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Pity the Savers, Not

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Thursday, 13 September 2012 14:34

As the Fed has attempted to push interest rates down with the purpose of boosting the economy, there have been numerous stories mourning the situation of savers who see little return on their money. The NYT gave us such a piece on Tuesday.

While those who have all their savings in short-term assets like savings accounts and money market funds are seeing low returns, the low return story does not apply to all savers. Of course those who have money in the stock market have done quite well, with prices nearly double their lows from 2009.

However, even people who do not have money in the stock market would have done well if they had put money in long-term bonds. The graph below shows the price of a 30-year bond that comes due in 2037, assuming that it was bought in 2007 with a 5 percent yield (roughly the interest rate at the time).

30-yr-bond-09-2012

 Source: Smart Money Bond Calculator.

The bond that our troubled saver purchased in 2007 for $10,000 would be worth a bit more than $14,000 in today's low interest rate environment. That isn't exactly the sort of situation that would normally call for violin music.

As a practical matter, there are people who are losing in this story, but realistically there are not a lot of people who both have substantial savings (enough that the interest makes up a big share of their income) and who kept it exclusively in short-term assets.

There are no policies to increase growth that leave no one harmed. (If you think you know of one, then you haven't thought through the implications of the policy carefully enough.) The winners from a policy to boost growth through lower interest rates vastly outnumber the losers. The biggest grounds for complaint is that the Fed did not go far enough.  

Comments (17)Add Comment
We are ALL losers because of this nonsense!
written by bailey, September 13, 2012 4:28
1. Pushing on a string, look at what it's accomplished so far. QE1 -$1.7Trillion, QE2 -$.7 Trillion, result (aside from enriching corrupt bankers was creating 2 million jobs at a cost of $1 million each.
2. Why has the stock market gone up so much in 3 years, because the economy is healthier or because the corrupt Banks the FED's throwingt free money at prefer to leverage it on stocks than invest in communities?
3. What's the advice for retired people who saved for a lifetime to accumulate $500,000., eat less or gamble more?
Economists calling for more of these "kick the can" resolutions, without also demanding responsible commitments from Banks should be ashamed. It's disgraceful, ansolutely disgraceful.
...
written by Mike, September 13, 2012 4:53
Suppose that 1) you are in a country with a disproportionate percentage of the population of the reaching retirement attempting to save, 2) that those individuals have recently been burned by real estate and equity bubbles and intend to save exclusively through short-term investments, 3) In the same country, younger individuals looking to borrow are effectively locked out of (non-student loan) credit markets by increased lending standards and decreased income levels.

It would seem to me that in this situation, lower interest rates would (A) force the older individuals to save in short term securities at a greater rate, thus driving down short term interest rates further and (B) have negligible benefit for those looking to borrow as their access to credit is limited by other factors.

I think in previous recessions, the monetary policy lever could work effectively to spur growth but in this environment, it seems like more difficult proposition.

So if you aren't going to get the bump from consumer borrowing, it seems to me that this mostly boils down to a race between major developed economies to devalue their currency, while savers world-wide pick up the tab on their bloated government's artificially low borrowing rates.

I think the NYT article nailed it.
About one percent have $500 k in financial assets
written by Dean, September 13, 2012 5:04
Bailey,

when you say people who have saved $500k, that would be around one percent of retirees/near retirees. Of this group, the portion would have all their money in short term assets would probably be no more than 10 percent. This is a pretty small and quite well to do group. I'm afraid I don't have any tears for them.
...
written by AlanInAZ, September 13, 2012 5:53
" What's the advice for retired people who saved for a lifetime to accumulate $500,000., eat less or gamble more?"

