Monday, April 01, 2013

Do not make a vice out of virtue

Nice article by James Surowiecki on the "war-on-savers":
But, to his detractors, Bernanke is guilty of waging a “war on savers”—fleecing people, especially retirees, of hundreds of billions of dollars that they could have earned in interest. Among many conservatives, this notion has become mainstream. Last year, both Mitt Romney and Paul Ryan regularly attacked the Fed for keeping interest rates too low, and, when Bernanke testified before Congress in February, Senator Bob Corker, of Tennessee, upbraided him for “throwing seniors under the bus.”
Certainly, it’s not the easiest time to live off interest income. The average rate on a savings account is less than 0.25 per cent. Long-term certificates of deposit offer rates well below inflation, and even a ten-year government bond yields less than two per cent. No wonder people with lots of savings want the Fed to start tightening—to stop buying bonds, and to raise interest rates. But most Americans depend on wages and salaries for their livelihood, not on interest income, and higher interest rates would hurt the job market, which is still weak, with unemployment near eight per cent and wages barely rising. Also, most Americans have more debt than savings, which means that they benefit directly from lower interest rates
Lots of assumptions, let's see what's actually true.

First, it is true (but an oft neglected fact) that interest rates have a fiscal knock-on effect through the interest rate channel. Low rates mean low interest income, which is a fiscal contractor just as higher taxes of lower government spending is.

Second, to the extent that low interest rates are fiscally contractionary, it is not at all clear that higher rates would hurt the economy. Americans do depend on wages, but wages depend on sales, and sales depend on people having money in their pocket. Higher rates put more money in peoples' pockets.

Lastly, it is not true that most Americans have more debt than savings. On a net basis, the non-Govt sector is a net lender, not a net borrower, and we know this because the Govt sector has an outstanding multi-trillion dollar debt -- money which it has spent but not collected. That money must be somewhere. And within the non-Govt sector, horizontal lending must, by accounting, net out to zero.

I think it is fair to consider savers to be collateral damage, since they harm they are suffering is incidental to the intentions of Government officials and regulators alike. Ultimately, only higher deficits, and more fiscal transfer, will sate their savings desire and begin to generate aggregate demand again.


Blogger Greg said...

Nice post but I do think you might get this part not quite right;

"Lastly, it is not true that most Americans have more debt than savings. On a net basis, the non-Govt sector is a net lender, not a net borrower, and we know this because the Govt sector has an outstanding multi-trillion dollar debt"

I think most Americans do have a net indebted position but just like our income distribution, the "net debt" distribution mirrors it. Those in the 1% carry very little debt relative to their incomes and are the major "lenders" to the govt.

I would guess that well over 65% of American workers owe more than they have saved, which would be a fine thing in a normal economy where your prospects for continued income earning were more certain.

2:36 AM  
Blogger paul meli said...

"Higher rates put more money in people's pockets"

Interest accrues out of thin air but is unfunded. Credit produces assets and liabilities at a 1-to-1 ratio so cannot fund the liabilities accrued interest creates.

Higher rates require net government spending to satisfy those liabilities. Fiscal again. Everything distills down to fiscal.

4:52 AM  
Blogger NeilW said...

The assumption there being that interest is saved, not spent.

In which case it is the same as all other saving out of income - interest or non-interest.

There's nothing special about saving interest earned.

6:45 AM  
Blogger paul meli said...

To clarify my previous comment...

Liabilities accrue in the system at (1+i)^n but it is impossible for incomes to increase at the same rate unless the system is frictionless. It should be intuitively obvious that incomes cannot increase faster than credit expansion. We have two choices...break-even or suffer a loss, and break-even is impossible in real-world systems i.e. perpetual-motion.

The system (domestic economy) cannot be frictionless because of savings desires. Even in the absence of savings desires there would still be saving as a result of natural bottlenecks resulting in the pooling of funds throughout the economy. In effect...savings.

Therefore, liabilities accrue at a faster rate than incomes (in the aggregate) leading to an eventual (inevitable) seizing of the banking system.

Higher interest rates speed up the process.

It is a simple experiment to graph the growth in household debt against growth in NFA...on a log scale it is clear they grow at the same rate in general and deviations tend to coincide with crisis'.

Fiscal provides the funds that alleviate the bottlenecks (funds saving). TINA.

6:58 AM  
Blogger paul meli said...

"There's nothing special about saving interest earned"

I've never said that saving of interest earned was special...only that the credit circuit can't fund it's own saving.

Interest accrual causes liabilities to expand faster. I explained the process in my previous comment.

Saving is's the friction in the system that demands fiscal input.

7:10 AM  
Blogger Steve Roth said...

"it is not true that most Americans have more debt than savings. On a net basis, the non-Govt sector is a net lender "

Problem here. "most Americans" suggests the household sector. That is wildly different from the non-Govt sector, which includes the (domestic and foreign) business non-financial sector and financial sector.

Might be useful to look at the nonfinancial domestic private sector -- basically, U.S. households and nonfinancial firms. What are their assets and liabilities vis-a-vis all the other sectors combined?

10:09 AM  

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