Tinkering With Interest Rates: Some Winners and Some Losers

Anyone who follows the economy knows that the Federal Reserve has been manipulating interest rates to be extremely low since the recession began in 2008. Short term interest rates are so low as to be almost non-existent, and the Fed has told us to expect that policy to remain in place until sometime in 2014 at the earliest. The Fed is also pushing down longer term interest rates through Quantitative Easing or twists or some other machination. These moves by the Fed are supposed to stimulate economic growth, but we cannot forget that there are both winners and losers due to the Fed's policies. Here are some of these folks.

WINNERS:
1) Banks -- The banks are able to borrow for next to nothing from the Fed and then to invest the funds into essentially risk free positions that pay low positive returns. That structure guarantees the banks something like a three percent spread on the money with extremely low risk of loss.

2) Homeowners with mortgages and great credit scores -- Because of the low long term rates, mortgage interest rates are at the lowest point of the last 50 years. Homeowners who can qualify for new mortgages have been able to refinance to take advantage of the lower rates.

3) The Federal Government -- When you owe $15 trillion on which you pay interest, lower interest rates are key. An increase in the average interest paid by the federal government of just 1% would mean additional interest payments owing of $150 billion per year, every year.

4) Speculators and Hedge Funds -- people who buy commodities as an investment always take the risk that the price of the commodity may go up or down. Normally, holding the commodities also brings the cost of paying for the invested funds. In other words, most times a speculator who buys wheat or gold or oil will borrow some portion of the money used for the purchase. So long as the position is held by the speculator, interest must be paid on the borrowed funds. When interest rates are next to nothing, the cost of holding these speculative investments disappears, so it is easy to invest in more positions and for a longer time. This increases overall demand for the commodities and drives prices higher. As a result, the speculators make bigger profits.

LOSERS:

1) Savers -- people who put funds away in a savings account for a rainy day have seen their returns on their savings disappear. Most savers do not have large amounts put away. Those with higher liquid net worth can find better paying investments. It is the small savers and the elderly who have seen the income on their savings dry up.

2) Small Business -- Small businesses are an important part of the economic engine of this country. These employers, however, are much more dependent on bank loans to fund operations than their larger counterparts that have sold public equity or tapped the bond market for funds. Since the banks can get a nice risk free return as discussed above, the amount of funds available for lending to small business is down in dramatic fashion.

3) The Less Well Off -- Every day, Americans have to buy certain necessities of life. Food, clothing, fuel, and the like are essentials which must be obtained. Well, the prices of all of these items are soaring. The latest numbers show that price increases for these types of items are rising at an annual rate of 8.1%, which is staggeringly high. It is true that purchase of a home is less expensive, but few of this group are out looking to buy a new home at the moment. On the other hand, they all have to eat. So why are the prices rising so quickly? There are many factors, but one of the biggest is the intrusion of speculators into the markets. The Fed policy of low interest rates has taken a big part of the cost away from speculation, so we see more and more speculation with the result of higher and higher prices. While the speculators may profit as a result, the folks who have to buy products like wheat and corn and pork have to pay the higher prices every day. For the poorer half of society, these price increases are a terrible tax inflicted as a result, in part, of the Fed's easy money plans.

There are other winners and losers, for sure, but these are some of the most important groups. Once again, it is another place where government is deciding on who wins and who loses in our economy. The Fed is distorting the markets.