As a retired person who was a saver and am now the owner of a balanced portfolio of investments I can tell you that I'm eating very well. I have been investing my savings from wages for decades and I don't consider that gambling. Low interest rates and more active monetary policy are necessary now for economic recovery and will provide more security for my savings, not less. The household with very modest savings will likely need to work and a vibrant economy is more important to them than a few points of interest on a savings account.
...
written by AlanInAZ, September 13, 2012 6:37
Mike,

Among other things I think the Fed is trying to provide some forward guidance that rates will remain low with possibly higher future inflation and therefore promote investment now rather than later. Also, near retirees who have only started to save will not gain much with a few points higher interest on their savings. They will need to work.
...
written by bailey, September 14, 2012 12:06
Mea culpa. I wasn't looking for sympathy, I was screaming at the absurdity of the "reasoning of the Obama Administration and the FED. But, I guess I'm wrong. Why not take the $500,000 out of the bank (money by definition of "retirement" can never be replaced) and gamble in a stock market the Banks & Brokerages pumped up using the FED's printing press and taxpayer funds and credit? How else can the Banks and Brokerages cash out if I don't jump in now?
Disregard how the markets' reached these absurd levels, disregard the FED failongs of QE1 & QE2, disregard the 2nd term cost cutting and trade plans of Obama, disregard our broken Congress. After all, what's to lose if $500,000 has already been devalued to only $5,000/year?
But, wait a second, isn't this the very same "market will pass you by" argument our Gov't foist upon us in 2005, the one that finally convinced those very last hold-outs to buy into America's future?
NEVER in my lifetime have I seen a President repeatedly and consistently exhibit such disdain for our middle-class.
...
written by winstongator, September 14, 2012 4:47
Bernanke commented on savers: On the second concern, my colleagues and I are very much aware that holders of interest bearing assets, such as certificates of deposit, are receiving very low returns. But low interest rates also support the value of many other assets that Americans own, such as homes and businesses large and small. Indeed, in general, healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the
income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.


An improved economy will help everyone, as likewise, a depressed economy hurts everyone.
...
written by xst, September 14, 2012 7:43
"As a practical matter, there are people who are losing in this story, but realistically there are not a lot of people who both have substantial savings (enough that the interest makes up a big share of their income) and who kept it exclusively in short-term assets."

Do you have any statistics on this? I know a lot of people who have all their substantial savings in short-term assets. My mother for instance. Or do you mean "over 10 M" for "substantial"?

Few people would even have $100k in short term money
written by Dean, September 14, 2012 1:57
Xst,

We have done some crunching with micro data from the Fed' survey of consumer finance. I don't have time to track down numbers just now, but here's the most recent survey http://www.google.com/url?sa=t...sz001mU0yQ
You can take a look at the summary data. You have to be pretty damn high up in the distribution to even have $100k in financial assets. Most of the people who have this much have it in mutual funds and bonds. The ones who just hold this much in short-term money would have to be few and far between.
...
written by bailey, September 15, 2012 11:29
Thanks Dean, I will read it this weekend. I noticed the following this a.m. and thought it worth relaying:
"According to the Social Security Administration, 23 percent of married couples and 46 percent of single people receive 90 percent or more of their income from Social Security. Furthermore, 53 percent of married couples and 74 percent of unmarried people receive half of their income or more from the program." http://finance.yahoo.com/news/...06642.html
First, I assume the numbers include only those receiving some form os soc.sec. Second, I think it's safe to assume not many of these people invest in stcks and bonds. It can easily be argued for many of these doing so would be irresponsible. So, while it's easy for Economists to cavalierly dismiss the plight of the 1% savers isn't it important to consider how Obama's low interest rate policy affects the huge numbers of smaller savers to whom interest rates are critically important?
Obama & Bernanke have chosen to throw unfathomably large sums of money at our money-center banks & brokerages, making essentially NO demands as to what these scoundrels (& worse) do with it. I really hope this large voting block of seniors seriously consider this come Nov., to do otherwise would be to vote against their own interests.
If you don't have much money, then lower interest rates won't matter much
written by Dean, September 15, 2012 4:43
Bailey,

