Fed says 'This balance sheet won't shrink'

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Fed says 'This balance sheet won't shrink'

It might stink, but it won't shrink.

Today the Federal Reserve confirmed what some of us have been saying ever since the crisis struck: having engorged its balance sheet to $2.3 trillion, the Fed can't possibly let it shrink now, without cratering the economy:

Aug. 10 (Bloomberg) -- Federal Reserve officials will maintain their holdings of securities to prevent money from being drained out of the financial system in their first attempt to bolster the economy in more than a year.

The central bank said it will reinvest principal payments on its mortgage holdings into long-term Treasury securities. The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting today in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.”

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a.QZRRy0n2JA

As the Fed was more than doubling its assets at the height of the crisis, promises were made that the mountain of newly-acquired securities would be sold off when conditions returned to normal. But they haven't returned to normal, and might never.

Given the current appearance of 'pushing on a string,' even holding the balance sheet constant doesn't guarantee that the economy will sidestep a double-dip recession. But to attempt shrinking the balance sheet now, as fiscal policy is tightening both domestically and overseas, would be to repeat the mistake of 1937. Then, the Fed boosted reserve requirements and the discount rate. The U.S. economy promptly tumbled back into the final phase of Depression I.

Although Ben Bernanke would deny it, the U.S. economy has Ponzi-like characteristics, necessitating constant expansion of the money supply. Even backing off on the accelerator as the Fed has done during the past 12 months -- much less applying the brakes -- produces an immediate wilting of the recovery.

I've said it before, and I'll say it again: the Federal Reserve's assets will never again decline below $2 trillion. We'll see $3 trillion before we ever see $2 trillion. When you're bicycling across a high wire with a pyramid scheme precariously balanced on your nose, you can't stop moving. Pedal, Ben, pedal! 

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Re: Fed says 'This balance sheet won't shrink'

'They sold my desk and "invested" the cash in a Fannie Mae bond!' *sniff*

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Re: Fed says 'This balance sheet won't shrink'
machinehead wrote:

'They sold my desk and "invested" the cash in a Fannie Mae bond!' *sniff*

You're looking at the last dodo of Keynesianism

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Re: Fed says 'This balance sheet won't shrink'
Johnny Oxygen wrote:
machinehead wrote:

'They sold my desk and "invested" the cash in a Fannie Mae bond!' *sniff*

You're looking at the last dodo of Keynesianism

I dunno Johnny O. I remember dodos having more hair. I mean on top.

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Re: Fed says 'This balance sheet won't shrink'

So far, the Fed's timid baby step is being called 'QE Lite' (the Telegraph) and 'QE 1.5' (Barry Ritholtz).

It takes time to rev those huge engines of inflation up to speed. 

Right now, all we're hearing is the 'wah wah wah' as the starter grinds. Ben -- let's spray some of this 'Magic Start' stuff into the carburetor! 

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Troubling Times...

At least Monsieur Flambe has the good taste to be brandishing a bottle of The Macallan as he immolates himself.  Methinks, however, it is inadvertent [good taste].

It troubles me that a so-called responsible purveyor of potent potables has wantonly vended a bottle of fine single malt to a man wearing a cheesy track suit, bad toupee, and holding what seems to be a jog bra in his off hand.  A Scots purveyor with any sense at all would gently pry The Macallan out of this fellow's hands and replace it with a bottle of J&B. 

These are indeed troubling times...

 

To get to the topic at hand...

It seems to be another bit of punting the can down the alley.  No, we're no longer kicking a can down the road -- every time we put off the eventual reckoning, we turn down a slightly narrower and darker road.  Eventually, we'll get to a dead end, and continued kicking of said can will result in the can bouncing off the wall and hitting us in our collective face.  While I am surprised on an ongoing basis at the juggling act TPTB are pulling off, deep down I know the longer we put off the reckoning, the more dire said reckoning will be.  Seems to me to be simple physics at the end of the day. 

Viva -- Sager

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Re: Fed says 'This balance sheet won't shrink'
machinehead wrote:

So far, the Fed's timid baby step is being called 'QE Lite' (the Telegraph) and 'QE 1.5' (Barry Ritholtz).

It takes time to rev those huge engines of inflation up to speed. 

Right now, all we're hearing is the 'wah wah wah' as the starter grinds. Ben -- let's spray some of this 'Magic Start' stuff into the carburetor! 

I hope thats not whiskey and a jock strap.

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Re: Fed says 'This balance sheet won't shrink'

Fortunately, the NY Fed owners (Wall Street) hold the controlling interest of the Federal Reserve system and they have an exclusive franchise with the international bank cartel.  They are doing "God's work" as opposed to exploiting their money creating monopoly in sacking America. 

