Who are the savers being harmed?

Karl Denninger explains QE and its consequences for the economy:

Let’s simplify “QE” and “low interest rates” generally into the most-basic view — a lending transaction for $100,000.  We’ll say, for the sake of argument, that this is to buy a house, although the purpose of the loan is not really material.  We’ll further start with an interest rate of 7% — not particularly high in the historical context, nor particularly low….

We’ll take this $100,000 and borrow it for 30 years @ 7%.  This produces a payment of $661.44 per month for 360 months (30 years of 12 months each.)  The total paid is $238,119.87 over that time, so just over $138,000 is paid in interest, or just over $4,100 a year on average (this is misleading, however, as at the start of the loan most of the payment is interest and that falls off over time.)  We will further assume that this 7% rate reflects a reasonable return for the risk that you will not pay and that inflation will occur — that is, the rate is negotiated between the lender and borrower using all known facts and no lies or distortions.

Now let’s assume we “lower rates” (by any mechanism) but the risk does not materially change.  We lower them to 4% by employing “QE”.

The payment is now $475.83, or a total of $171,298.51 over 30 years.  Note that approximately $65,000 in interest was saved by the borrower… The borrower saves that $66,821.36 and can thus spend it on something else but every one of those dollars is not collected by the lender and thus he cannot spend them.

Net benefit?   Uh uh. 

Every dollar benefiting one person comes out of someone else’s back side.

Remember that Bernanke and Yellen have admitted that “savers might be harmed somewhat” by these policies.  They want you to think of “savers” as the little old lady who is stupid and has all of her money in CDs at the local bank — indeed, Yellen, Bernanke and Congress have even used that precise example.

But in fact that is intentionally misleading too.

Who do you think actually owns all that paper?  For example, the FHA, Fannie and Freddie paper?

Let me give you a hint: If you have an interest in some sort of “stable” means of income or support against catastrophe, ordinary or otherwise, you can find one of the persons who own that paper by getting up and going into the bathroom, staring into the mirror!

Are you a teacher?  Firefighter?  Cop?  Have any sort of pension at all?  Have a life insurance policy?  An annuity?  Have any sort of insurance at all?

That is where all those loans are.  They’re in bond mutual funds, they’re in insurance companies, they’re in pension plans and they’re in various entities that have long-dated obligations — because these are long-dated instruments.

This is why the pension plans and cities are all going bankrupt now. Their fate was obvious several years ago, and mathematically sealed long before that, but those preordained consequences are now coming to pass because QE is continually devouring the value of their remaining assets.

Keynesian manipulation of the economy has always been a short-sighted strategy dependent upon putting off today’s pain until tomorrow and counting on dying before tomorrow dawned. The magical thinkers don’t understand this; they simply cannot fathom why something that worked yesterday isn’t working today, hence their prescriptions for more of the same even when the same is causing the very problem they are intent on solving.

It’s interesting, because I’ve yet to hear anyone even attempt to describe a scenario where QE will be successful. All I’ve ever heard is that “we’ll stop when the economy magically recovers”.  Okay, fine, but that raises the obvious question: as a result of what?  People can’t spend money they don’t have. People can’t use credit they can’t repay. People can’t retire on bankupt pensions.

It appears Mr. Keynes’s long run has finally arrived.