Dear John: Thanks for the article "Oil is not what's greasing the stock market's skid."
Just curious why the Fed "will soon need to raise interest rates" in the last paragraph. I thought the Fed will want to raise interest rates only when the economy is strong enough, but you
told us the Fed worried that "the economy is not strong enough." H.J.
Dear H.J.: As it now stands, the Fed is out of tools to control the economy.
I don't think we'll see another quantitative easing in our lifetime — at least not in the US. It caused a disastrous shift in wealth out of ordinary people's pockets and into the richest's already-ample portfolios.
And interest rates are rock bottom already.
So unless the Fed raises interest rates, it can't lower them when it becomes necessary — and it will become necessary when the true nature of the weak economy becomes known.
So here's how it works: The Fed will use any excuse it can to raise rates (and some of the economic numbers, if you don't look too carefully, are upbeat). And then it will lower rates when the economy makes it necessary.
Understand that all the Fed's interest-rate moves are largely symbolic. They affect only the rates on money borrowed very short term — like when banks need dough overnight from the Fed.
The market controls all the other interest rates, such as mortgages and corporate loans.
And since interest rates have not risen much lately, the bond market is telling us that the world economy is still weak.
But, as I said, the Fed will ignore the world economy and concentrate on whatever good news it has to raise rates.
But there's one other problem that the Fed will have to keep in mind when hiking rates: Borrowing costs will go up for Washington. The federal debt will not be able to tolerate increased borrowing costs.
That's the short answer.
Dear John: We are a retired couple with our life savings invested in a certificate of deposit at Bank of America. The amount is $500,000. The bank manager suggested we give the money to Merrill Lynch to make more interest.
So, sir, do you think this is a wise move? Is there any chance we could lose our CD by doing this? J.M.
Dear J.M.: Here's what I ask myself whenever I get frustrated with the lousy interest rates I'm receiving on my investments. Would my life change substantially if I received a 20 percent return on this investment? Second, would my life change substantially if I lost 20 percent?
No, to the first question. Yes, to the second. My life would change if I took a 20 percent hit.
If Merrill puts you into riskier investments, then a 20 percent loss is not out of the question.
So, the real question is: what does Merrill plan to put your money into? A brokerage firm is required to make sure your investments are suitable to your ability to handle risk. But they don't always do it.
Ultimately, you'll have to make up your own mind.
Here's what I think. The stock market has been rising too high in a very risky economy.
And I think interest rates will eventually rise, which automatically makes bonds decline in price.
So if Merrill or anyone else tries to put you into "risk- free" bond funds, they are deceiving you. Bonds are probably more risky right now than stocks.
Anyway, hope that helps.
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