Slow Growth, Not Low Interest Rates, Punishes Savers

There’s an idea gaining advocates out there—including, it seems, the president of the St. Louis Fed—that a policy of ultra-low interest rates “punishes” savers. This is either totally mistaken or else a deeply misleading way to put the point.

Let’s start with misleading. If the outlook for economic growth is very poor, then interest rates are overwhelmingly likely to be low. What’s more, if the outlook for economic growth is very poor then the outlook for savers is very bad. What “saving” means is that you buy up some assets that you plan to sell later. Maybe that’s a patch of land with a house on it. Maybe it’s some shares in Pacific Gas and Electric. Maybe it’s a bond issued by the city of Chicago or a claim on future deliveries of crude oil. If you’re good at following instructions and own a diversified portfolio, you own a whole great big bunch of stuff. If the economy performs well over the next 10 years, then your stuff, in general, will have a higher resale value than if the economy performs poorly. That’s what holding a diversified portfolio is all about. Rather than your financial future being pegged to the wisdom of your particular gambles, it’s pegged to the overall performance of the economy. If the economy sucks and rates are super-low, you’re screwed.

But consider it totally mistaken. You bought up a diverse pool of stuff in early 2007 and your stuff isn’t worth nearly as much as you’d hoped at the time because the economy performed much worse than you expected. And now James Bullard rides into town and says, “Let’s help savers by raising interest rates!” So up the rates go. Construction employment stops rising. Retail sales fall as debt service as a share of disposable income rises. Car sales fall. People start getting laid off. The jobless people can’t pay their mortgages, so defaults and foreclosures rise. Banks are failing, and FDIC-forced mergers lead to more layoffs. Modestly successful small businesses have a hard time getting loans to expand. Retail vacancies rise and commerce real estate defaults spike up. How does this help savers?

Now maybe you have some story about how tight money at a time of massive excess capacity will somehow boost economic growth. It sounds like an interesting, albeit wrong, story. But a desire to help savers makes no sense as an independent consideration. It’s just not possible for “savers” to detatch their fate from the fate of the economy as a whole.