Finally, someone is speaking up on a theme we've been promoting for a long while - one of the many "arbitrages" currently going on in the US. In this case, throwing America's savers under the bus, so that (a) any 4-year-old may run a bank successfully simply by turning on the light in the morning [Apr 20, 2009: How Banks will "Outearn" their Losses] and (b) so that debtors may benefit.
What is sad to see is the potential for the desperate American saver - who has been hit by multiple Federal Reserve induced bubbles - being set up to have her monies swiped away yet again. Many who have been hit by two stock crashes and a real estate crash - all within a decade's time mind you (3 Black Swans - what are the chances with a Federal Reserve gone crazy?) - now have fled into bonds. [Sep 16, 2009: Mutual Fund Investors Cling to Safety of Bonds, Missing Stock Rally] Why bonds? Because they are "safe" and offer some yield over and above the (almost nothing) offered in saving accounts or CDs. But safe is a relative term; interest rates and prices of bonds have an inverse relationship. At some point, rates will go up ... and prices of said bonds shall fall. Which, from my anecdotal discussions and readings on the intertubes, is going to be a shock/surprise for many of our savers who are simply trying to find any product that generates even modest returns over and above inflation rates. Surely within 3-5 years we will be reading story after story of the individual investor "shocked" they have taken losses in their bond mutual funds.
But no worries about that. The savers of America are here to subsidize the spending culture and to make sure our oligarchs are fed, fat and happy. (Remember who the Fed really "works" for?) All signals go. [Rhetorical question: With all this "recovery" around us, why won't the Fed move off "emergency" levels of rates?]
Charles Schwab opines in The Wall Street Journal: (My comments in parentheses)
- Today's historically low interest rates may be feeding banks' profitability, but they are financially starving our seniors. In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.
- Today's average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years. Some would argue that today's low inflation rate offsets the decline. But even at an inflation rate of zero, a 76% decline in spending power is painful. And we're already seeing signs of inflation this year.
- To be sure, the country's recent financial crisis required unprecedented action by the Fed, including lowering rates to levels not seen in more than 50 years. In particular, the infusion of capital into the banking system through historically low fed-funds target rates pulled many banks from the precipice of collapse. By that measure it has been a resounding success.
- Yet these unprecedented low rates have now been in place for almost 18 months. As a result, banks have enjoyed virtually free access to money while retirees have been deprived of any meaningful yield on their fixed-income portfolios. For a large segment of our population—people who worked long and hard, who followed the rules by spending less than they earned and putting the remainder away to keep themselves independent in retirement—the ultra-low interest rate is more than a hardship. It's a potential disaster striking at core American principles of self-reliance, individual responsibility and fairness.
- To put the scale of this problem in context, consider the fact that more than $7.5 trillion in American household wealth is held today in short-term, interest-bearing products such as checking and savings accounts, retail money funds and CDs. At today's low interest rates, the return on those savings is hundreds of billions less than it would have been at 2006 interest rates. (And hundreds of billions directly to the bottom line of our oligarchs.) Retirees feel the consequences disproportionately, but because much of that income would have made its way into the economy, spending and job creation also suffer.
- I see the pain that low interest rates have caused very directly. My company, Charles Schwab (SCHW), serves millions of individual investors, many of whom are 65 and older. These people depend on cash savings for their financial well-being. Many in this age group are being forced to stretch for income one of three ways. One is to take on more risk just as they are progressing through retirement. Another is to go longer in maturity with their fixed income investments, locking them into a situation where inflation will bite further into their principal and purchasing power. And the worst is the slow erosion of principal that is already occurring as people cash out of savings to make up for needed income.
- It's not just retirees on fixed income we should be concerned about. Let's not forget that savers of all ages—even the young person opening his first savings account—need some incentive of future reward for saving. Today, there is none.
And that last sentence says just about all you need to know about national priorities.