We should be thankful that the big Wall Street banks are benevolent rulers of our economy.  They are doing what they can and we should celebrate the growth of their balance sheets and stop whining about a jobless recovery.

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Re: Fed says 'This balance sheet won't shrink'
machinehead wrote:

 

Although Ben Bernanke would deny it, the U.S. economy has Ponzi-like characteristics, necessitating constant expansion of the money supply. Even backing off on the accelerator as the Fed has done during the past 12 months -- much less applying the brakes -- produces an immediate wilting of the recovery.

I've said it before, and I'll say it again: the Federal Reserve's assets will never again decline below $2 trillion. We'll see $3 trillion before we ever see $2 trillion. When you're bicycling across a high wire with a pyramid scheme precariously balanced on your nose, you can't stop moving. Pedal, Ben, pedal! 

The only "recovery" they achieved was purely statistical and limited to the "value" of certain assets - any and all of which can be revalued in a heartbeat. As hypertiger would have said - the top sucks from the bottom - sadly the bottom has died.  Without Joe6P running up a tab and consuming everything in sight, the system is deleveraging.  This isn't a temporary change but a permanent (at least for a generation) behavioral change as Joe suddenly discovered that debt kills when the cash flow slows even a tiny bit. 

Many commentators rush right to the plus side of the balance sheet and completely ignore the minus side of the sheet.  The amount of debt defaulting is rarely ever mentioned and seemingly no one has a "minus" sign on their calculators.  Whether  the banks choose to recognize a debt as bad or not is immaterial (other than to the banks books), the effect is the same - they have no cash flow from the asset and the asset has no value as something they can leverage.

So if the Fed is reinvesting the principal payments of their mortgage holdings into Treasuries, they are technically upgrading their holdings by some small measure.  What of their mortgage holdings that are not generating their full cash flow - that is to say that have gone bad?  If they aren't generating principal payments the Fed can't use that money to buy Treasuries.  The real effect could be a drain on their balance sheet.  I suppose they could ignore the true cash flow of their holdings and simply buy treasuries that replace the "value" of their mortgage holdings which would have an offsetting effect and prevent their balance sheet from shrinking. 

To me, the Fed is saying we went too far (from a self preservation standpoint) and they're looking at any and all opportunities to unload some of the mortgage crap they bought (most of which had fairly close in maturity dates).  By exchanging this for treasuries they have moved towards a more liquid stance and they avoid the trauma of trying to sell mortgage securities which could create a price discovery issue wreaking further havoc on their balance sheet.

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Re: Fed says 'This balance sheet won't shrink'

Birds of a feather flock together:

Aug. 11 (Bloomberg) -- Bank of England Governor Mervyn King said inflation will probably slow below the bank’s target in 2012 and growth will be weaker than previously forecast, signaling the U.K. economy may need more emergency stimulus.

“The overall outlook is weaker than that presented in the May inflation report,” said King at a press conference in London. He cited the “persistence of tight credit conditions” and planned budget cuts as risks to growth.

The bank’s Monetary Policy Committee “stood ready to respond in either direction as the balance of risks evolve,” the Bank of England said in a statement. “Inflation is a little more likely to be below the target than above it during the second half of the forecast period” and the risks to growth “are judged to be weighted to the downside.”

http://noir.bloomberg.com/apps/news?pid=20601087&sid=awhBx0wT_hiE&pos=2

Although the CPI is rising faster in the UK than in the US, the UK's planned fiscal austerity is more severe than in the US. The BOE is stating it in euphemistic terms, but the UK economy faces a hard landing into a double-dip recession.

This is embarrassing for the central banksters. CPI strength calls for raising the policy rate, but the predictable result of budget cuts means more stimulus will be needed later. King's fudge is to 'predict' that inflation will fall in the second half of the forecast period. Which is a roundabout way of saying that brutal budget cuts will pummel the economy into disinflation.

While inflation will be faster than previously forecast next year because of higher sales tax, it is “likely to fall below the target as persistent spare capacity weighs on companies’ costs and prices,” the Bank of England said today. “There is a range of views among committee members” on the risks.

For Americanese 'sales tax,' read VAT, which (contrary to pre-election promises) is being hiked from 17.5% to a crushing 20%. Tax hikes have nothing to do with inflation, which is a monetary phenomenon. But like children who believe in Santa Claus, central bankers still regard a tax-induced price rise as an unwelcome inflationary present. 'But we wanted price stability for our birthday,' they wail to Mommy.

