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I LEARNED IN COLLEGE economics classes that there’s a time value to money. A dollar today is worth more than the promise of a dollar a year from now. Result? If you’re going to promise me a future dollar, you have to make it worth my while by paying me some interest.
This was certainly true in 1980, when I graduated with an economics and management major. Admittedly, inflation was even higher back then. Still, one-year Treasury bills were paying almost 11% and the newly popular money market mutual funds were yielding more than 12%. Today, after rates hovering near zero for years, one-year Treasury bills are yielding over 4% for the first time since 2007, while my money market fund is paying more than 2%.
The years of low interest rates have been perpetuated by one financial crisis after another: the dot-com bust, the Great Recession and the COVID-19 economic shutdown. Just as one crisis abated and rates started to rise, another crisis came along. One consequence is we have an entire generation who think that near zero interest rates are “normal.”
There are also powerful economic players who relish this situation. Stock investors see share prices propelled higher as folks seek an alternative to the tiny return on their cash. Businesses can borrow to make capital investments at a low cost. Real estate investors and developers can also borrow cheaply to launch their projects. Perhaps most significant, governments can run larger deficits because their borrowing costs are low.
Who loses? One answer is responsible individual savers. This was true of my mother. She had diligently saved all her life, shopping carefully and preparing for retirement. When she retired, she had no debt of any kind, while keeping a lot of cash in certificates of deposit and money market funds. As I watched interest rates slide to near zero during her retirement, it occurred to me that she was funding other people’s extravagance.
She died in 2019. I’ve now taken her place as a retiree who saved my pennies and who hasn’t had any debt for the past 20 years. Interest rates are now inching up and the financial press says the markets are speculating that the Federal Reserve will raise rates for a while and then “pivot” to bring them back down once inflation is under control. Recently, Barron’s had a columnist suggest an alternative: that rates will go up sufficiently to control inflation—and then plateau at that higher level.
What a novel concept: Savers would once again be rewarded for their prudent habits. Fed Chair Jerome Powell hasn’t called to get my opinion. But I’ve got to think that a positive yield on cash—one that matches or exceeds the inflation rate—would provide a proper and healthy incentive to think twice about borrowing unnecessarily and, instead, to save prudently for the future. Rather than hoping for a return to low rates, maybe we should hope for a plateau at higher levels that encourages sensible financial behavior.
On the other hand real loan rates have apparently been falling for 700 years, and so have nominal bond yields
https://www.visualcapitalist.com/700-year-decline-of-interest-rates/
I have no problem with rates stablising at 5% as long as we acknowledge house prices are going to have to fall by 25%
It’s the value of the dollar that counts and it has been going down since 1913, well really 1800, but heck who’s counting! Since 1800, the dollar now can only buy 4.254% of what it could buy back then. It has depreciated 96% in value. And, it has steadily declined in value since 1933.
Do you feel rich now?
https://www.officialdata.org/us/inflation/1800?amount=1
Nobody had indoor plumbing in 1800, so I feel extremely rich now.
Savers have indeed been punished and excessive risk taking has continued to be encouraged and rewarded. This is in very large part due to Federal Reserve policy (ZIRP, QE, etc) and government bailouts after the 2008/09 financial crisis.
“Rather than hoping for a return to low rates, maybe we should hope for a plateau at higher levels that encourages sensible financial behavior.”
I couldn’t agree more.
Plateauing interest rates at higher level makes sense, though not sure the Federal government would be too wild about this idea. If interest rates really do stay elevated, interest costs on federal debt could quickly get out of hand.
Good point, Arnold. The government would not like it as they would be forced to act responsibly. No more schemes to lower inflation with still more deficit spending. Maybe a lean, efficient and honest government should be the goal.
“I’ve got to think that a positive yield on cash—one that matches or exceeds the inflation rate—would provide a proper and healthy incentive to think twice about borrowing unnecessarily and, instead, to save prudently for the future.”
True especially for folks who have been afraid to invest in the stock market because of the unknown — they feel they don’t know enough to invest wisely, or the uncertainty makes it feel too much like gambling. Banks are familiar, and the positive yield described would feel safe, at least for short-term goals.