Savers Pummeled Under ZIRP's Rain

[don]

Heard the singers playin', how we cheered for more.
The crowd had rushed together tryin' to keep warm.
Still the rain kept pourin', fallin' on my ears
And I wonder, still I wonder who'll stop the rain.

As a reprisal, let’s revisit the financial impact from Zero Interest Rate Policy (ZIRP) as it applies to responsible savers. From the previous post, we just need to make a couple adjustments. To assist in charting and calculations, the following data sets provided ample information:

1. Total Savings – FRED
2. Average interest rates on savings deposits – FRED (M2OWN)
3. Interest Income – IRS tax stats, NIPA tables
4. Effective Federal Funds Rate (FRED)

The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them. Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.






Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally. However, after 2001, the interest earned stopped increasing. The green line shows the effective interest paid on interest bearing accounts.

Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.





As savings increased when Fed Funds rate remained around 5%, interest income continued to rise. However, post 2001, the interest income received stopped growing at the same rate. With the exception of 2005 to 2008 when rates went back to “normal” in the 5% range – the interest income earned has remained stable at just under 1 trillion (Ben Bernanke is so smart).

Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?” Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%. With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income. Voila, a calculation is borne:





By calculating the estimated interest income from historical ratios (orange shaded area), we can see that as of July 2013, approximate interest income would be just over 3 trillion (1/5^th of GDP) on savings of 6.8 trillion (using the left scale). Whereas the actual interest income reported by NIPA remained at 1.1 Trillion, the difference in interest received and lost interest equals roughly 2 Trillion. Remember, this is interest income to SAVERS forever lost since 2001. By aggregating the entire shaded orange area, SAVERS have missed out on a whopping 10.8 Trillion in earned interest usage. The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.


Hey, at least it's going to a good cause - the 1/10 of 1%. Notice how the 10.8 trillion lost approaches what the TBTFs have received in bail-outs. Coincidence? At least it was put to good use - fattening obscene bonuses, speculating on commodities, buying up smaller competitor banks. All good, right? And they're still insolvent.

[vinoveri]

Re: Savers Pummeled Under ZIRP's Rain

Thanks Don. The ZIRP policy is so unfair to savers and has constituted a massive wealth transfer over the past 5 years - all that interest that should have gone to savers, goes to gov (reduced borrowing costs) and banks (in conjunction with QE and interests on reserves). What is surprising to me is that this seems to be ignored by the population at large - as these articles with quantitative analysis seem to be few and far between. Theft pure and simple and no outrage from hardly any.

[Milton Kuo]

Re: Savers Pummeled Under ZIRP's Rain

What is surprising to me is that this seems to be ignored by the population at large - as these articles with quantitative analysis seem to be few and far between. Theft pure and simple and no outrage from hardly any.

The majority of the population has no savings worth mentioning and thus feels no pain from ZIRP. For those that still have jobs and have good credit, ZIRP is almost something of a godsend as it lowers the cost of debt service and increases purchasing power.

The only people who really feel the discomfort or pain from ZIRP are the middle class who have prudently saved.

[don]

Re: Savers Pummeled Under ZIRP's Rain

The majority of the population has no savings worth mentioning and thus feels no pain from ZIRP. For those that still have jobs and have good credit, ZIRP is almost something of a godsend as it lowers the cost of debt service and increases purchasing power.

The only people who really feel the discomfort or pain from ZIRP are the middle class who have prudently saved.

Pensions are also pummeled by ZIRP.

[GRG55]

Re: Savers Pummeled Under ZIRP's Rain

Pensions are also pummeled by ZIRP.

Pensions and pensioners on fixed incomes were also pummeled during the high interest rate period of the inflationary 1970s.

From what I can see, during most of my lifetime our governments have ALWAYS favoured debtors over creditors. And I suspect that one reason is because there are many, many more of the former on the voter rolls than the latter...including all those indebted home "owners" living in houses they don't actually own...

[vinoveri]

Re: Savers Pummeled Under ZIRP's Rain

The majority of the population has no savings worth mentioning and thus feels no pain from ZIRP. For those that still have jobs and have good credit, ZIRP is almost something of a godsend as it lowers the cost of debt service and increases purchasing power.

The only people who really feel the discomfort or pain from ZIRP are the middle class who have prudently saved.

Agree with this last point ... which is the main point relating to the injustice perpetrated by ZIRP. I don't understand the notion that lower interest rates increase purchasing power - unless you're referring to housing and that it prevents deflation (can help serve to maintain inflated housing prices for instance)?

[mmr]

Re: Savers Pummeled Under ZIRP's Rain

At least since 2008, higher interest rates would likely have contributed to higher defaults as well (higher interest costs on loans originated during the bubble would have pushed quite a few additional borrowers into default).

