How the Federal Reserve is Tricking Us – Episode 106

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey, everybody. Welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have best-selling financial author and my co-host, Kim Butler with us today. Welcome, Kim. Thank you, Todd. Very happy to be here. Today, we’re going to be talking about how the Federal Reserve is tricking us. And I want you to just take a minute, and some of you are going to cause an emotional response. But we want to talk about just what’s happening out there in the interest rate environment.

[00:53] We have this unusually low interest rate environment, which excites us if we’re out there buying a house and, my gosh, we get to buy twice as much house as we probably could have five years ago because the interest rates are so low. But then if we flip the coin and think about the fact that our 401Ks, our pensions, our retirement, our savings account are all subject to that low interest rate environment, all of a sudden, maybe what’s so good on the mortgage side isn’t so good. So today, we’re going to be talking about why would the Federal Reserve do that? Why would they lower interest rates and try to manipulate a market? How are you, Kim? I’m very fine. And boy, isn’t this a question. And it’s been something that we’ve been dealing with really for quite some time.

[01:50] And you know, it’s funny, the mortgage interest rates, they inch up and then they come back down. And then they inch up and they come back down. And every now and then I’ll have a client ask, well, what if the interest rates go up? And my answer, not only mine, but more importantly, Todd Langford’s answer, because you and I both know he did way more research than you and I did on this subject, is that they can’t. That the feds in cahoots with all the banks have lowered the interest rates over time and yet kept the spread the same when what they should have done is lower interest rates over time and lowered the spread. Now, what I mean by this spread is basically the difference between the rates

[02:46] that the bank pay on liquid money compared to the rates that the banks charge on consumer loans. And so here we have the federal government, specifically the federal reserve, which is not federal and it’s frankly not a reserve, playing with things that is causing havoc. It’s manipulation of the market. And this is not a political statement, but it’s causing havoc in the finance of America and its individuals, us, you and me, and our clients. And so when we hear about things like this, it makes us concerned because we think, oh my gosh, what’s going to happen with the interest rates, which can create some of the dividend rates that’s different at insurance companies, but I might be jumping ahead a little bit.

[03:47] Do you think there’s a little more we need to chat about around just exactly what the fed’s doing and why and the impact that it has? Super. Yeah. I think you addressed the banks. The people in the middle are the people who have pension funds. And I think this is what interests me the most because as a pension fund manager, I have a responsibility to not only protect the principle that has been put under my supervision, but I also need to grow that money so that when the people need it to retire, it’s still there. So one of the main things that pension fund managers did in order to protect themselves was they would buy government bonds. But now that the government bonds are paying such a low amount of money,

[04:38] it’s pretty much strong arming these pension fund managers into investing into riskier investments. And, you know, before I read these articles, I really thought that, you know, this was more of an accident. And now looking at it, it looks like it was done rather intentionally because by investing in these riskier investments, it almost always requires the employment of additional people. So it’s causing the unemployment numbers to dip at the expense and the risk of the pension funds. What do you think? Well, it’s evident and provable because if you look around at all the pension funds, which all are required to have public information in the ERISA red book, these pension funds are underfunded, meaning

[05:38] they don’t have enough money because of what happened in 2008 and 2009 to pay out the claims that they need to be paying. And of course, as we know, people are living longer. And so that’s causing additional stress on these pension funds. Not only are they having to pay longer, they don’t have as much money as they should have. And so they’re scrambling for resources and this does cause them to invest in things that have the hope of getting more money because they certainly cannot fit there in bonds earning so little on their money when they’ve got these two additional pressures and there’s underfunded pensions and information about underfunded pensions findable in all different types of industries all across this country.

[06:29] And you think the general American consumer is not aware of it and they’re not because most people that are working, they don’t even have pensions. And so there’s this false sense of, oh, well, pensions are gone. They don’t exist anymore. Well, yes, they do for all the people that are in their sixties and seventies and eighties that worked when pensions were more common. By pensions, we mean dollar amounts that a particular company would manage in order to pay a particular defined benefit. They’re actually called defined benefit pension plans, unlike 401k plans, which are technically defined contribution plans. You put in what you put in and you got what you got defined benefit plans. It didn’t matter how much you put in.

