So Janet Yellen's first hearing took place overnight. It was fairly boring. She's expected to sail through and become the next Chairperson of theUS Federal Reserve. Given that the last few years of extraordinary monetary policy have achieved a miserable recovery, what's she going to do differently?

Nothing. Just more of the same. While hoping for different results of course. Heh.

Then again, the beauty of economics is that it is about a complex system. That's a snazzy way of saying that causation is hidden. For example, you don't blame an avalanche on the snowflake that triggered it. It was the structure of the mountain and all the previous snowflakes. But blaming a gigantic rock and billions of snowflakes is kind of bizarre.

In the same way, the policy move that triggers Janet Yellen's avalanche, whether it's inflation or another financial crisis, won't be to blame. It's the inherent characteristics of the system and all the policies before that created the imbalance. Fiat money, fractional reserve banking, demographics and 'guns and butter' are the real source of instability. QE is the natural response from policy makers just trying to keep the party going.

Avalanches come as a surprise. That's because the snowflake which triggers an avalanche is the same as the previous snowflake which didn't trigger one. So don't just watch the snowflakes looking for one that will cause an avalanche. You'll end up taking a rough trip down the mountain.

Instead, you need to keep an eye on the ground - on the health of the underlying structure. Even though it's only changing very slowly. One snowflake at a time. That's why we write about odd things like fractional reserve banking in The Daily Reckoning. Despite the fact that it's a daily newsletter, we cover the biggest, slowest trends, looking for clues about what's going to happen.

Anyway, even if Janet Yellen simply continues doing what her forerunner Ben Bernanke did, at some point something new will happen. You'll get an avalanche. And when it comes to the Federal Reserve's policy of choice, money printing, that avalanche has always been inflation in the end. That's because policy makers can always up their money printing efforts. Once they've broken the forbidden taboo, it's like a curse. They just can't stop.

Erik Townsend, a retired software entrepreneur turned commodities trader, was at a conference where Yellen gave a speech not long ago. He explained on Jim Puplava's Financial Sense podcast what Yellen may have in store for us:

'She was talking in her lecture, about how if there was anything she could do to figure out a way to make interest rates negative, she would do that, because she feels that that's what we need to do to make credit as easy as possible for the people. And I asked the obvious question that none of the San Francisco liberals were asking, which is, what about savers and investors? Doesn't that punish them?'

Negative interest rates would mean savers pay interest to the bank and borrowers get paid interest. Although, by the time banks throw on their margins, it's likely that both rates will just approach zero. Townsend continues:

'She said, well, we're coming to the point where we have to consider the role of people who have significant savings and their responsibility in society, that it really is selfish to be hoarding it and that we need to create incentives through government for people to spend their savings, because that's exactly what we need in order to rejuvenate the economy.'

Making comments about policy is different when you're actually making the policy. But this remarkable way of thinking tells you how Yellen sees the world. And it's a world where savers are bad, spenders are good and borrowers are great.

The real world has already felt the weight of this thinking. Yellen's forerunner, Ben Bernanke, has the same beliefs, just a little less extreme. Even without negative rates, it turns out that savers have already been routed for the benefit of the world's biggest spenders and borrowers, politicians. Bloomberg reports on a McKinsey study on the effects of low interest rates and QE so far:

'Governments have benefited from low rates and the injection of almost $5 trillion of liquidity since the financial crisis broke out in 2007, McKinsey said. The gains amounted to just over $1 trillion for the U.S., $365 billion for the euro area and $170 billion for the U.K., due to cheaper debt costs and the handover of profits on asset purchases from central banks to state coffers.

'Non-financial companies in the three regions also have made out, to the tune of $710 billion, as their borrowing costs fell, according to the report. That though hasn't led to an increase in capital spending, as company executives have viewed the lower interest rates as temporary, Dobbs said.

'Households lost $630 billion in net interest income, with older people holding interest-bearing assets suffering the most...'

The figures are just guesswork. But on the ground, the effect is very real. As interest rates fall, so do returns and retirement pots.

Funnily enough, the government believed its own lies. Government pension funds booked in 7% returns from the stock market before they got them. But stocks haven't even kept up with inflation in the US over the last decade and a half. And so now cities are defaulting on their pension obligations. The money booked in isn't actually there.

Here in Australia, our retirement savings system is in trouble too. Aussies rely on rising asset prices to pay for retirement. They hold a far higher proportion of their wealth in shares than other countries. Which is why our system did so poorly during the financial crisis, when stocks got slammed. And they still haven't recovered.

At least houses are hitting record highs. Not that retirees will ever be able to sell them at high prices. Who would they sell them to? First home buyers are cut out of the market at these prices. And those on the bottom rungs of the property ladder won't be able to afford more expensive houses if house prices start to fall. Increases in equity are what funds your ability to buy a bigger house and get on the next rung of the property ladder. So if prices stop rising, that equity stops appearing. And prices will fall as more and more retirees age and sell out.

It's a classic case of first mover advantage. Those who sell out first will do best. The question is whether you can spot the peak in prices. Could you spot it in the stock market in 2007?

Rob Burgess, writing in Business Spectator, came up with a different answer to selling out. And we reckon it might just be the worst piece of financial advice we've ever read. It goes a little something like this: Retirees who haven't saved enough for retirement should borrow money against their homes to fund their lifestyle.

Now just about all of Australia's current affairs programs and some of the newspapers have been reporting on how this strategy wiped out hundreds of retirees over the past few years. Luckily, the courts have sided with borrowers and allowed those who followed Burgess' ideas to cancel their loans using a paperwork technicality as their legal reasoning.

Over at The Money for Life Letter we put together a guide on how to check if you can cancel your mortgage too. And how to do it if you do find the key paperwork discrepancy.

Borrowing money against an overvalued asset which is at record prices is a bad idea generally. Borrowing money to enhance your investment returns is a no-no for retirees. Borrowing money against an unproductive asset is dangerous too. Especially when you're no longer earning an income. And borrowing money to fund consumption is dangerous at any age. Burgess has managed to combine all four! And his readers took him to task in the comments section.

Just take a look overseas at those who got sucked in by the Burgesses in America and Europe. You'll find that many retirees who topped up their home loan lost everything. In Britain, where some equity release strategies were banned in the 1990s, hundreds of borrowers managed to use an Icelandic bank to gain an equity release on their Spanish holiday homes, according to This is Money. One day a 72 year old Mr Hemus was told he had a fortnight to come up with 30,000 euros or lose his home. Debt is just that dangerous, especially when it's combined with overvalued property and retirement.

But if there's a war on savers, what do you do with your money? Especially if you do take the money and run by selling your home now and downsizing or renting. You'd be loaded.

You'll find plenty of answers to that question at our upcoming conference. We just saw the tentative schedule and we'll be speaking on the same day as a legendary investor we can't name just yet. You'll find out soon though. And if you want to be among the first, click here.

Regards,

Nick Hubble+
for The Daily Reckoning Australia