I'm not seeing your logic. I know very well that most seniors don't have much income. They also don't have much money.So, they have $5000 in the bank and they get 0.5 percent, instead of 3 percent. That comes to to $125 a year. I understand that may not be trivial to someone getting by on SS, but if we can get another 300k jobs out of it, sorry -- it ain't close.
I'll never agree that any policy
written by bailey, September 15, 2012 6:19
I'll never agree that any policy that throws trillions at the very same corrupt Bankers who nearly tore this country apart (with, at best, negligible strings attached) deserves a pass.
I've read you regularly since way back in the Boskin Hearing days. I'm retired largely because I acted on what we similarly agree to and there is no question your reasonings made my decisions easier. But, on this one, if you're arguing Obama's Treasury programs and the FED's QE1,2&3 are the best way to improve the economy - you've got a lot of "teaching" to do. I think the idea that the greatest problem is "the FED did not go far enough" is better argued within the context of FDR's democtratic precept that along with great power comes responsibility. Have our mega-center Bankers shown any responsibility? We have gotten minimal return on our huge deficits and money printings because those in power Gov't. AND Private Sector) now play by different rules. It's folly to suggest more of the same failed policies will return a better result.
"I really hope this large voting block of seniors seriously consider this come Nov., to do otherwise would be to vote against their own interests. "
written by AlanInAZ, September 15, 2012 8:02
Bailey,

Who do you suggest seniors vote for.
Who should ANY Democrat/Progressive voote for?
written by bailey, September 16, 2012 10:53
How long has it been since campaign rhetoric proved a significant indicator to Presidential policy? I refuse to get caught up in tribal politics - there's NOTHING in it for me.
I get no say in the selection process, so I look at how the person in office has performed, given the legislative balance and relative to what he/she campaigned on.
Mostly, I deliberate & grouse about it until I can't stand it, then I vote to oust EVERY Incumbent seeking reelection - BOTH Parties. If I find the Republican/Democratic alternative too objectionable to support, I opt for a third Party candidate, or even a write-in.
I have yet to reconcile voting for Obama in '08. All the evidence I needed was made obvious when Obama did not demand Dean Baker be included in the Fall,'08 pre-election gathering of Economomists to discuss direction.
Don't get fooled by the misdirection
written by bailey, September 16, 2012 8:07
Forget devisive rhetoric that it's ok to penalize savers for the greater good, and that it's a zero sum game. That stuff benefits too well the people who caused this mess, and worse - it skirts the real issue.
"... over the 2007?10 period ... median net worth fell 38.8 percent ...."
Here's my question, how can an Administration forward an economic policy around making the culprits whole (our money-center banks) to the further further detriment of the families that suffered the most because of the actions of those culprits?
We sent Obama to Washington with veto proof control in the Senate & the House. Obama is shameful, he is the worst Democratic President in our history and he is one of the very worst of all our Presidents.
...
written by Mike, September 17, 2012 5:49
AlanInAZ, I agree that a few basis points off a savings account would be a great trade off for vibrant economy.

However, I strongly believe that history will show that in the face of current circumstances, the today's monetary policy will have been an obstacle to the recovery. Here is why: take a quick look at interest rates over the last 3 years versus new home builds, car sales, or credit card balances. In old business cycles, interest rates where they are would have driven consumption through the roof. Sure, we have seen an uptick in refi activity, but we're talking about rates around 2.0% on a ten year mortgage. This would indicate to me that there is a fundamental rejection of debt by consumers and corporations regardless of the interest rate. If that is the case, we're not going to see that vibrant economy being driven by low interest rates.

Instead, what I think will become clear, is that this recession is fundamentally different from previous - and it is because of demographics. We have millions of baby boomers approaching / entering retirement who have to play catch up with their retirement savings. Rather than leveraging out, these boomers will save more as their expected investment returns go down with interest rates - which is the opposite of what the fed policy intends.

What is becoming abundantly clear, is that these boomers are getting pushed out of safe investments and into more speculative investments. This feels good when your investments go up, but will make the market for stocks and low grade bonds inherently riskier. Without projects to put their money (as we've seen with growing corporate balance sheets over the last 3 years), there's no good reason to believe an increase stock value is substantiated by any increase in future earnings.

So in the end, what's the real result of the policy? A jobless, stock market recovery paid for with future inflation?
...
written by AlanInAZ, September 17, 2012 7:44
Mike,

I am not a professional economist but those that are say the Bernanke move is not a game changer but will help, especially if the housing market is in a rebound phase. I do think the problem of unemployment goes beyond just a drop in demand. The structure of the work force needs to change (stronger labor and something like work sharing) and income must be more evenly distributed, however, don't hold your breath for these things to happen. So given the lack of possible remedies I support the Fed action.

Regarding near retirees, they need to invest in riskier assets if they are playing catchup. There is no other way to get high returns. The real risk they took was waiting so long to start saving.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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