6 years of free money?

As the Federal Reserve's zero-interest-rate policy continues, doubts begin to grow.

By Anthony Mirhaydari Jan 4, 2013 3:03PM

Money copyright John Lund, Blend Images, JupiterimagesIn late 2008, something happened that many thought was impossible: Borrowed money became essentially free. It was then that Federal Reserve started its zero-interest rate policy, slashing short-term borrowing costs to near 0% in an effort to stem the financial panic and recession.


Of course, they didn't stop there. In the years that followed, the Fed piled on with four "quantitative easing" efforts focused on pushing down long-term rates as well. 

The results: Adjusting for inflation, the big banks and the government can now borrow money at negative interest rates. That's better than free. And that's because the monetary base has swelled from around $800 billion in 2008 to nearly $3 trillion now.


The benefits of all this are questionable. 

The unemployment rate is stalled near 8%. Employment-to-population ratio has fallen to early 1980s levels. Middle-class wages are still flat-lining. And, as hawkish members of the Fed are starting to point out, the downside risks are growing fast -- causing Wall Street to question its "free money 4'eva" mindset. Here's why.


The quiet enthusiasm was shattered on Thursday after the December Federal Reserve meeting minutes were released and, to the bulls' great surprise, suggested that a growing number of Fed policymakers are beginning to doubt the efficacy of repeated doses of quantitative easing and an extended period of ZIRP.



The minutes said that a "number of participants" on the Fed committee expressed concern the $85 billion-a-month open-ended money printing stimulus under QE3 (mortgage purchases) and QE4 (Treasury purchases) -- and the resultant expansion of the Fed's balance sheet as the monetary base swells like a cancer -- could result in higher inflation expectations and gum up future policy implementation.


Concern was also noted about the fact the Fed's zero-interest rate policy, now entering its sixth calendar year (shown above), could lead to "imprudent risk-taking" and "financial imbalances."


More simply, as the Bank for International Settlements noted in its recent quarterly report, the Fed and other central banks could be blowing up a third asset price bubble of the last 12 years -- this time, in corporate bonds.


All of this suggests the market's cheap money addition may not be a sure a thing as many believed.


The result was a dramatic pullback in stocks and precious metals during the cash session, with the selling accelerating afterhours in gold and silver. While the price action looks weak, the technicals in the precious metals are already oversold.


So for now, I recommend avoiding gold and silver. But I also wouldn't recommend short positions either. The takeaway is that, as we move closer to the debt ceiling fight over the next few weeks and what's set to be a disappointing Q4 earnings season, an increasingly reluctant Fed is just another catalyst to work against the market's newfound enthusiasm.


Indeed, today Richmond Fed President Jeffrey Lacker said that current Fed policies will "test the limits of credibility" and that additional monetary stimulus would not boost growth.


I'm going to use the complacency and false enthusiasm that has settled on Wall Street to add leveraged exposure to the CBOE Volatility Index ($VIX), which has been crushed on a historic scale over the last few days, by adding the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) to my Edge Letter Sample Portfolio


Disclosure: Anthony has recommended TVIX to his clients.

I found this positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)


Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.   

Jan 5, 2013 2:52PM

I think anyone who is elected should have to live off their money not ours. As far as the banks and how they handle our money, they should have to work for minimum wage and have to take out loans at the same rate regular people have to.

CEO's there should be a limit on how much they get paid and no more. If these companies that have multi million dollars to spend then put it where it can do the most good, not welfare but people who want to work and need to get a small loan to get on their feet. the banks  are not people friendly unless you make millions.