The wizards of Threadneedle Street might want to consult Japan's experience in raising its sales tax from 3% to 5% in 1997. The shaky Japanese economy promptly tumbled back into recession. But politicians never lose their morbid enthusiasm for applying the leech-cure of tax hikes to an anaemic economy. And so the central banksters will again ride to the rescue with more of the stuff that got us into this jam -- confetti currency; pounds sans sterling. Kids of all ages love the bright colours and silly pictures.

 

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Re: Fed says 'This balance sheet won't shrink'
machinehead wrote:

I've said it before, and I'll say it again: the Federal Reserve's assets will never again decline below $2 trillion. 

Yesterday I was just making up this $2 trillion figure -- it's a convenient round number. But today I learn that the FOMC feels the same:

Aug. 11 (Bloomberg) -- The Federal Reserve reversed plans to exit from aggressive monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated.

Central bankers meeting yesterday adopted a $2.05 trillion floor for their securities portfolio, pivoting toward a quantitative target for monetary policy. 

“They are now targeting a balance-sheet level, and the fact they are targeting the balance sheet is new,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York who worked on the Fed Board staff for seven years. Any further easing “will likely come in the form of a higher balance sheet and investment in Treasuries.”

The Fed’s total assets, which include loans and securities other than those used for monetary-policy operations, rose to $2.33 trillion last week from $878 billion at the start of 2007. Even so, Fed officials never had a formal target for the balance sheet level.

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aWemm9SmF89E

Nope, strictly speaking the Fed never had a hard target for its balance sheet. But during the heyday of monetarism in the 1980s, the Fed did target money supply measures such as M1 and M2. Since the M's are leveraged off the monetary base -- the only quantity the Fed can directly control via adjusting its balance sheet -- one could almost paint this development as a return to classical Milton Friedman monetarism.

Not that the Fedsters wanted to get into this pickle. Rather, once they hit the dreaded 'zero bound' on the Fed Funds rate, the banksters' favorite tool of rate cuts was no longer available. So the moldering statue of Saint Milton was rescued from the basement of the Eccles Building, dusted off, and given a temporary place of honor as the patron saint of Quantitative Easing.

If it doesn't work, it's all his fault! SmileSurprised

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Re: Fed says 'This balance sheet won't shrink'
yobob1 wrote:

So if the Fed is reinvesting the principal payments of their mortgage holdings into Treasuries, they are technically upgrading their holdings by some small measure.  What of their mortgage holdings that are not generating their full cash flow - that is to say that have gone bad?  If they aren't generating principal payments the Fed can't use that money to buy Treasuries.  The real effect could be a drain on their balance sheet.  I suppose they could ignore the true cash flow of their holdings and simply buy treasuries that replace the "value" of their mortgage holdings which would have an offsetting effect and prevent their balance sheet from shrinking. 

To me, the Fed is saying we went too far (from a self preservation standpoint) and they're looking at any and all opportunities to unload some of the mortgage crap they bought (most of which had fairly close in maturity dates).  By exchanging this for treasuries they have moved towards a more liquid stance and they avoid the trauma of trying to sell mortgage securities which could create a price discovery issue wreaking further havoc on their balance sheet.

According to Dr. John Hussman, thanks to the open-ended Congressional bailout of Fannie and Freddie (cost: $148 billion to date), the US Treasury is making up the lost principal on soured mortgage loans, and paying over full value to the Federal Reserve as loans are foreclosed for cents on the dollar. He foresees a train wreck after 2012, when those temporary guarantees are supposed to end.

I had the same thought as you: with housing still weak, why wouldn't the Fed reinvest into MBS, in line with the policy objective of supporting housing finance? Maybe this FOMC 'flight to quality' is a quiet attempt to start skating away from their trillion-dollar-plus slug of toxic MBS, before it becomes unmarketable.

'Buddy, can you spare $5 for a cup of coffee?'

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Re: Fed says 'This balance sheet won't shrink'

Luckily the Fed has help....from other central banks.

The so-called 'custody account' at the Fed now stands at a whopping $3.154 trillion (link), up a hefty $344 billion in the past year.  This too counts as balance sheet expansion just it's on other balance sheets than the Fed's so, taken together, we can expect the Fed's MBS rolls and the other central bank's efforts to contribute close to $750 billion annually to our slow-motion US government fiscal train wreck.  Should the Fed decide to do more, that number could easily top a trillion.

A few years ago you never could have gotten me to guess that all that could happen AND we'd have the ten-years at sub 3 and the thirty-years at sub 4. I'd have lost that particular bar bet.  To me, this massive disconnect between thin-air money printing and the so-called bond vigilantes speaks to the power of the government/banking axis. Who the heck is buying 10 year paper at 2.76?  What do they think the world might look like in 2020?