[07:16] It didn’t matter what the interest rates were necessarily, but you absolutely had to pay that benefit. Well, if you have lower interest rates and or you have a lower dollar value in that entire plan, then you are at risk. And now they’ve got both. They’ve got lower dollars and lower interest rates. And so they’re scrambling. And as you said, maybe that is something that the Fed has done on purpose to try to prop up employment because these riskier investments are causing additional people to get to be put to work, even if it’s maybe not permanent or maybe not what they want to do. So we’ve got a big circular challenge here and it does cause us concern around how is our life insurance company dealing with this because life

[08:11] insurance companies have pension plans. Life insurance companies have large blocks of money that they are having to invest. So again, let me just check in with you. Am I getting ahead of myself? Is there anything else we need to be covering before we get into how does an insurance company deal with this? No, I think we need to move to life insurance. But the one thing I would like to point out is that a lot of times people with pension plans have it in black and white. If I serve so many years and this is my salary, I can exactly calculate my pension. And that’s absolutely true unless the pension runs out of money. And we can look at the railroad industry, we can look at the airline industry and we can look at the teamsters and we can look at General

[09:04] Motors just right off the top of my head of pension funds that literally ran out of money. And at that point, the pension fund is turned over to the state guarantee and the state guarantee association has the ability to come in and say the only way for us to continue to paying your benefits is for you to take a 50 percent or a 70 percent or a 10 percent. They will reduce the amount of the pension, even though it was guaranteed to you the day you signed up. Once that happens, you get the lower amount of the pension, potentially losing your health benefits. So the guarantee that you get is guaranteed by the company till the company can’t pay any more, correct? Absolutely. And if there’s no more money, there’s not much that can be done.

[10:05] So it’s a scary environment for pensions. And many times, if somebody does have a pension, it is not something that can be rolled over into an IRA like a 401k plan. Many times those pensions stay at the company and you really don’t have any control over the asset that is backing up that promised payment. So now we move to the insurance companies and particularly we’re talking about life insurance companies and life insurance companies take in premium and then they have just a tremendous track record of being able to make proper investments to generate income. And in particular, we’re talking about mutual insurance companies, meaning that each policy holder is also an owner in the company. So each year in the form of dividends, they receive a portion of

[11:05] the profits of that company back. So these insurance companies are faced very similar to a pension fund, to how to invest the money. And they’re looking at the same thing. They have the riskier investments, which they’re more restricted into the riskier investments. And then they have the things like bonds, which are now paying so low that they’re really not generating the type of income that it takes in order to be able to properly give a rate of return to their policy holders. But yet somehow these insurance companies continue to pay usually three to 4% above even what the banks are paying their depositors. And I think today what we want to get across, and Kim, I can’t think of a better person to explain this than you, is the fact that not

[12:07] only are you getting the benefits of their many hundreds of years of investment advice, but they also have a profitable business model that allows them to continue to generate profit through, you know, through the Great Depression, through World War One, through World War Two, through all of these different years, because their model is so profitable, those of us in mutual companies continue to receive those annual dividends. And most companies paid annual dividends for over a hundred years through multiple versions of the economy. What do you think of that, Kim? Well, and you neglected to say the Great Recession. They also paid through the Great Recession, not just the Great Depression. And that, of course, is the 08-09 timeframe that we as

[13:05] America are already forgetting. There are studies that show that we’ve got a seven to eight year memory when it comes to financial mess. So the difference that a mutual whole life insurance company creates, so it’s really a mutual company that has whole life as a product, is their business model, as you’ve implied, and it’s because they have an environment where they are receiving massive amounts of cash flow in the form of premium payments and pay to petition payments, but not only premium for whole life, premium for term insurance. And it’s actually this business model that creates over 50% of their ability to pay dividends, which means less than 50% of their ability to pay dividends is generated by their investments.