The underlying problem was the official policy of blowing a massive asset price bubble and creating "low risk" debt backed by the inflated assets (with middlemen profiting throughout the process). Investors then believed that they were "saving" when they were really just purchasing bad debt backed by the inflated assets. Losses were inevitable, either through default, lower earnings on the assets (i.e. interest rates), or inflation to devalue the debt.

QE may just delay the loss recognition - rather than taking principal losses on the bad assets through defaults, investors will take the losses over time through lower interest income than they had assumed.

[Milton Kuo]

Re: Savers Pummeled Under ZIRP's Rain

Pensions are also pummeled by ZIRP.

Pensions don't vote and their beneficiaries have not really felt any pain yet.

But certainly, unless contributions to pensions are increased to account for lower returns, ZIRP greatly increases the risks that pensions go bust. If and when pensions go bust, then we'll have another small percentage of the population who may complain.

I would say the only pension that cannot be allowed to go bust is Social Security. But even if Social Security goes bust, what are the beneficiaries going to do? Threaten to hit people with their canes and walkers?

[Milton Kuo]

Re: Savers Pummeled Under ZIRP's Rain

Agree with this last point ... which is the main point relating to the injustice perpetrated by ZIRP. I don't understand the notion that lower interest rates increase purchasing power - unless you're referring to housing and that it prevents deflation (can help serve to maintain inflated housing prices for instance)?

ZIRP allows debtors to service a greater amount of debt. Thus, they can buy more goods and services that they probably don't need. ZIRP by itself does not depreciate a currency.

[thriftyandboringinohio]

Re: Savers Pummeled Under ZIRP's Rain

ZIRP allows debtors to service a greater amount of debt. Thus, they can buy more goods and services that they probably don't need. ZIRP by itself does not depreciate a currency.

Milton -
Isn't there a line of reasoning like this

1. ZIRP increases lending
2. lending loans new credit money into existence
3. therefor ZIRP creates new money and depreciation of the currency

[GRG55]

Re: Savers Pummeled Under ZIRP's Rain

Milton -
Isn't there a line of reasoning like this

1. ZIRP increases lending
2. lending loans new credit money into existence
3. therefor ZIRP creates new money and depreciation of the currency

I thought ZIRP's primary purpose was to lower the cost of servicing the massive amount of debt already "out there" and thereby avoid a potential cascading decline in the prices of the assets collateralizing that debt.

To the degree that ZIRP depreciates currency that would have to be through relative official interest rate differentials between jurisdictions, would it not?

[jk]

Re: Savers Pummeled Under ZIRP's Rain

it seems to me that the primary beneficiaries of zirp are the primary bond dealers, who get to finance their inventories at zir and collect the spread. the banks also get to borrow at zir to finance their trading and speculative activities. although it may appear that gov't has favored borrowers, the only borrowers really benefitting are the big bank borrowers who borrow directly from the fed. and aside from those borrowers, in the last decade or so it has always been the bond holders, i.e. the lenders not the borrowers, whose interests have been protected. unsurprisingly, those lenders turn out to be the same entities which are the borrowers from the fed.

[gwynedd1]

Re: Savers Pummeled Under ZIRP's Rain

Pensions are also pummeled by ZIRP.

Hugely. State budgets that promised pensions and backed them with fixed income are a mess.

[GRG55]

Re: Savers Pummeled Under ZIRP's Rain

Hugely. State budgets that promised pensions and backed them with fixed income are a mess.

If they stuck to fixed income they should have done spectacularly well. First, the risk-adjusted gains on high quality bonds in a secular falling interest rate market have outperformed anything else out there (why do you think Bill Gross become such a celebrity). Second, pension funds have such long investment time horizons that they are able to hold a bond to maturity and get the full original face value even if interest rates rise and the bond value falls.

I think if you look closer you'll see that the main reason so many pension funds are in trouble is because they did NOT stick to their knitting and ended up getting suckered into "diversifying" their portfolios into high-fee, underperforming private equity, hedge funds, low quality credit and various forms of credit derivatives by the wizards on Wall Street.

Most pension fund managers get highly compensated without any tie to the performance of the fund itself and suffer no downside, other than possibly reputation, when they lose a bundle of what they see as OPM. They deal with bankers, investment managers and other financial industry professionals every day and see themselves as part of that club. But when they gamble and fail they don't get the bailouts that the TBTF banks get for similar behaviour.

[jk]

Re: Savers Pummeled Under ZIRP's Rain

a lot of pensions- both governmental and corporate- got stuffed with iou's from the entities which were supposed to be funding them. they also all clung to an assumed rate of return of 8%, which contributed to further underfunding.