At any rate, I hear it often said that the "markets are bigger than the Fed" but I am less clear on that matter at the moment.  The data says otherwise...

I guess I can say this; so far the Fed (et al) have been bigger than the markets.  This will someday change, I assume, but so far it's been true.

 

 

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Re: Fed says 'This balance sheet won't shrink'

AH-OO-GAH, AH-OO-GAH! Trouble in Fantasyland, summer campers:

The two-year Treasury yield fell three basis points to 0.4892 percent. Gilts extended gains after the Bank of England cut its growth forecast. The yen strengthened as much as 0.8 percent to 84.73 per dollar, the strongest since July 1995.

The difference between two- and 10-year Treasury yields was 2.22 percentage points, after earlier narrowing to 2.20 percentage points, the least since May 2009. The German 10-year bund yield dropped to 2.46 percent, the lowest since at least 1989, when Bloomberg began compiling the data.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aeKnboaI2umQ

For all practical purposes, a two-year note that yields only a quarter-percent per coupon payment (a paltry $2.45 every 6 months on a $1,000 note) is hitting the zero bound, too. So of course, as the 10-year yield plunges the yield curve contracts, along with the implied subsidy to the 'borrow short, lend long' banking system.

And just for reference: the dollar's all-time low against the J-yen in 1995 was 79 to the dollar. This is smelling like a real-life stress test of whether the nation with the world's highest debt-to-GDP ratio can be pushed over the cliff into deflationary default. How is Planet Japan gonna compete with China, when the renminbi is pegged, but yen-to-dollar prices are skyrocketing? Good luck with that trade!

Take a look at the chart of the 10-year note yield -- oh my! It has decisively busted the 3% midpoint of the range. Next target: the crisis low at 2%.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tnx&sid=0&o_symb=tnx&freq=1&time=9

Already, the nattering nabobs of negativism are carping at Ben Bernanke's timid toe-dip into 'QE 1.5':

“We’re in a worldwide soft patch and investors wonder why the Fed didn’t do more,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management.

Right-o, Jim. This is Wednesday -- what has the Fed done for us since yesterday? It was all so foreseeable: as feckless legislators bake austerity into the fiscal cake, all eyes turn to the central banksters to rescue us from the deflationary headwinds. 

Sadly, monetary policy has a well-established lag of up to 18 months. QE 1.5, QE II, QE !!! -- none of them promise the instant relief that the pills advertised on TV offer. Nothing short of dropping money from helicopters is going to turn around the entrenched deflationary psychology. Nothing, that is, except announcing a massive gold purchase program. 

If gold exploded to $2,000 an ounce, would the demoralized masses believe in inflation then? Go for gold, Ben. You've blown your wad on bonds, and it only signaled more deflation. You're buying the wrong thing.

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Re: Fed says 'This balance sheet won't shrink'
cmartenson wrote:

To me, this massive disconnect between thin-air money printing and the so-called bond vigilantes speaks to the power of the government/banking axis. Who the heck is buying 10 year paper at 2.76?  What do they think the world might look like in 2020?

At any rate, I hear it often said that the "markets are bigger than the Fed" but I am less clear on that matter at the moment.  The data says otherwise...

I guess I can say this; so far the Fed (et al) have been bigger than the markets.  This will someday change, I assume, but so far it's been true.

 

 

I think this continues to be the problem with many peoples hypothesis' and analysis.  As a few of us on this site have continued to pound away at:  The power brokers are the Central Banks.  The Central Banks are in on this together, and are in full control of the situation!  They will allow this situation to continue to deteriorate, continue to put the nations into debt (to the Central Banking Cartel) and implode the system when they deem it's in their best interest.  The end result will be a world currency (which means world gov't), that will again be controlled by......wait for it........THE CENTRAL BANKING CARTEL!!!

This above comment is not directed to anyone in particular.  It's just the facts as I see them.  And with all that's taken place  over just the past 2 years, isn't enough to push thinking in this direction, I don't know what will.  

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Re: Fed says 'This balance sheet won't shrink'
cmartenson wrote:

Luckily the Fed has help....from other central banks.

The so-called 'custody account' at the Fed now stands at a whopping $3.154 trillion (link), up a hefty $344 billion in the past year.  This too counts as balance sheet expansion just it's on other balance sheets than the Fed's so, taken together, we can expect the Fed's MBS rolls and the other central bank's efforts to contribute close to $750 billion annually to our slow-motion US government fiscal train wreck.  Should the Fed decide to do more, that number could easily top a trillion.

