Federal Reserve

This week the Federal Reserve issued a policy of maintaining low interest rates for another 3 years, until 2015. It is very important to undertand the implications of this policy. The first section is from Vanguard. The last section is titled One of 7 Billion which should get us thinking about the future.


Vanguard

Amid some encouraging signs that the economy continues to grow modestly, Federal Reserve officials gave an unprecedented look at the details of their economic expectations. In a report issued Wednesday, the Fed signaled that it expects growth to remain modest enough to allow short-term interest rates to remain near rock bottom for even longer than it had projected in recent months. For the week ended January 27, the S&P 500 Index rose 0.1% to 1,316 (for a year-to-date total return—including price change plus dividends—of about +4.8%). The yield on the 10-year U.S. Treasury note fell 12 basis points to 1.93% (for a year-to-date increase of 4 basis points).


Implications of the Federal Reserve Actions

The Federal Reserve sets monetary policy for the US so when a policy statement is given it is a very important event. This week the Federal Reserve stated that interest rates would be maintained at this current low level for 3 more years, until 2015. So what are the implications of this policy?

First, this means that interest rates will be less than the rate of inflation. This means that a Certificate of Deposit will not keep up the inflation and relatively it will lose spending power. The better solution is to invest in a high quality mutual fund that invests in corporate bonds.

Second, it means that this is being done to help the housing market and capital equipment that involves a long term loan. The interest rate for mortgage will continue to stay low. The philosophy is that we will only have an economic recovery when the housing market recovers. It also means that now is a good time to purchase a new automobile if you are secure in your job.

Third, this is good for the stock market as stock valuations tend to rise with low interest rates. The reasons are stock buyers like a stable environment and stocks can be bought that yields a higher dividend than bonds. A stock valuation equation is the annual dividend rate divided by the difference between the growth rate and interest rate. An improving economy gives a higher growth rate and with low interest rates this gives higher stock values.

Lastly, it means that the Federal Reserve is projecting that it will take 3 years to fully recover. For an investor with a time horizon of at least 3 years, owning stocks makes good sense. It also suggests that owning stocks could be somewhat choppy for the next 3 years.

ONE OF 7 BILLION

Today, you are one of 7 billion people on Earth. Global population is expected to reach 8 billion by 2025, according to the United Nations. It also has many wondering whether the Earth can support so many people. About half were added just in the past 40 years, and 3 billion more are expected by 2100.

Where Western powers ruled the world in 1920, today the West is aging and dying, and much of the world is on fire with anti-white and anti-Western resentment after 500 years of European domination. In 1920, Western people were nearly one-third of mankind. Today, Western man is down to one-sixth of the world's population, shrinking to one-eighth by 2050, and not even one tenth by century's end.

Global population has swelled in record time since 1987, when it hit 5 billion. At this time, world population is growing at the most rapid pace in history. In 1900, we were at 1.6 billion. In 99 years, we flipped the numbers to 6.1 billion. The world is adding more people in less time but the annual population growth rate is slowing down — from 2.1% in the late 1960s to 1.2% today — reflecting lower birth rates.

In 1999, when we passed the 6 billion mark, the world economy was in overdrive, In October 2011, we grew to 7 billion, in a recession and an economic atmosphere of pessimism. Recessions and depressions slow population growth, especially in developed nations. Currently, growth is highest in poorest countries where health care advances are keeping people alive longer while birth rates are still relatively high. The result is a yawning age gap. The share of the population 65 and older is at 21% in Germany and 23% in Japan. In countries such as Gambia and Senegal, only 2% are in that age group.

As many more people are added in the next century, more will live in cities. Even in developing nations, a growing share of the population lives in urbanized areas, a shift that is leading to denser living conditions and creating more pressure to reduce energy use and build new infrastructure.