HarmonicaBruce said:
I'm not trying to argue, but how do you think the high debt level is making things difficult for retirees? Inflation is low, interest rates are low, life is good.
Hard assets? You mean like gold, silver, oil, guns, ammo? Hard assets are difficult to own if you live in a van. Or do you mean land?
For those who may not be familiar, the QE was a large bond buyout program initiated by the Fed in an attempt to free up money in the banks, so they would have money to lend to new home buyers, in an attempt to increase home sales. Generally, a lot of money in the bond market lowers bond values, but increases yield. This would have been a benefit to retirees, pension plans, etc which invest money in bonds for income. The lower prices would have permitted retirees and others looking for fixed, less risky income to purchase more bonds and receive a higher coupon (yield) on new bonds. And, as long they held on to old bonds, their previous income would not have been affected. The only negative result would be if a retiree had to sell a bond - he'd be receiving a lower value than what he paid.
Unfortunately, in addition to large monthly bond purchases, the Fed also set the prime interest rate to almost zero. The thinking was new home buyers would not only have access to money, but would also have low interest rates so they could AFFORD A mortgage. This failed due to reasons not related to this discussion.
But in addition to failing, it also created a situation where bonds were low valued, but also in an environment where interest rates were low, but expected to rise in some unknown time frame. The Fed could not artificially keep the interest rates low forever. So, as time went on, investors began divesting their portfolios of bonds because when interest rates rise, the value of existing bonds drop proportionally. Retirees, and others on fixed income were OK for a while, but eventually they have to renew bonds, and at a lower coupon, since interest rates were low. Retirees generally cannot withstand the volatility of stocks, since they are in disbursement mode with their portfolios - taking out, not putting in. They have little choice but to ride the valley of the bond market.
Bad enough, but it's still going to get worse as, now expected in 2015 the Fed actually raises the prime rate. They must.
Another result of the wave of bond sales was the boost to the stock market over the past years. Investers had to do something with the cash, and the majority, after a bit of a pause, put the money in stocks, driving the stock market higher. The trend became to invest in high dividend stocks, with the hope that the dividends would make up in part for the lack of income from bonds.
But, in the end, retirees and pension plans have, still are, and will in the short term future, be worse of due to their dependence on bonds and the upcoming, but necessary, rise in interest rates.
Sorry if the response was a it long winded lol
I guess I should have just said bond related income for retiree has been lower, and - despite a minor YTD increase in bond yields, are slated to get worse n an environment of rising net rest rates. Our intermediate bond funds are still in negative numbers over the past few years, despite 5% TYD returns. We are lucky that we dont rely on our bonds for retirement income.
But I'm also familiar with a lot of workers who SHOULD be retiring, but won't be because they understand the future dilemma for the bond market.
I completely failed to mention the debt per se: the national debt is essentially in the form of US bond sales. The ten year bond, as of two years ago, was about 1.6%. Extremely low, but for foreigner investors it was 'safe'. The influx of money contributed to the bonds decreasing value. Yields should have risen except, again, for the Feds decision to to drive the prime rate as low as possible.
Right now, the government is still paying very little returns n US bonds, currently somewhere about 2.6% to 2.8% , but don't quote me. But once the interest rates betting to rise, the values drop, yields rise, and the government could be twice was much to bond holders, if yield rises above 5%. That extra money paid out to holders of US bonds has to come from somewhere - either by a reduction in existing programs or higher taxes.
I kind of wandered, but I hope this explains my thoughts on the retiree comment I made.
