(ThyBlackMan.com) There is a financial battle brewing that will dramatically affect Black America. There is an old African saying which states, “When elephants fight, it is the grass that suffers.” Well, African Americans (AA) are the grass in this battle. When the American economy tilts downward, it is blacks who are laid off first, just as it is the grass that suffers first in the old African saying. Like a forest fire that is never satisfied, the woes of the national economy continue to spread through AA communities wreaking havoc. Characterizing this battle as a boxing match, we have in one corner Janet Yellen, Chairwoman of the Federal Reserve Bank (Fed). She oversees the Federal Open Market Committee (FOMC) which determines if interest rates should be increased, decreased or remain the same. And in the other corner are bond holders, bond fund managers, and bond and pension funds. These are, among others, the bond and state pension funds who pay the retirement checks of state employees, teachers, and municipal workers.
Bond investors (let’s call them that) emphatically feel interest rates, which have been near zero percent since the 2008 Great Recession, should be raised at the next FOMC meeting scheduled for June 14th-15th. Increasing interest rates tend to create layoffs and raise the unemployment rate as businesses seek to reduce their cost of doing business as money becomes more expensive. Thus, raising interest rates is a policy that will potentially, cause African Americans to lose jobs in the coming weeks. The Fed knows, raising interest rates in a weak economy is certainly not going to create jobs. If anything, raising interest rates will exacerbate job creation. The economy in the first quarter of this year grew at an anemic .80 percent according to the second estim
ate released by the Bureau of Economic Analysis. The ideal rate of growth is from 2%-3% per many economic experts.
Nevertheless, bond investors have dug in and are not retreating from their position. The Fed has kept interest rates at near zero percent for almost a decade in an attempt to create jobs and fire up consumer demand. The easy money policies of the Fed has had limited success. Here is the link where easy money as a policy is examined as a job creation plan (https://thyblackman.com/2014/01/30/easy-money-being-drawn-out-of-the-economy/ ). The article tells you why easy money is not a workable long term job creation plan.
Yet, the bond investors have a point and they are saying to the Fed, how are we going to pay pension beneficiaries and give investors in general a reasonably good return on their money, if the policy of zero to low interest rates persist? And bond buyers who live off the income from bonds are saying, how are we going to continue to live in the style in which we are accustomed if interest rates are kept at these low rates? A bond (note) in this instance, is a certificate issued by the government or a company promising to pay back borrowed money at a fixed rate of interest on a specified date.
A very popular bond called the ten year treasury note issued by the United States government when it borrows money is at the center of this fight and is the reason to some extent while the fight to raise interest rates is beginning to heat up. You see, in 2007, prior to the 2008 Great Recession, that treasury note when issued in January 2007 paid 4.76 percent in interest. This particular treasury note (or T-note) which is a ten year investment is sold in denominations of $1,000.
Over ten years, the 4.76 percent interest rate comes to $47.60 yearly interest income. So, $1000.00 dollars at the end of ten years becomes $1476.00 dollars (10 x $47.60 = $476.00 dollars plus the $1000.00 dollars you invested). You say, wow that’s all you can make per a thousand dollars left with the federal government for ten years! You have got to remember the $47.60 is guaranteed and at the end of the ten year period you are guaranteed to get your one thousand dollars back.
Here is what the fight is all is about. Following is an example of a ten million dollar investment. And that is not an unusually high amount of money for individual bond buyers and certainly not for bond and pension funds, which actually invest billions of dollars in buying bonds. A ten million dollar investment (Lebron James estimated earning is over $20 million dollars a year from Nike) in ten year treasury notes (bonds) would have the United States government paying you $4,760,000.00 dollars at the end of that ten year period, if you had purchased the notes in January of 2007 and held them to January, 2017. That would amount to $476,000.00 dollars a year. Now fast forward to January of 2017; these notes are coming due and bond investors will be looking to roll this money over into new ten year notes (bonds). However, in 2017 when the notes mature, bond investors will face a totally different interest rate environment. With the Fed almost zero percent interest rate policy, that same ten year note (bond) will not pay anything close to 4.76 percent based on current interest rates.
The January, 2016 ten year note paid 2.09 percent, which gives us an indication of what interest rates might look like in January 2017, if rates are kept at or near zero percent. That’s $20.90 per a one thousand dollar investment compared with $47.60 ten years earlier. If you wanted to reinvest that same ten million dollars you would get over the next ten year period only $2,090,000.00 compared to $4,760,000.00 for the previous ten years. Bond investors find this unacceptable. Especially, when Janet Yellen, the Fed Chairwoman says we are at or very near full employment with the unemployment rate at 4.7 percent. These bond investors say very loudly, if you are at full employment, why can’t you raise interest rates, so that we can get back to normal rates where we can earn at or near the same amount of interest income we made in 2007.
But, you see it is all smoke and mirrors! The 4.7 percent national unemployment rate, reported by the Bureau of Labor Statistics (BLS) for May; the number the Fed is basing its interest rate policies on is questionable (https://thyblackman.com/2015/11/12/the-rip-off-of-african-americans-and-the-unemployment-rates/ ). The true rate of unemployment agreed to by most experts, as stated by the U-6 category, remained at 9.70 percent for May (use the link above). However, bond investors are having none of it; and they are using their financial muscles and influence to move interest rates up as soon as June 15th when the FOMC makes a decision about interest rates.
The bond investors’ advocates are taking what the current administration says about the unemployment numbers as stated by the U-3 category at face value, disregarding the opinions of experienced professionals. They do not want to take a $2,670,000.00 dollar cut in interest income based on our example of the ten million dollar investment! Thus, they and some members of the FOMC want to see interest rates raised. In the meantime, according to the BLS the economy in May created a paltry 38,000 jobs, the lowest rate of monthly job creation in seven years. While the national rate of black unemployment fell in May to 8.2 percent from 8.8 percent in April, the overall outlook for African Americans is dismal, if interest rates are increased at the next Fed meeting.
Staff Writer; James Davis
This talented brother is a graduate of Florida A. and M. University(FAMU), a former stockbroker, and a human rights activist who resides in Sanford, Florida. He was awarded the prestigious Governor Haydon Burns Scholarship to attend FAMU and while at FAMU was awarded the first Martin Luther King Scholarship. He is also author of three books, among them are “The Fix This Time,” Expanding Social Security Benefits to Create Jobs and Spur Demand( http://www.amazon.com/dp/B00MI3PD2M ) and “Hey…God’s Talking To You,” The Study Book ( http://www.amazon.com/dp/B00GYI3VQW ).
He can be reached through his blog @, (http://www.thefixthistime.com).
