Why Savers Should Put Up Or Shut Up

There is an idea popular in certain circles that low interest rate policies are stealing from savers. When the economy went into freefall in 2008, central bank interest rates were lowered to the zero bound. And rates for savers and investors in both government and corporate debt have certainly fallen since then:

Critics of low interest rate policies actually have the wrong end of the stick. It is not central banks that set interest rates for the market. Central banks set lending rates into the banking system. The interest rates in the market remain a function of the demand for savings. Demand for savings (shown as a percentage of GDP, to show the real level of demand for savings relative to economic activity) has absolutely soared since 2008:

How can savers expect a positive real return on their savings when the demand for savings has gone so high even in the context of lower interest rates in general? Central bank policy is designed to discourage saving and encourage investment and consumption. That’s the point — but even with interest rates close to zero, the growth in savings has not been stanched. All else being equal, had central banks not cut rates, demand for savings would be even higher. And with higher demand for savings, that would have just depressed interest rates to the levels we see now irrespective of central bank policy.

The great irony here, of course, is that there are still high rates of return for those with capital if they look for it. Payday loans companies continue to charge companies interest rates in the thousands of percent lending to people with poor credit histories or who may have lost their jobs in the context of the bad economy. Access to capital is not universal or even widespread. Real incomes are flat on where they were five years ago, which has led many individuals and families into borrowing to meet their bills. The fact that the financial industry is lending to some at huge interest rates and denying credit to many businesses while simultaneously paying smaller interest rates to savers is not symptomatic of theft from savers — it’s symptomatic of financial industry dysfunction, and a failed transmission mechanism.

For savers, positive real return on capital is not a right, and it should not be an expectation especially in a depressed economy. If businesses aren’t mostly expanding and taking on new workers, where is the positive real return going to come from? If wages aren’t rising, where is the positive real return going to come from? If the economy isn’t growing where is the positive real return going to come from? The answer is that with a pie that isn’t growing, those who get a bigger slice will be dispossessing others. Simply, high real rates of interest in the context of a depressed economy are rents, and demanding them — and especially demanding that the government enforce their existence — is rent seeking. This is ultimately why a low-growth environment is naturally and in the long run unavoidably a low interest rate environment. It is not central bank theft. It is the inevitable outcome of a depressed economy.

Savers looking for a larger rate of return should know damn well what to do — take their money out of low interest savings accounts and out of the failed financial intermediation industry and invest it into quality economic projects that create jobs and growth. This could involve buying the stock or debt of large companies that wish to expand, or it could involve starting your own business, or investing in a startup or a mixture of these things. The easiest way to return to growth — and thus higher interest rates, and higher returns for things like pension funds — is for today’s savers complaining about low interest rates to turn into tomorrow’s investors seeking out and pouring money into quality projects that increase incomes, create jobs and create products that people desire and want to use. Sitting on cash in a bank account in the dysfunctional financial system and whining about a low return is incoherent nonsense.