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Author Topic: Why are savings interest rates TINY (lower than inflation) in the US?  (Read 3189 times)
TradeFortress
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December 15, 2012, 08:06:40 AM
 #1

From a quick search, I saw interest rates of 0.95% or something. Inflation is nearly 3 times that. That means you're going to be losing money putting it in a bank.

In Australia the interest rates are about 3%-4%, some banks give you 5% as long as you deposit $200 a month and don't withdraw. Sure, inflation + tax takes most of it away, but you're still becoming wealthier. What's different in the US?
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December 15, 2012, 09:01:11 AM
 #2

That's actually an easy question to answer. The interest rate charged by the central bank (where private banks get their money from) is what's different in the U.S.:

Reserve Bank of Australia: 3.00%
U.S. Federal Reserve: 0.00-0.25%

Of course, that just raises further questions, which are less easy. Wink

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December 15, 2012, 03:11:10 PM
 #3

Because the Fed is trying to force companies like Apple to take their huge cash pile and invest it in new jobs/products or distribute it as dividends.

In effect use it or lose it.

Savers are collateral damage, but that also too helps the velocity of money, if they go out an spend it.

I would prefer they use a corporate capital reserve tax and leave savers out of this financial war.
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December 15, 2012, 06:25:49 PM
 #4

0.95% is actually high.  CD's and Money Market funds are more like 0.1%.  Charles Schwab *high yield* checking offers a whopping 0.15% interest.

As people have mentioned this is because of the Federal Reserve (the US central bank) philosophy that low interest rates will create cheap credit and somehow create jobs.  Currently they say they'll keep this up as long as unemployment is above 6.5% and inflation doesn't go above 2-1/2%.

And who would actually buy short term treasury bonds for 0% interest, effectively losing money after inflation? Well 90% of them are sold to the Federal Reserve.

The low interest rates are supposed to help businesses.  And how are they trying to help the common man?  They're buying up mortgage backed securities to drive mortgage rates down.  That's right.  To fix the global crisis caused by they sub-prime mortgage crisis, they're artificially lowering mortgage interest rates so people will take out more artificially cheap mortgages.

What could possibly go wrong?

Do a youtube search on 'Bernanke' if you want to see hundreds of people complaining about these policies.
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December 15, 2012, 06:32:12 PM
 #5

Well lots of people will buy bonds at negative interest rates.

Say you are a company in China and you send a cargo ship worth of Chinese junk to the US.  You are paid with a $20 million bank wire.  Your choices are leave it in a Chinese bank, convert it to Yuan, and buy Treasury bonds.   There is no FDIC equivelent in China so leaving $20M in a Chinese bank is riskier than T-bonds so if you don't need that capital right now putting it in a T-bond is a safe(r) place to park it.  

Now lets say you have your bank exchange it for Yuan.  No what is the bank going to do with $20M USD.  Due to currency import/export controls in China there is limited access to USD.  So the bank likely will buy T-bonds to "park" the money.   Of course a small bank might exchange it for Yuan with a larger bank who might exchange it at an even larger bank and an even larger bank all the way up to the Central bank of China.  Now what is the Central bank of China going to do with $20M USD?  Request it be delivered in $10 and $20 on a shipping pallet?  Nope they will park it into .... yup T-bonds.

TL/DR:
Think of negative real interest rates as a holding fee.   If you had $20M in Gold and wanted to keep it safe you likely would pay a depository to hold your gold for you.  You might pay 0.5% to 1% per year in order to protect your gold from theft or loss.  For those with LOTS (i.e. tens of millions or billions) of dollars there really is nowhere to "park" it other than in a treasury bond.  So even when the FED drives rates downs these institutional and governmental holders of dollars will still keep buying T-bonds and supply vs demand it will drive interest rates negative.

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December 15, 2012, 11:53:11 PM
 #6

Hmm, this is actually a good point. Lower interest rates than inflation should drive the economy, but we're doing fine in Australia..
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December 16, 2012, 02:40:58 AM
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I guess those commodity export countries could afford a high interest rate since they do not need to invest heavily to get the economy going

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December 16, 2012, 03:15:35 AM
 #8

Should be noted, since we're in a super-low-interest economy (for the few able to secure bank credit), that interest paid isn't the whole picture regarding what's paid for deposits. Banks have been getting more and more obnoxious with fees -- both for lendees and depositors. It used to be, 5+ years ago, that overhead/admin for depositors cost the equivalent of paying out ~2.25% in interest (excluding actual interest paid to depositor). Between fees and service cuts, I'd guess that number's somewhere between 1%-1.5%, now. But, because interest rates are so low, that's higher than actual interest paid to consumers in most cases.

Banking seems pretty fucked, and it seems to be moving more into bizarro-world every day. I wouldn't be surprised if it soon became common practice to never charge interest, only high fees for technical errors the customer might commit if he didn't memorize his 20-page loan contract. Similarly, maybe banks will stop offering interest entirely unless you jump through the high-interest hoops (many CUs/banks have a higher-tier interest-bearing account which requires you do something like 12 debit card purchases, 5 ACH transactions, and a direct deposit each month, but you get 4% or more annually). Who knows... Sneaking fees in seems like it's become more important than anything else businesses can legitimately sell anymore -- maybe Walmart will start exchanging merchandise for contracts with hidden fees instead of money. Load them all up on your Walmart Consumers Card, pay $250 each month you forget to click a "don't charge me for my purchases" link they email to you (similar to credit card companies only offering certain cash back incentives if you remember to sign up for them every month or so).
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December 16, 2012, 03:09:28 PM
 #9

Now what is the Central bank of China going to do with $20M USD?  Request it be delivered in $10 and $20 on a shipping pallet?  Nope they will park it into ....

Fort Knox had to be emptied somehow.

For those with LOTS (i.e. tens of millions or billions) of dollars there really is nowhere to "park" it other than in a treasury bond.  So even when the FED drives rates downs these institutional and governmental holders of dollars will still keep buying T-bonds and supply vs demand it will drive interest rates negative.

Because for a long-ish time gov't debt was a safe and reasonable place to store wealth it does follow that some people (not that many) will continue buying them even after they stopped making economic sense. However, this is akin to saying a famous restaurant doesn't have to serve good food, can get away with reheated stale pizza because it's famous anyway. This sort of bs doesn't work long term.

As a complete aside: putting a 5mn BTC buywall @ $200 each up in MtGox might actually be the most rational use of a billion dollars currently. You'll end up with 2-3 mn BTC and the price will be permanently in the hundreds. Profit.

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December 16, 2012, 03:48:33 PM
 #10

From a quick search, I saw interest rates of 0.95% or something. Inflation is nearly 3 times that. That means you're going to be losing money putting it in a bank.

In Australia the interest rates are about 3%-4%, some banks give you 5% as long as you deposit $200 a month and don't withdraw. Sure, inflation + tax takes most of it away, but you're still becoming wealthier. What's different in the US?

It's actually much worse than that when real inflation numbers are used.

The US economy is built upon a principle of credit(debt) greater than previous credit(debt). As a result borrowing is "encouraged" and saving is "discouraged". If you look at the sum of federal monetary policy you will find it clearly supports this blatantly non-capitalist principle. How can you have capitalism without capital?

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