A consumer complaint is ricocheting around the world: low interest rates are eating away at savings.
Bill Taren, a retiree near Orlando, Fla., discovered in August that his credit union would pay only 0.4 percent annual interest on his saving account, even though inflation averaged 2.8 percent over the last year. So he and his wife decided to just stuff their money in the mattress, he says, because at least there “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 percent interest — “almost nothing,” they say — even though the consumer price indexrose an average of 2.5 percent over the last year.
Jiang Rong, an information technology professional in Xiamen, China, decided to dive back into the
The fact that interest yieldsare so low in so many parts of the world is no coincidence. 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, the government’s report on job growth in the United States showed continued weakness, and an international forecasting group warned that the European economic powerhouse, Germany, will fall into recessionlater 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 rateallow 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 a variety of tactics to encourage captive audiences, like pension funds and banks, to buy their debt. Consumers, in other words, are subtly 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 the 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. The 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 the 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, the 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, the chief economist at Allianz Global Investors. “But these elements are not necessarily in place today.”
For that reason, economists are less certain that the success of the strategy will be repeated.
Many major economies are already slowing down, if not outright contracting. And the actions taken by governments to keep interest rates low can restrain how much savers have to spend and force fragile banks and pension funds to take on more risk. Ultimately, it could crowd out private borrowing.
Governments have different mechanisms to keep their borrowing costs artificially low.
The Chinese government can just make a call to banks and dictate how much they will lend and at what interest rate.
“By forcing them to lend at low interest rates, China’s central bank is taxing banks at high rates,” said Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics. “They make it up to the banks by dictating that banks pay depositors even lower rates, so consumers are getting taxed too.”
Inflation-adjusted interest rates on one-year deposits have been below zero since late 2003, he said. China tightly controls how much money can leave the country, so individuals cannot seek higher yields elsewhere. As a result, Chinese families have been investing their growing incomes in real estate, which has led to a huge real estate bubble in some Chinese cities.
Democracies use more roundabout techniques.
“They have to work with their captive audiences — the pension funds, domestic insurance policies, banks, any domestic buyers they can find — to force-feed sovereign debt, sometimes under the euphemism of ‘macroprudential regulation,’ ” said Professor Reinhart.
Ireland and France, for example, have required or “encouraged” pension funds to invest in more government debt.
In Spain, fragile banks have been arm-twisted into lending to the government, which forces down the interest rates that the banks can pay to depositors. The Spanish government also capped the amount of cash that could be withdrawn from bank accounts, which prevented people from seeking higher yields elsewhere.
And in the United States, the Federal Reserve is buying up government debt to keep interest rates even lower than what markets would otherwise pay (and rates were low to begin with because investors from all over the world are buying up American debt because it seems relatively safe).
In the nearly four years that the Fed set its benchmark interest rate at zero, the government has saved trillions of dollars in interest payments. If interest rates today were what they were in 2007, the Treasury would be paying about twice as much to service its debt.
Inflation in the United States is very low by historical standards, but interest rates are so paltry that savers are losing money anyway.
“I got hit a couple of years ago pretty badly in the stock market, so now my savings are weighted mostly toward bonds,” said Dorothy L. Brooks, 65, who lives in Garland, Tex., and retired about a decade ago. She recently decided to go back to work as an assistant at a local school. “Now both investments are terrible. And I can’t put my money in a money-market account because that’s crazy. That just pays nothing.”
Of course, any economic policy will produce winners and losers, and it seems unlikely that policy makers are deliberately sacrificing retirees either to stimulate the economy or to grind down government debt. More likely, older Americans and other savers are just unintended casualties of policies aimed at other economic targets, particularly the policy making it easier for consumers and companies to borrow.
“If you care about the distribution effects of these policies, and being fairer to the elderly or other people, that seems to argue for carefully designed fiscal stimulus,” said Robert J. Shiller, an economics professor at Yale. “With fiscal stimulus you have more control over who gets taxed at what rate and so on. At least it’s more transparent anyhow.”
But, he added, “the whole reason we like using monetary policy is that it avoids those very political discussions of who gets taxed.”