One of the many negative ramifications of the Fed’s grossly incompetent monetary policy over the past few decades has been to reward speculators and punish savers.  Charles Schwab makes this point, only in a much nicer way, in today’s Wall Street Journal.

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.

Today's average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years.

Some would argue that today's low inflation rate offsets the decline. But even at an inflation rate of zero, a 76% decline in spending power is painful. And we're already seeing signs of inflation this year. The first two months of 2010 showed an annualized inflation rate of 2%, further exacerbating the spending power problem for retirees by eroding the value of their principal. ...

We would accentuate what Mr. Schwab is saying.  In February 2006, the CPI was 3.6%.  Thus, the senior was earning a 1.8% real return.  Today, the CPI is 2.1%, earning the senior a real yield of -0.8%.

[T]hese unprecedented low rates have now been in place for almost 18 months. As a result, banks have enjoyed virtually free access to money while retirees have been deprived of any meaningful yield on their fixed-income portfolios. For a large segment of our population—people who worked long and hard, who followed the rules by spending less than they earned and putting the remainder away to keep themselves independent in retirement—the ultra-low interest rate is more than a hardship. It's a potential disaster striking at core American principles of self–reliance, individual responsibility and fairness.

The Bernanke/Greenspan solution is to push grandma and grandpa out onto the risk curve and force them to buy risky assets.  One would think that after 50 years of hard work, a person would be entitled to a sound sleep, and not have to worry about the credit quality of banks, or what this quarter’s earnings are going to be, or if we can trust the ratings agencies.  Sorry Grandma, gotta make sure those $2 million Wall Street bonuses are paid.

One lesson of the past 20 years is that it takes more and more monetary and fiscal stimulus to get less and less results.  But more and more stimulus begets more and more speculation in asset markets. 

Greenspan cut interest rates to 1%, held rates there for a year, then slowly walked rates up, igniting one of the biggest bubbles of all time.  Bernanke cut rates to 0%, has held rates there for 15 months, bought over a trillion dollars worth risky securities, guaranteed trillions more, and has indicated there will be no surprises in the unwinding of the unprecedented easing.  See the parallels? 

Artificially low interest rates encourages rank speculation and creates mal-investment within the broad economy.  This is the policy Greenspan followed.  This is the policy Bernanke is also following, only it is much, much bigger today.  There is no reason to think that the next several years will be any different than the last several years.  Sadly, nothing has changed. 

Surf the oceans liquidity, but make sure you know when to get to dry land.  In the asset-driven economy, savers are losers and speculators are winners, at least until the next bubble pops.