A Lost Decade for Savers

Photograph by Jason Dewey/Getty Images

The 1990s were a lost decade for Japan. The 2000s delivered a lost decade to U.S. investors. Now, five years into the onset of the financial crisis, with stock and bond markets booming, housing resurgent, and even Detroit redeemed, it’s savers who find themselves in a lost decade.

This runs counter to the lessons of the credit bubble. We were urged to spend less, save more, tell fewer lies on our mortgage applications. Problem is, the jumbo monetary response to that era’s excesses—0 percent interest rates, followed by trillions in quantitative easing and a vow to keep rates this low until at least 2015—is bent on getting people and companies spending and investing (and out of cash) at pretty much any cost.

Five years ago, the average money-market fund yielded 0.93 percent, while a one- and five-year certificate of deposit yielded 3.75 percent and 4 percent, respectively, according to Bankrate. So $10,000 parked in a CD would earn approximately $400 a year. After taxes and inflation, that might leave just enough for date night at Ruth’s Chris.

Today, with the Fed having done everything in its power (and then some) to jackhammer down the Treasury curve, the average money-market fund yields 0.12 percent, which is bank boilerplate for nothing. A one-year CD offers 0.30 percent, and a 5-year certificate pays 1 percent. Your aforementioned 10 grand—no doubt dearer to you in this era of chronically high unemployment and uncertainty about retirement—huffs and puffs to produce a mere $100 in annual income. Back out taxes and inflation, and you’re losing money in a bank account—however FDIC-insured it may be.

“Policymakers had to pick between saving the system and punishing the savers, or letting the market fail and punishing everybody,” says Michael Livian, a Manhattan money manager who has written (PDF) on what’s increasingly being called the financial repression exacted by negative real interest rates. “They went for the first one.”

Policymakers call this recapitalizing the banking system. That’s so much euphemism for transferring wealth from depositors to taxpayer-rescued banks (and, at least theoretically, their borrowers). The banks are not exactly being bashful about the great deal they’re enjoying at the expense of cheap or free customer deposits. Consider: Only 39 percent of non-interest checking accounts are now free to all customers, compared with 76 percent in 2009, according to Bankrate. It says the average monthly service fee on checking accounts is at a record $5.48, up 25 percent in a year. It should thus come as little surprise that, subprime lessons be damned, the nation’s personal saving rate is declining (PDF). In desirable, heal-thyself-consumer fashion, saving spiked at the onset of the Great Recession after hitting a generational low at the peak of the housing boom.

Lest you feel the urge to cry bloody foul, first realize that there’s a global epidemic of actually negative-yielding government bonds. And the Fed only exerts so much control over the U.S. yield curve; chronically low rates have been enabled in large part by the seemingly insatiable appetite foreign institutions have shown for Treasuries, especially during Europe’s econo-purgatory. But when the Federal Reserve comes out and commits to buying hundreds of billions in mortgage-backed securities, it is explicitly prioritizing the interests of borrowers—borrowers who keep seeing record-low mortgage rates.

Where does this leave an elderly couple that was banking on income from their ladder of CDs? Or a soon-to-retire baby boomer who pulled money out of stocks ahead of and after the crash on the assumption that some modicum of bank yield would help tide them over to age 65?

And this is hardly just about widows, orphans, and retirees. What of the owner of a business or home who was planning to sell and draw income from the proceeds of the cash? In the desperate search for yield, these and other forgotten cash constituencies have been forced deeper into the yield curve, where obliging corporations have been issuing 30-year debt on record-low terms.

“I guess I’m old fashioned, but I continue to find it astonishing that the Bernanke Federal Reserve believes it is within its mandate to incite risk-taking from our savers,” says Doug Noland of Federated Investors, one of the authors behind the Credit Bubble Bulletin that for years warned of the hazards of an over-indebted economy. He fears that just as risk was mispriced when too many Americans bought homes and consumed past their means, the Fed-induced hunt for yield is pushing people to bid up all manner of debt instruments past their true value. Stay on the sidelines with your savings, and you lose.

James Grant of Grant’s Interest Rate Observer puts this all in a critical political context. In the latest fiscal year, the interest cost on the government’s debt was clocked at $225 billion. While that sum was only a hair less than the interest cost of 2006, the debt was then 58 percent smaller than today’s. Here’s the rub: In 2006, the government’s average interest rate on its debt was 4.8 percent. Today it’s at 2.1 percent.

At that current low rate, Grant calculates that Uncle Sam’s net interest expense represents 9 percent of its total receipts. But an interest rate of 4 percent today would mean fessing up to the reality that interest outlays represent 18 percent of what’s taken in. Take that interest rate up a notch to 5 percent (close to what it averaged last decade), and you’re talking net interest cost on the debt suddenly representing 22 percent of total net receipts. Plug in 6.7 percent, the prevailing net interest rate of the 1990s, and interest costs on the debt would now exceed defense spending. That proposition just wouldn’t fly anywhere within a 1,000-mile radius of Washington.

“Ultra low rates,” writes Grant, “flatter the nation’s credit profile.”

And flatten the nation’s savers.

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