[14:01] And I’m using the 50% number because I’ve looked at a couple different companies with different numbers, but they’re always greater than 50% where the ability to pay dividend is coming from their business model, not their investments. And so insurance companies do invest money, of course, as you indicated, they might play in the riskier ones just a little tiny bit. They might do some basic stocks, a few bonds, but when they buy a bond, they buy it for 30 years and they hold onto it for 30 years. That’s a lot different than a stock oriented company that is constantly having to think about quarterly earnings and project and deal with these 90 day timeframes. Insurance companies think in 30 year, sometimes even 100 year

[14:53] timeframes. And then additionally, an insurance company dividend once paid. And so we need to state, of course, that dividends are not guaranteed to be paid, but once paid, an insurance company dividend becomes a part of your guaranteed cash value and it can never go down again. So let’s compare that to say dividend from a stock orientation. So I’m not playing a stock insurance company, but a typical stock company and I don’t want to pick on any ones. I’m not going to use an example, but let’s just take a dividend from a typical company. If you get your dividend and you do what most people do, which is reinvest that dividend in that same company’s stock and the next day that stock value decreases, you have

[15:54] effectively lost your dividend in that company’s stock. Whereas a life insurance company, mutual life insurance company’s dividend essentially gets reinvested and paid up addition riders is the most common thing that dividends go into it becomes a part of your guaranteed cash value, which can never go down again. And that’s something that’s so easy to forget or to even not know at all. And it is enabling us as owners of our life insurance policies to know that every single year we will have a new floor that rises that can never go down again. And then the next year when the, if the dividend pays, then that gets added to that floor and the new floor gets set never to go down again. So we have a much safer environment.

[16:49] Not only does the company have a safer environment with which to pay the dividend because it is more based on their business models and their investments, but we have a safer environment once we get the dividend, because it goes into guaranteed cash value and rises. And even if the company never pays another dividend, that guaranteed cash value is guaranteed to rise every single year. So you not only have a guaranteed cash value, but I will mention that the whole purpose of life insurance or the main purpose of life insurance is also to provide compensation to those who will be affected by our death. So we have not only a guaranteed cash value, but we also have that guaranteed death benefit.

[17:39] So we’ve got kind of that double safety net, not that anybody wants to die just to collect on their insurance, but there’s this inevitability, at least inevitable so far, nobody’s figured out how to live forever so that we have this guaranteed cash value today that we can borrow against or we can withdraw along with that guaranteed death benefit that’s going to be passed on to our beneficiaries. Yes, and a guaranteed death benefit connected with a guaranteed event, our death can also benefit us while we’re living. Think about it this way. If you knew for sure that X dollars was going to come into your estate at a certain time upon your death, so you didn’t know the time, but you knew that when the death

[18:31] occurred, it would come, that might make you spend your own money differently, possibly faster, more efficiently. And so that guaranteed death, while the actual dollars are clearly going to go to our family, it can help us while we’re living, spend our dollars a little bit better. So you’re right, there’s good to that guaranteed death benefit, in addition to the guaranteed cash value. And I just want to throw out there that whole life insurance also has a guaranteed premium. So you’re going to start to see a lot of negative press about universal life, and it’s changing premium. And I want all of our listeners to remember that guaranteed premiums exists with whole life insurance, you cannot have a changing premium.

[19:24] Now your pay to petition writer number can move around a little bit, but that’s a maximum number, you don’t have to contribute anything to the pay to petition writer. And we always recommend you at least contribute minimum, which is usually 100 or $120, depending on the company. But you don’t have to contribute maximum pay to petition just because that number went up doesn’t mean you have to add to it. But your guaranteed premium will be there and will also not ever change. Once that policy is enforced, that premium dollar figure does not move. Well, Kim, we’re starting to run a little long here. I believe you have a book or something that you’re willing to offer to our listeners. Always gratitude first.

[20:05] And we want to give you something that will benefit you and help you expand your knowledge. It’s called financial planning has failed. It is available at partners number four prosperity dot com slash ebook. And that’s again, partners number four prosperity dot com slash ebook. There is an audio version there as well. Financial planning has failed 60 pages, hour or two hours. I can’t remember. Think that audio is a little under two. So enjoy. Check out that blog. Check out that book. Again, I know we’ve run a little bit long today, but this is No BS Money Guy for the Prosperity Podcast. Special thanks to Kim Butler. Let us know how grateful we are to all of you and how much we are committed to your continued

[20:52] education. Thanks so much, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.