Wednesday, September 18, 2013

Real Net Personal Interest Income Growth

Click to enlarge.

That's a fairly impressive downdraft (in blue), especially if one considers just how much money is out there to earn interest.

1. ZIRP once helped borrowers, especially long-term borrowers with good credit who managed to refinance their homes at much lower interest rates. I'm not so sure it is helping many now though. Credit card interest rates have certainly not fallen much in the last 10 years.

2. ZIRP continues to hurt savers, especially short-term savers who patiently wait for the end of ZIRP.

“Patience – A minor form of despair, disguised as a virtue.” - Ambrose Bierce, The Unabridged Devil's Dictionary

Let me assure you that I generally have plenty of patience and despair, but not nearly enough to sit in treasury bills long-term. I've been a permabear since 2004. In hindsight, sitting in treasury bills would have been an awful plan.

From what I can see, the "average" American currently earns 5x more interest than he/she pays. As monetary economic stimulus goes, at some point ZIRP could easily hurt savers far more than it helps borrowers. We may have already reached that point, just like Japan before us.

As a side note, I really don't think the typical American is personally earning 5x more interest than what is paid. Toss a few billionaires into any party and the average starts looking pretty good. That's not enough to make the typical American rich though, unless streams of cash spill out of pockets as the billionaires wander around the room. You know, trickle-down economics and what not. Cash falling out of billionaire pockets is about as likely to happen as the end of ZIRP, at least in the near-term.

I will end here with 100% certainty. I am a long-term retired saver and the Fed's zero interest rate policy is forcing me to spend less than I otherwise would, lest my nest egg run dry before I die of old age. It's not a complaint. It's simply a fact. Spending less is a rational reaction to lower real yields. That's not what the Fed intended me to do of course. Call it an unintended consequence. This uncertain world is full of them.

Source Data:
St. Louis Fed: Custom Chart


dearieme said...

By owning TIPS you have bought protection against inflation - but you have bought it from the Great Inflator itself. The GI has a conflict of interest, therefore, and may decide to diddle you.

Stagflationary Mark said...


It could be worse. Since I am buying directly from the government at least Wall Street can't double-diddle me, lol. Sigh.

Hartford Inflation Plus C

Expenses: 1.59%

Asset Allocation: 99.68% Bonds

I can't say for sure how much the Great Inflator is diddling me, but it's not hard to say what some companies would do to me. After 30 years, Hartford would like to diddle 38% of my nest egg.

(1-0.0159)^30 = 0.618

That's insanity in my opinion. Pure and simple.

Wisdom Seeker said...

I think we're making a mistake of thinking of interest as "income". It's a transfer payment.

The lender's (or bondholder's) "interest income" is the same as the borrower's (or debtor's) "interest expense". On net, no one gets any richer. Except, as you noted, for the financial firms who take a slice along the way.

So with ZIRP, we not only need to look for who is no longer receiving "interest income", we also need to look at who is no longer paying "interest expense". (That Which Is Seen, And That Which Is Not Seen, and all that Bastiat...)

ZIRP is a policy to benefit debtors at the expense of savers. The biggest debtors on the planet are the ones practicing ZIRP: U.S. Government, Japanese Government, European Governments...

For savers, tolerating low interest rates has the same effect on personal finances as accepting higher tax rates.

Stagflationary Mark said...

Wisdom Seeker,

For savers, tolerating low interest rates has the same effect on personal finances as accepting higher tax rates.

Yeah, that's pretty much how I see it too.

It's one reason I was willing to lock in long-term TIPS (at higher rates). I thought that "tax" would increase over time.

dearieme said...

"Hartford Inflation Plus C

Expenses: 1.59%

Asset Allocation: 99.68% Bonds"

Good grief, who elects to buy that?

Stagflationary Mark said...


Good grief, who elects to buy that?

My bank offered me a similar product once. Fortunately, I was not swayed by the quality of the package they put together for me. Glossy pages on high quality paper all within a binder that I could keep! Beautiful I tell you! Really inspired confidence. ;)