are low interest rates essentially just a tax on the wealthy

FRED Graph
This chart is from the St. Louis Federal Reserve and shows Personal Income Receipts (the interest you earn from corporate bonds, government bonds, CDs and savings accounts) as compared to Total Consumer Credit.

The logic behind the Federal Reserve lowering interest rates is two parts 1) it becomes cheaper to borrow money so people who previously couldn’t purchase items that typically require financing such as cars, machinery or homes now could buy them because their payments will be lower. 2) Low interest rates also discourage banks and individuals to keep their money in savings/checking accounts because they don’t earn enough interest as compared to other investments such as stocks, bonds, loans, etc.

The problem I’ve noticed is the large and seemingly growing difference between the amount of interest savers are earning and the amount of interest borrowers are paying. According to Bankrate.com’s October 18th survey of interest rates, the average interest rate for a credit card is 14.56% and the average interest rate for a 1 Year CD is 0.30%.

Translated into dollars this means as August 2012 savers are earning $435.6 billion less annually than they were in August 2008! That is a billion with a B and annually with an A!

And who are these savers? I’ve heard them being called wealthy, frugal, the 1%, financial responsible, etc. Whatever their names, they seem to me to be the ones bearing the brunt of low interest rates.

What are you doing to offset any decline in interest you used to receive?

How the earning, saving and spending of wealth affects various parts of our lives.

Comments

  1. When I have some money earning ANY interest, I’ll let you know :) . All joking aside, great job on the blog and interesting take on the low interest rates. Let me ask you; where’s the incentive to save besides from yourself? If the average interest rate for a 1 Year CD is 0.30%, it’s almost as if the banks don’t want you to save any money! Growing up as a kid, (I’m 47 years old now) we always thought of banks as a place to deposit and save money. I don’t even think Banks think they’re a place for you to deposit and save money!

    • While I was pretty excited to refinance my house at 2.75%, it’s pretty tough when the best savings account I can find is less than 1%, especially given a current inflation rate of 2%. As my nest egg grows and my personal liabilities decrease, the benefits of lower interest rates are definitely being outweighed by their costs.

Trackbacks

  1. [...] Are low interest rates essentially just a tax on the wealthy by Wealth Effect Blogger at Your Wealth Effect [...]

  2. [...] Effect Blogger @ http://www.YourWealthEffect.com writes Are Low Interest Rates Essentially Just a Tax on the Wealthy? – Comparing how low interest rates have impacted both savers and [...]

  3. [...] Effect Blogger @ http://www.YourWealthEffect.com writes Are Low Interest Rates Essentially Just a Tax on the Wealthy? – Comparing how low interest rates have impacted both savers and [...]

  4. [...] Effect Blogger @ http://www.YourWealthEffect.com writes Are Low Interest Rates Essentially Just a Tax on the Wealthy – Comparing how low interest rates have impacted both savers and [...]

  5. [...] Effect Blogger @ http://www.YourWealthEffect.com writes Are Low Interest Rates Essentially Just a Tax on the Wealthy? – Comparing how low interest rates have impacted both savers and [...]

Speak Your Mind

*

* Copy This Password *

* Type Or Paste Password Here *