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Does anybody have a good explanation of why the G Fund % returns have been steadily dropping year after year since as far back as I can see the historical data? Is this going to continue in the future?
tia, bkr
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You ask a great question. The roaring nineties in the stock market were accommodated by low interest rates and today’s high rate of American consumption, largely funded by debt, is also a by-product of low interest rates. Those that got burned in the 2000 stock bubble mania are either trying to recoup their losses or have moved into real estate which appears to be reaching a bubble mania phase, of its own, in some parts of the country, again thanks to low interest rates. I think the days of low interest rates are behind us for the next 8 years or so. The trend in interest rates has reversed my opinion.
Back to your question. What is the explanation for how these interest rates have trended down and remained low over the years? Historically, if our own Federal Reserve provided this type of liquidity by artificially attempting to keep rates low it would have created a highly inflationary environment. So, how has long-term liquidity (low interest rates) been maintained without spurring inflation reflected by the CPI numbers? We need look no further than Japan (commonly referred to as the U.S. Federal Reserve of the East).
Japan, coming out of their own financial crisis, desperately needed to export their products to the U.S. to salvage their economy. In order to export their products they had to be priced attractively to U.S. consumers. The only way that could be arranged was by Japan’s Central Bank buying up U.S. treasuries with their Yen. That helped to keep the Yen low and the dollar high and our stock market soaring even our as manufacturing base was going up in smoke.
If any currency is highly sought after or in high demand the interest rate remains low because that currencies purchasing power is strong. Interest rates traditionally reflect risk. As demand falls for a currency because of perceived risk the rates naturally rise to provide investors an incentive to buy. The Japanese chose to sacrifice the purchasing power of its currency to keep its people employed in the manufacturing sector which they were counting on to help their economy rise from the ashes. It was a marriage made in heaven for the two central banks. The cheap imports, especially electronics, helped to keep inflation in check in the U.S. and the low interest rates in our country, subsidized by the Japanese central bank, buoyed our debt funded consumerism, the stock market and funded our wars.
Those in the U.S. hurting the most with this arrangement between the two central banks were retired people on fixed incomes heavily reliant upon interest income. It takes a lot of dollar deposits to meet the necessities of life when interest rates are hovering around 2-3 per cent or less. Making matters worse for those retirees was the fact the difference between short term and long-term CDs was not significant enough to take the risk of locking in the slightly better longer term rate in the event interests started rapidly rising. If they laddered in their deposits with 90 day maturities, they could easily transition to longer term maturities as interest rates rose. Unfortunately, they’ve waited a very long time while enduring painfully low interest on their CDs while holding out for the higher rates. The collusion between the two central banks was not that apparent at the time and therefore the prudence exercised by these retirees was only a mistake in hindsight. To my knowledge, this type of collusion between central banks has never occurred before, at least to this magnitude.
Another factor in keeping people in the dark about true inflation is the Consumer Price Index. The components of that index can be changed by the powers that be to reflect whatever they desire. Currently, the index doesn’t count fuel, food, and housing. You can bet your sweet bippee that cheap Japanese and Chinese products exported to this country are in the index. Again, who is hurt the most by this arrangement excluding those U.S. employees who lost their jobs to Asian countries? The retirees who have their COLAS tied to the CPI. If the CPI stays low, guess what…Social Security and other corporate retirement schemes, currently bankrupt, remain solvent a little longer.
Anyway, that is probably a little more information than you wanted, but I couldn’t figure out how to keep it short and still answer your question adequately. Hope it helps.
Trading is true democracy in action. The dollar votes we cast, in the marketplace, have real influence without the coerciveness associated with pseudo democracy operating under the principle of 'might makes right'. Trading allows us to protect ourselves from those inclined to pick our pockets in the polling places and at the printing presses.
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