Jan 5, 2013 1:18PM
My quarterly bank statement received yesterday says I earned a whopping 0.03% on my retirement savings, amounting in almost enough to buy one small-size meal at a fast food restaurant.  Nice going Federal Reserve Bank. . .  Sadly, my letters to my elected "representatives" go unanswered, or give no hope for the future.  Continuous dilution of the money supply by printing $Billions more each month will go on reducing the purchasing power of every dollar we have saved.
Jan 5, 2013 10:05AM
Retired citizens who worked hard and saved what they could while raising their familys will be left with nothing to live on. Their savings is not growing at all and prices keep going up requiring them to withdraw from savings to get by. What happens when the savings has depleted? I feel like i have been robbed by big business and ALL the politicians, whom wich big business owns lock stock and barrel.  It does no good to plan for the future or save money because if you have savings, the government will pass laws to take it from you. SAD DAY IN AMERICA.
Jan 5, 2013 9:43AM
The most infuriating part of all of this is that when he decides to leave the sinking ship, Bernanke will be able to spend the rest of his life in luxury, traveling around the world giveing lectures about economic matters for large fees.  If you doubt this, check up on Greenspan, who started the ball rolling. 
Jan 5, 2013 9:34AM
It is the height of arrogance to believe you can artificially and continuously manipulate markets without consequence.  This goes for all markets - bond, stock, currency, debt, etc...  Eventually, the free market will find the natural equilibrium - it's just a matter of when, not if.  Based on our actions over the past few decades, we've ventured so far from the natural equilibrium, when we finally get back there, it's gonna hurt like hell.
Jan 5, 2013 8:29AM
It appears the progressives (or liberals) feel that taxing away wealth is the answer.  The problem with this strategy is the target becomes those who saved and invested for retirement, and therefore the accumulation should be confiscated for those who didn't.  When simple interest was driven to zero it removed from the economy a vast group of people who spent money from their earnings, driving the economy.  Driving down long term interest rates is also poor policy, when eventually interest needs to be raised due to inflationary pressure it makes those investments undesirable.  Some investments with poor return rates will be abandoned like the plague, it will be a better investment in simple bank accounts that pay double or triple the return.  Mortgage rates currently at 2.5% are ignorant policy decisions....the largest holder of these mortgages is fannie and freddie....guess who pays to prop up this bubble.....the taxpayer.  I see tax free day for W-2 earners going past 6 months, people who work will have to decide whether they work from Jan. to July for the Gov't or from June to Dec. for the Gov't.     
Jan 5, 2013 7:09AM
This is basically the same policy Japan did 30 years ago. Their economy has never recovered really. I think we might be better off just taking the pain for a few years rather than dragging it out. People think the banks repaid most of the bailout in 2008 but in reality they merely paid it back with trillions the fed loaned them as free money to lend at big profits. They paid us back with our money and now reward their CEO's with mega million dollar pay days again.
Jan 5, 2013 3:24AM
With inflation coming down the road, sounds like we had better invest in tips or funds of tips.
Jan 5, 2013 1:41AM

Anthony....you have a bad memory, or perhaps you were too young to remember when Alan Greenspan's tight monetary policy got us into this mess.   The U.S. was already heading down into a recession several years back and Alan Greenspan of the Federal Reserve raised interest rates which in large part shut our economy down.....remember?  I didn't think you would remember Mirhaydari - you were probably growing up in India.


Jan 4, 2013 11:58PM

You cannot create jobs or prosperity by PRINTING money, no matter what the idiot Bernache and imbecile Obama tell you.  85 billion a month is about $1000/household in the USA.  Did you get your share?


Neither can you Borrow and Spend your way out of debt...


And raising taxes on anyone, DESTROYS demand.  Raising taxes, is like slamming on the economic brakes.  The imbecile Obama must have cut economics class that day to attend a Marxist rally.


We are trying all 4 at once, and wonder why we are entering the 5th year of democrat economic Malaise?  Buy gold/silver, guns/ammo, and prepare for economic disaster...  it's coming...

