What It Will Take to Get This Economy Moving and Implications for Savers and Borrowers

Ben Bernanke and the other bankers pledged to keep rates low. That means low savings and cd yields and potentially low mortgage yields for the foreseeable future.

The Fed admitted that the economic recovery was proceeding more slowly than they had initially predicted:

"The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee would like." The statement continued: “Recent labor market indicators have been weaker than anticipated...The slower pace of the recovery reflects in part factors that are likely to be temporary,” the statement said alluding to supply chain disruptions in Japan and high oil prices.

But in a press conference after the meeting Bernanke conceded that "part of the slowdown is temporary and part of it may be longer lasting."

"We do believe growth is going to pick up," he said. "We don’t have a precise read on why this slower rate of growth is persisting"

Well, let me provide some insight on why growth has slowed:

• The U.S. budget is in shambles and this has created vast uncertainty and anxiety in the business and consumer worlds. It's hard to feel good and start spending when you hear that your govenment is going broke, regardless of whether it is true or not.
• An aging popuilation means that more of our money is going to healthcare, leaving less for consumption of other products and services.
• Housing has not recovered from a once in a generation bubble; and it may not recover for years. Since houses were used ATMs over the last ten years, a vast source of spending has disappeared. Many people who still have their homes are paying more than they can afford or above market rates and this is sapping disposable income.
• China, Vietnam, Brazil, etc. are competing hard. The U.S. no longer has a business monopoly on the world and jobs are American workers must compete internationally.
• Energy prices are going up and will probably stay up. See the last point. A developing world is hungry for energy and since production and discovery is flat, prices go up.

We are in for a painful adjustment. But I think if the following is done, the economy can start moving again:

1. The Federal Government produces a credible long-term budget plan that reduces the debt using a mix of budget cuts and tax increases. The argument about keeping taxes low is specious. What's the point of low taxes if the pie is shrinking? People forget that it was after Clinton signed a bill raising taxes and balancing the budget that the economy took off in 2003.
2. The housing market is allowed to naturally adjust and recover. This may take several more years. But trying to prop up the housing market will only prolong the pain.
3. A viable, long-term energy policy is implemented. To some degree, the market will take care of this. Once the price of oil gets above $100, alternatives become much more attractive.

In the meantime, we are stuck with a low rate, low dollar policy. If nothing is done, short term rates may stay low but eventually long-term rates will move up, as the debt becomes an increasing problem.

What should savers do?

1. Take advantage of low rates by refinancing your mortgage, if practical. See refinance rates.
2. Don't be afraid of debt. Paradoxically, now is a great time to load up on low interest debt, as long as you can repay it and are financially secure. Borrow when rates are at rock-bottom. Corporations do this all the time.
3. Get the most you can on savings and cd accounts. Inflation has ticked higher so super-low rates mean that you are losing money over time when inflation is factored in. Click on the appropriate tab above to find tables showing the best cd rates and best savings account rates.