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The Background
The Federal Reserve's easing policies have added an excessive amount of dollars to the international financial system. This has been carried out in the following manner: primary buyers, such as large banks, buy a certain amount of treasuries directly from the U.S. Government at auction. The Federal Reserve then purchases the treasuries from the primary institution, and pays for it by simply crediting the account that the institution has with the Federal Reserve (this is the "reserve" segment of the Fed). While the Fed does not physically "print" the money via a traditional printing press, the new cash is now available to the institution for various banking activities.
ZIRP Policy: Speculative Fervor, Low Savings Rates, and Relevering
Low interest rates, however, have so far dampened profitability and thus desire to loan money to businesses and households, and, as always, have induced a speculative fervor in which malinvestments are a natural consequence. More importantly, our low personal savings rates, also a consequence of ZIRP, hovering around 3.5%, display our low capacity to invest in productive assets and organic growth. Furthermore, low personal savings rates foretell of a situation in which most retirees do not have significant "nest-eggs" and will rely heavily on social security (which probably won't be available when the time comes). Finally, we can argue all we want about the jobs market, but it remains weak. When we have underemployment above 17%, and an announced unemployment of 8.6%, statistically significant wage growth is highly unlikely in most sectors. A lack of wage growth has been a rather loud trend since the beginning of the "recovery:"
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http://seekingalpha.com/article/317083-don-t-buy-the-u-s-growth-story-fear-it-short-it-and-profit?source=feed
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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