Jan 4, 2013 11:20PM
Can I get a copy of this story in plain english? 
Jan 4, 2013 10:08PM
Everyone that "works" for a living or owns anything and is just in the middle class is going to be ruined. The economy is destroyed and we all get a slow motion view from the front row of the destruction that is coming. Plan on lots of water, rice and beans and hope you are debt free. The folks at forfree.com have ruined you all and you don't even see it yet. Good luck to all.
Jan 4, 2013 9:30PM
In my last post I stated INFLATION is our enemy.  As some others have posted, the Fed is silently creating a stealth tax on all savers.  This is intentional, my recommendation is to cut expenses, live off of earning return regardless of how small and convert to an asset that will provide a means of trade when the dollar bill is cheaper as fire wood, than wood itself.  Owning physical assets otherwise as a trading asset will help protect any wealth left.  The dollar will continue to be less desireable......the poor savers will be creamed in the coming financial apocolapse.  No one would have guessed the situation that unfolded in 2008, I distinctly remember the photo of Hank Paulson and Ben Bernanke talking in the parking lot.....both looked like they seen a ghost.....both were white as sheets.  Tiny Tim and Helicopter Ben will actually look this way again, but the bag of tricks will be empty.       
Jan 4, 2013 9:18PM
I see the news where we are finally recovering from the housing bubble....this is hype by any standard.  As I've stated before, when the so called smart money guys who set monetary policy for this country finally see the forest through the trees the fight will already be over.  The dollar will eventually be sacrificed to pay down the debts and in doing so will become worthless.  Ron Paul is right and has been right....INFLATION is the largest enemy the US has right now, next to Congress and the current occupant of the White House.  Voracious need for gigantic sums of money will ruin the country, before it stops the darkness will begin. 
Jan 4, 2013 9:16PM
Hate to disappoint KO but, there is to much happiness for a bull market. The first thing that will happen is the lately go happy retail investors will come in and push the market up it's final push before the next bear market. Gold and silver will go up and gold will be 5000.00 an oz. under 10 years from now. It is only consolidating in a range right now.
Jan 4, 2013 9:13PM
As a retired person, this program has royally screwed me and even worse is printing more and more money. It just makes the money i do have worth less and with no hope of any help from the fed's my retirement is stuck on hold. guess they are trying to hold out long enough for us to die.% years ago i had cd's at 5.5%. today those same ones are offering .25%. I wonder how they think they will be able to reverse this now and not have extreme hyperinflation ??? Greed is what runs this country now, so how long will it last???? China owns a lot of real estate here and so do a lot of others. Have we sold our children's future??? I think we have and only a handful of people will benefit from it.
Jan 4, 2013 9:07PM

Avoid silver and gold like the plague. Not every country in the world nearly went bankrupt trying to police the world for BIG OIL and the GOP. America is a fire sale right now and demand for our products will increase dramatically from emerging markets. Even an old short-seller like Tony Mirhaydari can't deny you can't short a market that is heading straight up from zero. This BULL MARKET is going to steam roll all the way through 2016. Spending will be cut slowly, not overnight as Romney wanted to do. OMG, can you imagine how far back in time and reputation we would be if that fanatic was President? We don't need any more porn stars or carpenters from Utah so the federal government needs to roll in there quick and start separating church from state, especially in the schools, before Romney gets back from his banking vacation in the Cayman Islands. BULL MARKET 2013 !!!

Jan 4, 2013 9:03PM
The politicians act like people in malls, spend,spend,spend and more spending.
Jan 4, 2013 9:01PM
Wow, the Obama Rally soldiers on. Where are all those bloggers like Ted Nugent who threatened to leave the country if Pres. Obama was re-elected? Probably somewhere wondering why they just missed another rally because of their ignorance and prejudice like 1 Classy Lady. It was common sense that we needed to change because the Republicans are no longer the party of small business. Force-feeding right-wing fears of the world and regressive religious beliefs to our children is being replaced by a common path of thinking that we need new ways of harnessing energy in order to never again be held hostage by some CIA-paid dictator manipulating our oil supply through bribes and intimidation. Why bother teaching political science in college or foreign affairs when the entire drama we have witnessed since Reagan has been one of fraud and outright lies to the public. So many trillions wasted with nothing to show for it. Has any other country matched our ignorance in feeding money to dictators paid off by Big Oil? Henry Ford sold us down the river when he chose gasoline engines over electric ones in order to help the fledgling oil industry. Now we have bankrupcty, irreparable pollution and deals with the devil. This market is going higher because the GOP is dead. We tried it their way and failed miserably, almost destroying modern-day society. There will be hard times ahead as we deal with spending cuts but under this President we will regain the moral high ground. The American Dream is global now so continue to invest globally - not with blinders on like the Republicans. BULL MARKET IN PLAY.
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