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Savers Beware: The True Cost Of ZIRP.

  • Written by Syndicated Publisher 390 Comments390 Comments Comments
    October 19, 2011

    Savers beware. Bank bailouts and an “easy money” Federal Reserve policy cause financial injury to nearly everyone’s bottom line in at least three distinct ways. First, we taxpayers funded the “bailouts” through higher taxes (it’s coming). Second, your bank pays minimal interest to your savings accounts. Third, the increased dollar printing causes commodities to rise, which increases gas and food prices. Each injury requires a little more explanation than a simple statement.

    The first injury is easy — the “bailouts” took bad stuff from the balance sheets of banks and placed them in our hands. Have a look at the chart below that shows how much the Federal Reserve bought, transferred (stole?) from us — around 2 trillion (did you vote for that?):



    Not to be nebulous, here is a list of exactly what you and I now own:

    Reserve Bank credit is the sum of securities held outright, repurchase agreements, term auction credit, other loans, net portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility, net portfolio holdings of Maiden Lane LLC, net portfolio holdings of Maiden Lane II LLC, net portfolio holdings of Maiden Lane III LLC, float, central bank liquidity swaps, and other Federal Reserve assets.

    For those unfamiliar with Maiden Lane LLC stuff … well, let’s just say it might be the really good mortgage backed securities from the honest banks, or it could be junk mortgages that have defaulted. Regardless, by transferring assets from the banks to us (privatizing profits, socializing losses) –those debts will be paid. Public debt is an easy one, there is only one way to get rid of it. The government … ahem … cough, cough (that means taxpayer) will pay it off.

    Our 2nd ZIRP injury stems from the Federal Reserve belief that lowering the Federal Funds rate “costs nothing” and stimulates the economy. Most of us remember a time not that long ago when the banks actually gave you interest for your deposits. The chart below shows the total amount of savings held in depositary institutions since 1974 — around 5.8 trillion at present — with the amount of interest paid on the savings — around 1.2 trillion at present.



    Notice that the savings and interest moved in tandem until our real first “accommodative” policy out of Greenspan in response to 9/11 and the recession that followed. One can easily see the divergence in increasing savings and decreasing interest payments from both the Greenspan and Bernanke actions.

    The following chart seems busy, but is easily explained. The Effective Federal Funds Rate data from the St. Louis Fed shows the steady decline from around 10% post 1987 crash to near zero today. As a cost of money, zero isn’t too bad. The problem is that while our savings increased, once we crossed into the “near zero” or below 3%, the interest that banks paid decreased.



    Clearly, someone benefits from low interest rates.

    So what would happen if we removed the Federal Reserve Policy decisions and simply used a floating rate? Perhaps we could calculate how much the Fed and Banks have disgorged savers.

    The chart below illustrates the historical average of the Effective Federal Funds rate since 1964. In 1984, the rate was around 8% (remember — 20 years averaged to that point) and moved down to a present rate just under 6% (nearly 50 years averaged).



    The result: Using the same long term historical interest to savings ratio from 1964 to present, a line can be drawn to simulate what savers with money deposited could have earned in interest income. The difference at present resides at around 2.7 trillion to about 1 trillion. When summing the difference post 2001 to present — the rough amount is 7.4 trillion dollars Lost from the savers pocket (into whose pockets?).

    Savers should not be dismayed though, because normal consumable items such as flour tortillas or unleaded gasoline have not increased during this time. Oh wait; by looking at this last chart, the CRB index, I guess the basket of commodities increased as well:



    Perhaps the next time you hear Bernanke et al discuss the “free” cost associated with stimulating the economy, you might have a better clue as to exactly which sectors might be stimulating the money right out of your pocket.

    Notes: Charts are based on data and calculations on data from the following sources:

    • FRED (Federal Reserve Economic Data)
    • NIPA (National Income and Product Accounts) Table 2.1
    • BLS (Bureau of Labor Statistics) Consumer Expenditure Survey
    • IRS (Internal Revenue Service) Ninety Years of Individual Income and Tax Statistics, 1916-2005


    From “Savings Lost”: The True Cost of Zero Interest Rate Policy.

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.


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