

Banks see it differently.  They usually want your deposits.  After all, bank profits are based on taking it from you and handing it out to spenders, borrowers, or lenders.

What happens when that transfer mechanism breaks down, when both borrowers and lenders become too cautious?  Enter the Fed, or more exactly, conventional monetary policy of which they are the engineers.  When our economy slows down, the Federal Reserve tends to push more money into the banking system.  Ideally, they hope to add more than enough cash to overcome the concerns of savers, expecting that folks will eventually spend when they feel comfortable with the size of their nest egg.

But it doesn’t seem to be working as expected.  After plumping up the money supply by trillions of dollars without seeing convincing evidence that solid growth and its accompanying inflation were manifesting, the Fed seems to be having second thoughts.  They may be growing uncomfortable with short-term interest rates, their traditional tool for managing the economy’s ups and downs, near zero.  Perhaps they are asking themselves, “If the current economy’s pace now represents a new standard of normal, what will we do if things begin to slow even more?”  With rates hovering around zero, they are out of traditional ammunition.

Here at Atlas we have been saying current short-term interest rates, now essentially at a zero bound for the sixth year, are doing way more damage than should be tolerated.  Pension plans and annuities are struggling to meet their obligations.  Some are on the brink of collapse.  Retirees are being squeezed as CDs and other traditional bank deposits yield ridiculously low returns.  Banks are feeling the squeeze as well.  Who wants to spend or borrow when conditions appear so tenuous?  Current Fed policy had a good run but it seems to be letting us down.  It’s time for the Fed to reload, raise the overnight rates they control directly, and allow folks other than the super-rich to realize a living return on their hard-won savings.  Unfortunately, we aren’t expecting them to do so any time soon.   (by J R)