Stop Whining About Low Interest Rates!

Joe Weisenthal The Money Game February 1, 2012

Bankrate.com

Specifically, we're going to address the people who whine about how they're getting such paltry rates on their savings accounts (including CDs).

You hear it all the time: Bernanke's Zero Interest Rate Policy is screwing over savers and retirees. Bernanke is even screwing over your grandma!

Mainstream media reports amplify this line all the time.

Here's the FT talking about the Fed's latest moves.

Low interest rates from the US Federal Reserve are designed to have a dual positive effect: to help the economy and debtors.

But there is a dark side to this interest rate austerity: the relentless tightening of pressure on savers, company pension plans and other investors who rely on fixed-income returns.

The problem is: This kind of reasoning that loose money is screwing over pension plans gets cause and effect completely opposite.

The reason rates are low is because the economy is still quite weak, and there's virtually no inflation to speak of.

Remember, 2011 saw the slowest non-recessionary growth in history.

The rate of inflation, meanwhile, also remains pretty low by historical standards.

So when the economy is horrible, you can't expect to get great returns with risky investments. And with inflation at pathetic levels, there's very little risk of taking on a fixed income investment.

Therefore it's not surprising to see this chart: 10-year yields, inflation, and growth have all been in a big, secular decline since 1980.

In this chart, the thick blue line is yields, GDP is in green, and inflation is in red,

With fixed income yielding so little, how on earth do people imagine that their Federally Guaranteed bank deposits are supposed to give them anything in return?

But why can't Bernanke just, you now, raise rates or something!?

Well think about what that means: Essentially people are asking the central bank to create a special carve-out in the economy, where despite all that's happening, one class of people—savers—gets to have above-average returns on their money. The whiners are demanding that despite the pathetic returns to be held elsewhere in the world, their savings account should be a place of plump yields. How on earth is this fair?

While we're certain that pension funds with big mandates do find it difficult to hit their goals in this environment, it's not because of Bernanke or ZIRP, it's because the rate of growth (and therefore expected stock market returns) is so lousy. THAT's the problem. If anything, pension funds should be blasting the forces of austerity, who are driving government spending lower, and causing GDP to be so mediocre.

But let's say for a second that Bernanke did suddenly start hiking rates. Would that accomplish anything? First of all, we'd start exacerbating one of the biggest problems in the economy there is: We'd be incentivizing people to save more at a time when the biggest problem is a lack of investment and hiring. And we're not even convinced that rates would rise. Think about it: An interest rate hike would discourage people from taking risk, meaning they'd dump their stocks ... and buy Treasuries, driving the curve even lower!

And while we sympathize with people not getting returns on their money, the fact of the matter is that the big problem we have right now is that people have too much debt, not an abundance of cash that's just sitting there not returning anything.

The bottom line is this: Yes, it sucks that pensioners and garden-variety savers aren't getting returns, but it also sucks for everyone in the U.S. right now, because the economic outlook seems to be so mediocre. Welcome to the club!

Until growth and inflation return to anything that looks robust, savers will have to be stuck with the same garbage returns boat the rest of us are in.

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