A few years ago you never could have gotten me to guess that all that could happen AND we'd have the ten-years at sub 3 and the thirty-years at sub 4. I'd have lost that particular bar bet.  To me, this massive disconnect between thin-air money printing and the so-called bond vigilantes speaks to the power of the government/banking axis. Who the heck is buying 10 year paper at 2.76?  What do they think the world might look like in 2020?

At any rate, I hear it often said that the "markets are bigger than the Fed" but I am less clear on that matter at the moment.  The data says otherwise...

I guess I can say this; so far the Fed (et al) have been bigger than the markets.  This will someday change, I assume, but so far it's been true.

 

If you'll recall, I made that absurd assumption that the yields on Treasury debt would drop - went as far as saying that 3% on the 30 seemed probable.  They don't issue, nor is there much outstanding in 30 year notes.  While there is considerably more in 10 year, it still is only a small percentage of the overall debt.  Of course its not only the yield considered in a "trading" market, its also the gains on the price of the notes themselves - all of which get further muddied by forex in the case of foreign buyers. Of course in a deflationary environment even money at 0% has a real return.

750 billion a year isn't much in the face of the total global debt - no doubt much smaller than the amount of repudiation that is in reality occurring.  In the heyday of the shadow banking system where they were securitizing anything they could lay hands on, they were easily "printing" much more than that.  Once the system had become used to its daily bread, anything less than it was accustomed to doomed it automatically.

They may save their precious equity markets from total (and well deserved) destruction, but overall the CBs are powerless to prevent economic shrinkage that is occurring and will continue because of a 180 shift in the psychology of the common man who is drowning in debt and has already sated his future demand on credit.  There is no pent up demand for anything - we already have it all.

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Re: Fed says 'This balance sheet won't shrink'

Can I buy an oversimplification Pat?

The common Joe6P (me) should go to cash short term, with budgeted regular aquisition of metals in physical form for purchasing the new currency later?

The economic doom that seems to be now inescapable has brought me to the determination of fencing my entire property with 8ft chain link and buying some well trained dogs to augment my electronic measures now in place.

I know this is somewhat off topic, but I am trying to digest what I am reading here into actionable intelligence, (without turning into Marc Faber) a result of my 17 years of military experience.

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Re: Fed says 'This balance sheet won't shrink'

Here is a factor which may have underlain the Fed's 'QE 1.5' decision yesterday, if they got an advance tip-off:

Aug. 11 (Bloomberg) -- A swelling trade gap, less stockpiling and weaker construction indicate the U.S. economy slowed even more in the second quarter than the government estimated last month, economists said.

Revisions due later this month may shave last quarter’s 2.4 percent annual growth rate by 1 percentage point or more, according to Morgan Stanley’sDavid Greenlaw and Nomura Securities International Inc.’s David Resler. Thetrade deficit in the U.S. unexpectedly widened by $7.9 billion to $49.9 billion in June, Commerce Department figures showed today in Washington.

A surge in imports means American companies contributed less to the rise in gross domestic product, the value of all goods and services produced in the U.S., than previously estimated. Earlier reports showing smaller gains ininventories and less of a rebound in commercial construction than the government projected will also reduce the pace of expansion.

By Resler’s calculations, the world’s largest economy probably grew at a 1.3 percent pace from April through June, while Greenlaw’s estimate is down to 1.4 percent.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=adEoa9CPe4EE&pos=1

Ugghh -- the 'nascent recovery' has slowed to stall speed, and the 'stick shaker' is numbing Benny's hand.

'Full thrust, full thrust!' cries the automated voice over the cockpit speakers.

'But it won't go any farther!' yelps Ben in frustration, contemplating whether a power dive to regain airspeed is advisable, this close to the ground.

In Benny's nightmares, 'fly by wire' has morphed into 'pushing on a string.' 

One way out, Benny -- hit 'em from left field -- monetize gold! Money mouth

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Re: Fed says 'This balance sheet won't shrink'

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Re: Fed says 'This balance sheet won't shrink'

The Federal Reserve is experimenting with the cash supply in an effort to bring the US economy back to its feet. It's struggling from the waving inflation rate.The Fed is purchasing United States of America Treasury notes and bonds and is also getting interest from mortgage backed securities to try and keep all the interest rates down to a near zero rate. Monetary stimulus, or quantitative easing, is what we call this and can be putting more cash into the market. The theory is that by expanding the cash supply through monetizing debt, interest rates decline. Businesses and consumers will want to borrow and spend more, because savings essentially earns no interest.

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