The Insightful Trader

Fed Policies Set to Decimate Poor and Retirees

by on Dec.06, 2010, under Editorials

The Federal Reserve’s monetary policies have no doubt been a positive factor for the stock market. We’re barely a month into QE2 and already there is talk of unlimited QEs to come, if necessary to inflate the economy. But little has been said about about the ugly consequences for the poor, not just here, but worldwide and those retirees on a fixed income due to steep increases in commodity prices.

The past six months has seen one of the sharpest rises in commodity prices in history while at the same time interest rates have been pushed lower and lower so that even retirees with some savings, which most tend to invest conservatively in shorter term instruments, have seen their incomes drop considerably. Can any advisor tell their elderly clients that they must pull their money out of short term bonds and CDs, the traditional refuge, and put it into the Russell 2000? But even this assumes they have some discretionary money to invest. How about those who are locked into fixed payments via Social Security and perhaps a fixed pension payment?

The net result is rising commodity prices, while affecting everyone, has a particularly adverse effect on those on fixed incomes. According to the latest Bureau of Labor Statistics the average consumer unit, spends 12.4% of their income for food shown very well here at Visualeconomics.  Now two important things to consider here – these results are based on prices over a year old and notice that the number is based on an average family income of nearly $63,000. Must be the banker salaries skewing the income numbers because I know plenty of families that exist on much less. The result is that even before the recent skyrocketing of commodity prices some families were already spending in excess of 25% pf their income on food.

Now let’s talk about about rising energy prices, which affect everything from home heating oil, elctricity cost, and perhaps most importantly gasoline prices.  Wholesale gasoline prices are up more than 25% since mid August. Not only does this have a more direct impact upon poorer and fixed income consumers, but also indirectly as these fuel costs are translated into higher costs for nearly everything farmed, produced and transported.

There is also the indirect costs to our economy of increased health care expenses since as food costs go up, those who can least afford it switch to less healthy foods, encouraged to do so by our government. In a recent Newsweek article it addresses the social divide we now have in this country based on food.

We haven’t even began to talk about the ramifications on the poorer economies of the world where often food can eat up 50% or more of their budget. The UN’s Food and Agriculture Organization is predicting the food import bill could surpass one trillion dollars for the poorer countries. Here is a FAO food price index chart showing the dramatic increase in food prices. If you remember, it wasn’t long ago that there were riots in many parts of the world over food. Guess what, the prices are higher now. Is it long before we start seeing them again and pictures on the nightly news of people starving?

Here in our country, the big debate is about extending tax cuts. What about the the most regressive tax of all, higher food and energy prices for the people who can least afford them. Who is lobbying for them?

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