The Fed's assault on retired people, personal anecdote

My grandfather, 95 years of age, has a sharp mind and beats all of the 70 year youngsters in his apartment complex in pool and billiards. He rode his bike to the clubhouse and back up until last year.

He's lived through so much, and was able to overcome so many obstacles, but the monetary policy set by the Federal Reserve has been making it harder and harder for him. He is on a fixed income from social security, dividend payments, and interest on savings.

However, he has expressed great frustration with his savings earning only 1/2 of 1 percent in interest. He expressed a desire to take more of his savings and put it into stocks. He believe that the economy might recover, but he is confident the stocks will do well.

Of course, at 95 years of age, to increase the risk of your portfolio goes against any conventional financial advice I've ever heard. Typically, when we're young we should take higher risk and as we grow older we should take fewer risks financially. In a sense, we have a "call option" on life when we're young - at 22 years of age, one can take their meager savings and invest in a risky asset or in a new company, which gives the potential for high payoffs and has very little downside (that is if he or she can move back with the parents!). If this fails, the individual hasn't lost much, and still has most of his or her working life to recover financially. But if a retired person takes a large financial risk and loses, there is a huge downside- this models more of holding an equity than a call option.

Now, surely, the brilliant, benevolent minds at the Federal Reserve only want what's best for us and might write off my grandfather's particular case as acceptable collateral damage in their attempts to help the overall economy recover. Of course in this case, if we are trying to have a society in which the government treats all equally and fairly, the Fed's policy would be wrong on those grounds.

But there is something more insidious. One of the ways that monetary policy affects the real economy is what is referred to as the asset price effect, or the wealth effect. This was one of several ways the Fed hoped to help the economic recovery. The idea is that by keeping interest rates down and increasing inflation expectations, people would save fewer dollars in the bank and go into riskier assets instead- specifically stocks. And if this is successful, it would be an increase in demand for stocks, which would drive up their prices. With these higher stock prices, small businesses and households would have more valuable assets against which to borrow, plus they would feel wealthier - this could encourage both consumers and entrepreneurs to resume borrowing, investing, and consuming.

So what my grandfather is being forced into doing just to try to keep up with cost of living increases - inflation (being caused by this very program of "quantitative easing" (read: printing money)) is exactly what the Fed intended.

Is this form of statism fair or right if we are striving for a fair and free society?