As Low Rates Depress Savers, Governments Reap Benefits

A consumer complaint is ricocheting around the world: low interest rates are eating away at savings. Bill Taren, retiree near Orlando, Fla., discovered in August that his credit union would pay only 0.4% annual interest on his saving account, even though inflation averaged 2.8% over last year. So he and his wife decided to just stuff their money in the mattress, because at least “we can see the cash when we want”. Jeanne and André Bussière, in Annecy, France, have a stable pension and a bank account that pays 2% interest, “almost nothing”, even though consumer price index rose average of 2.5% over last year. Jiang Rong, an information technology professional in Xiamen, China, decided to dive back into speculative real estate market rather than watch his savings wither at the bank. In China, too, the cost of living is outrunning savings, as local restaurants nearly double their prices. The fact that interest yields are so low in so many parts of the world is no coincidence. The rates are determined not only by markets, but also by government policy. And right now many governments say they have good reason to keep their own borrowing costs as low as they possibly can. Just last week, government’s report on job growth in United States showed continued weakness, and an international forecasting group warned that the European economic powerhouse, Germany, will fall into recession later this year. Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases. Along with keeping rates low, governments are using variety of tactics to encourage captive audiences, like pension funds and banks, to buy their debt. Consumers, in other words, are subsidizing governments without even knowing it. Economists have compared this phenomenon to a hidden tax on people’s wealth. “If you ask a central banker is that what you’re doing, and why you’re doing it, they’ll say ‘No, we’re just trying to get economy going by making it easier for the private sector to borrow,’ ” said Neal Soss, chief economist at Credit Suisse. “But I have a syllogism for you: The government makes the rules. Government needs the money. So why should it surprise if the rules encourage you to lend the government money?” This is not the first time governments have benefited by depressing interest rates, something economists refer to by the ominous name of “financial repression.” In the three and a half decades after World War II, interest rates in developed world were on average below zero after adjusting for inflation, according to Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard. This helped Europe, United States and Japan slowly whittle away much of their war debt as their economies grew faster than their debt burden. “The difference is that the postwar period was one of strong growth, when rebuilding and capital investment was going on across the Continent, and there were strong demographics,” said Stefan Hofrichter, chief economist at Allianz Global Investors. “These elements are not necessarily in place today.” For that reason, economists are less certain that the success of the strategy will be repeated (…..)



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3 Responses to As Low Rates Depress Savers, Governments Reap Benefits

  1. Professor Uziel Nogueira says: My retirement paycheck from an international organization in DC and my savings are denominated in dollars. Back in my country Brazil, I was hit by a triple whammy: (a) downhill value of the dollar vis a vis the Brazilian Real; (b) below inflation interest rates in my savings account in Washington DC; and (c) declining interest rates in Brazilian denominated financial instruments. The FED loose monetary policy is causing a worldwide downward effect in interest rates. In Brazil, financial instrument yields are barely covering the inflation rate. So, no place to run for retirees as long as the FED continues printing free money in the US. If this monetary situation was a transitory one, the baby boomers retirees could take cover and wait. However, I am not optimistic about the near future. The US is caught in a Japanese-style economic trap characterized by low economic growth, high unemployment and negative interest rates. In the Japanese case, this pathetic state of the economy has been going on since the early 90s. I think the US could easily follow Japan. The American baby boomer generation has had an unique experience. It had the best of times and (now) is experiencing the worst of times. This raises a political question for the baby boomers. Who is the best candidate to end the loose monetary policy by the FED? Obama or Romney? If I could vote, I have no doubt about the best candidate to defend my interest.

  2. The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially. This is the first time that the Fed has tied the duration of an aid program to its economic objectives. And, in announcing the change, the central bank made clear that its primary reason was not a deterioration in its economic outlook, but a determination to respond more forcefully — in effect, an acknowledgment that its incremental approach until now had been flawed. The concern about unemployment also reflects a significant shift in the priorities of the nation’s central bank, which has long focused on inflation. Inflation is now running below the Fed’s 2 percent annual target. But with the unemployment rate above 8 percent, the Fed’s policy-making committee suggested Thursday that it might tolerate a period of somewhat higher inflation, promising to maintain stimulus efforts “for a considerable time after the economic recovery strengthens.” “The weak job market should concern every American,” the Fed’s chairman, Ben S. Bernanke, said at a news conference. The goal of the new policies, he added, “is to quicken the recovery, to help the economy begin to grow quickly enough to generate new jobs.” The need for new stimulus reflects the disappointing condition of the American economy, which continues to struggle between crisis and prosperity three years after the official end of the recession. More than 20 million Americans cannot find full-time jobs. Median household income has declined. The housing market remains depressed. The Republican presidential nominee, Mitt Romney, issued a statement describing the Fed’s announcement as “further confirmation that President Obama’s policies have not worked.” Mr. Romney added that he did not think the Fed’s efforts would work, either. Democrats, in turn, laid the blame on Republicans in Congress. “The Fed is fulfilling its obligation to take action to address unemployment. Now Congressional Republicans need to fulfill theirs,” Senator Charles E. Schumer, Democrat of New York, said in a statement. Delighted investors responded by piling into the stock market, instantly gratifying one of the Fed’s primary objectives for its program — to push money into riskier investments. The Standard & Poor’s 500-stock index closed up 1.63 percent; shares in home builders rose on the news (…..)

  3. Professor Uziel Nogueira says: Another decision by the FED making few winners and lots of losers. The losers? the usual crowd of millions of baby boomer retirees and small investors.They are hit by a double whammy: theirs houses have lost value and the yield in their savings barely covers inflation. The winners? the usual 1% posse of rich folks and bankers getting money for nothing and making tons of profits in their investments overseas, particularly in China. As the crisis goes on, The American Dream became The American Nightmare for millions, including foreigners, like myself, living on dollar-linked pension. Which candidate offers the best financial policy to defend our interest: Romney or Obama?


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