Policy Failure: ZIRP, Bubbles, And How The Fed Has Cost Savers 9 Trillion In 11 Years

 |  Includes: DIA, QQQ, SPY
by: Colin Lokey

When one thinks about the idea of the 'wealth effect' and its potential to stimulate the economy via instilling within consumers a false sense of financial security, it is key to recognize that it can only work if the supposed increase in asset prices is accompanied by a decrease in the savings rate. If households simply stuff the Fed-generated returns on their assets into savings accounts, the money is never spent and the wealth effect never kicks in.

As I noted in a previous article, this is the ultimate irony inherent in the Fed's plan: they print money to boost asset prices, but the very act of buying those assets depresses savings rates and thus reduces consumers' ability and propensity to spend the money the Fed just created for them.

Despite this, there are those who defend the Fed's current policy stance and assert that the FOMC's crusade against the bogeyman we call 'deflation' is the only thing that separates our economy from collapse. Consider the following comments from BusinessInsider's Joe Weisenthal:

"If you want higher rates for savers, the only way out is to do whatever you can to boost the economy, which itself will cause interest rates to rise...If you want to screw over savers, do nothing, let deflation rule the day, and watch interest rates collapse...Boosting the economy is the best thing that could happen to savers."

Note that Weisenthal is essentially saying that if your goal is to increase rates on savings accounts, the best thing to do is to keep rates low on savings accounts. It would appear his logic goes something like this: the Fed is attempting to boost the economy by adopting a zero interest rate policy, because a stronger economy is good for savers, a zero interest rate policy must therefore also be good for savers.

Of course the best thing to do to evaluate that claim is simply ask savers how the current policy is working out for them. According to the Boston Globe, the average interest rate on savings accounts is .08% per year:

"That means $10,000 would generate just $8 a year in interest."

Furthermore, the rate on a 5-year certificate of deposit is now below 1 percent for the first time ever. Meanwhile, GDP grew by only 1.3% during the second quarter. This savings rate for economic growth swap doesn't seem to be going so well thus far.

If one really wants to drive the point home however, it is possible to actually calculate how much the Fed is costing savers. Consider the following graph which shows the amount of interest paid on savings accounts (red line) and total deposits (blue line):

Click to enlarge

Source: FRED, Chris Turner via ZeroHedge

Notice that since 2001, the amount saved has skyrocketed but the amount of interest paid has barely budged.

If that isn't enough to convince you that savers are being indiscriminately wiped out by the Fed's experiments in monetary policy, consider one more chart. This one shows how much savers have lost over the last 11 years as a result of FOMC action by calculating what interest income would have been if interest rates floated based on the long-run historical mean of the Fed Funds rate:

Click to enlarge

Source: FRED, Chris Turner via ZeroHedge

By this measure, the Fed has cost savers $9 trillion in just over 10 years.

Over that same time period, the asset bubble created by ultra easy monetary policy nearly collapsed the world's financial system, wiped out untold wealth in the process, and has now led us to the brink of stagflation. What a wonderful success story. Given this track record and given the fact that the S&P 500 has now traded below its pre-FOMC levels twice in under 30 days, investors would be wise to bet against the Fed's ability to continue to support asset prices. I continue to recommend shorting U.S. equities (NYSEARCA:SPY) (NASDAQ:QQQ) (NYSEARCA:DIA).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.